The adverse impact of the global crisis on the Russian automotive market was one of the most pronounced worldwide.

Back in 2008 the country was on the verge of becoming the largest car market in Europe, overtaking Germany. But then along came the global economic crisis and sales of new vehicles slumped by 49% to 1.47 million cars in 2009 – the same level as 2005.

The decline hit the manufacturing industry hard, particularly for carmakers that were already struggling pre-recession, and Izhavto, which produced some Kia and Suzuki brand cars, was forced to file bankruptcy papers in August 2009, while AvtoVAZ saw its market share dive from about 70% 10 years previously to around 20%. Other firms practised production shutdowns.

At the start of 2010, sales were still falling, prompting the government to take action with its own scrappage scheme – dubbed “roubles for wrecks” – whereby owners could trade in vehicles 10 years and older for a 50,000 rubles ($1,254) incentive. According to reports, the government spent 25 billion rubles ($627m) on the programme, which disposed of 500,000 vehicles.

The scheme was also extended into mid-2011 and, according to JATO Dynamics, most benefited Lada, which had an 80% increase in sales in 2010 and was up 30% in 2011.

Other government measures included funding to banks to subsidise low interest rates on car loans and support to ailing national carmakers, AvtoVAZ, GAZ and KAMAZ.

Helped by such measures, the car market and LCV market rose 30% in 2010 to 1.9 million units according to the Association of European Businesses (AEB). And latest AEB figures show that growth has soared in 2011 – sales of new passenger cars and LCVs increased by 56% in H1 and were also up 40% in June 2011.

AEB chairman David Thomas says: ‘Growth for the first half of 2011 of 56% shows that the recovery of the Russian market is now well established and is tracking ahead of our latest forecast of 2.35 million units for the full year. June compared to June of last year is 40% up so while the rate of growth is slowing we must remember that for the second half of this year we will be comparing with the recovering market of 2010.’ As a result, the AEB has said that it will shortly issue an updated consensus forecast.

Meanwhile PwC has said that it expects Russian car sales to rise by 20 to 40% in 2011 to 2.1 million-2.5 million units.

A report published earlier this year by the Boston Consulting Group also shows that the Russian automotive market is well and truly in recovery and says that the market will become one of the key global growth engines of the industry in the coming decade, making it one of the top six by 2020.

Ewald Kreid, a partner and the head of the Industrial Goods practice and the Automotive topic in the firm’s Moscow office, says: ‘The Russian automobile industry has been the roller coaster of the BRICs (Brazil, Russia, India, and China) for the past 18 months, but now it is firmly back on track. The new regulatory environment is leading to a new wave of localisation and partnerships of global and Russian companies in the automotive sector, and it is critically important to manage partnerships in a way that fosters modernisation and technology transfer.’

Things are also looking positive in terms of production, prompted by the Decree 166 rules, which enable carmakers to avoid import duties in exchange for a required level of localised production in Russia.

Recent deals include Volkswagen and the Gaz Group, which have signed a contract manufacturing agreement to produce VW and Skoda models for the Russian market, through a €200m investment in production.

Meanwhile Ford and Sollers have signed a joint deal to establish a new 50-50-owned joint venture in Russia named Ford Sollers. The operation will produce six Ford models from 2012, including some models that will be built exclusively for the local market.

In addition, GM has signed an agreement with the Russian Federal Ministry of Economic Development to increase its production from the current capacity of 200,000 units to nearly 350,000 a year.

Furthermore Renault-Nissan is continuing its months-long talks about taking a controlling stake in AvtoVaz, with the carmakers building a joint assembly platform at AvtoVAZ’s Togliatti plant to produce five different Renault, Nissan and Lada models. It has also added that it’s committed to developing a range of products tailored to local needs.

With car ownership levels in Russia at a low level – estimates say there are 240 cars per 1,000 adults, which is about half that of Western Europe – and an economy that’s growing with rising income levels, Russia would seem to be well and truly back on track to become Europe’s biggest car market.

The local fleet market:

Looking at the fleet market, a picture emerges which shows that this is still very much a fledgling market.

Fleet Logistics is present in the Russian market through a joint venture with local fleet management specialist, Fifth Wheel Management (FWM), and says the total Russian fleet market is still relatively small at around 2.1 million vehicles in a car market totalling over 37 million vehicles.

However, 2011 research by the Corporate Vehicle Observatory shows that the fleet market is fast growing – participating fleet decision-makers were asked about whether the total number of vehicles on their fleet will decrease or increase in the next three years, with the balance showing a total of 46%. This compares to 14% in the EU.

Outright purchase is by far the preferred acquisition method but operational leasing is starting to establish a toehold. The company says that some 90% of new vehicles are purchased outright, while just 10% are on finance or operating leases. There were just 18,000 cars financed through operating leases in 2010, but estimates suggest this is expected to grow by around 20% year on year and could reach around 60,000 vehicles by 2015.

ALD Automotive – which has been in Russia for seven years – agrees that outright purchase dominates the market but has some slightly different figures for knowledge and usage of funding methods, with outright purchasing taking 68% (mostly driven by local companies of all types from SME to TTLC), financial leasing at 21% (mostly driven by SME local companies), operational leasing at 5% (mostly driven by multinationals) and cash allowance at 6% (equal spread over all types of companies both local and international).

Meanwhile JATO Dynamics has evidence that take-up of financial leasing is set to rise fast.

Vladimir Vidulov, country manager Russia at JATO Dynamics, says: ‘Due to the recent financial crisis, the interest in financial leasing decreased dramatically. Today we see outright purchases of fleet vehicles in Russia preferred over leasing, with around 70% of passenger cars and 50% of LCVs being bought for fleet use.’

‘Financial leasing has certain potential as people consider it as an alternative to automotive loans through the banks. It has even more potential as there are less fraud (due to the asset rights kept by the leasing company).’

He adds: ‘It is important to note that most of the fleet vehicle contracts in Russia are made with budgetary (government) organisations where a certain amount of money is fixed and can be spent immediately without the help of leasing companies.’

When asked about the relatively slow take-up of operational leasing, Mr Vidulov says: ‘The reason is in the highly fiscal focus on local legislature regulating leasing operations (operational leasing). This involves double VAT while providing services to the customers and with sales of the cars afterwards. In many countries VAT is close to 0 points for leasing operations.’

According to Fleet Logistics/Fifth Wheel Management (FWM) there are several barriers that need to be removed before the operational leasing market can grow.

Sergey Zykov, MD of FWM – which specialises in fleet management services to large international and multi-national fleet operators, says: ‘There is no established culture of leasing vehicles in Russia. Companies prefer to own their vehicles outright rather than lease them, although with more international leasing companies here now, such as Arval and ALD Automotive, we are seeing more companies moving to leasing. But the numbers are still very small.’

He adds: ‘The [operational leasing] product is not very well known with few established players in the market so far. There are inconsistent service levels from second-tier suppliers such as car dealerships, daily rental and tyre suppliers across Russia, and for fleets with good regional management system it is easier to manage an owned rather than a leased fleet.’

Both ALD Automotive and FWM say that environmental awareness amongst fleets also has a long way to go before it reaches the levels seen in Western Europe.

Kent Bjertrup, general manager of ALD Automotive Russia, says that there are no tax differentiators to support green fleets and adds that: ‘Green fleet perception is associated with extra costs and treated as nice to have but not a must-have.’

FWM agrees that there is little evidence of any reduction of the corporate carbon footprint and green initiatives and highlights that many local car policies make no mention of carbon emissions when it comes to selecting new vehicles, for example.

However, it says that its inaugural “EcoFleet award” last year shows that this may be changing.

Mr Zykov explains: ‘We received almost 100 presentations from fleet managers telling us about the successful implementation of environmentally-friendly car policies, so perhaps we are not so far behind in the green stakes as we initially thought we were.’

Further evidence that the Russian car buyers are ready to go greener has come in the form of the announcement that the country’s Yo-Avto carmaker has started production of a new plant just outside St Petersburg to produce its trio of natural gas hybrid Yo-mobiles (Yo CrossCoupe, Yo Microvan and Yo Furgon). The company has told Russia Today that its models are sold out for 10 years.

Clearly there is some demand there for greener cars but with government support focused on increased car production but not increased green car production, relatively low fuel prices and a lack of environmental standards to prompt domestic carmakers to go greener, there is much work to be done to ensure that Russia’s rapidly transforming car industry does not fall further behind global trends.

Russia and the developments in the car rental market

Anthony Ainsworth, Commercial Director at Avis, overviews the local rental market.

‘With over 18 years experience in Russia, Avis has been on quite a journey. The car rental market is fragmented and heavily reliant on the B2B customer, with the leisure car rental sector only accounting for 24% of the market.

‘The recession also had a major impact, with the industry experiencing sales growth of only 1% in 2009, compared with 8% in 2008. This resulted in a decline in purchasing power, with a lot of Russians seeing renting a car as inapplicable to their everyday lives in the economic downturn. Combined with the fact some Western tourists see driving in Russia as unsafe, the leisure car rental sector is comparably smaller to that in Europe.

‘The six largest international renters occupy nearly 48% of the car rental market and differentiate themselves by offering a better service and a predominantly international car branded fleet, something the local competitors find it hard to emulate due to the high start-up costs of acquiring a well regarded fleet.

‘Although the market in Russia is competitive, the potential for growth outweighs this factor. With growth forecasts of 4%, the industry is expected to increase at a dynamic pace and expand into the domestic markets, concentrating on the major economic cities.’

‘What are the main challenges Avis Russia has faced? Finding the right licensee can prove difficult when entering a new market, particularly in Russia, which is often perceived as a corrupt working environment. We’ve been working with our licensees, who already operate within Poland, since 2007 in the North Western territory’s and in January 2010 decided to further this relationship and engaged them to look after the Central Federal district, as we knew they could be trusted to offer a high quality service. Working with a proven business operator has led to a resoundingly successful operation that is ready for future growth.’

Breakdown of usage of vehicles in Russian fleet sector

1. Field force cars – 61%

2. Engineering/technician cars – 15%

3. Pool cars (internal replacement cars with or without drivers) – 12%

4. Middle management – tool car – 9%

5. Middle management – benefit car – 4%        

6. Top management – benefit car – 8%