At the mercy of everything from international sanctions to currency devaluation, political uncertainty, and only partially successful vehicle scrappage schemes, in the last eighteen months the Russian car market has fallen far and fast from its 2012 peak, when 2.2 million new cars were sold..

According to data from JATO dynamics, in the first three months of 2015, 360,882 cars were sold in Russia, around 35% less than the 566,138 sold in the same period last year. In April sales fell over 41%, in May the fall was 38%. No car manufacturer or importer has escaped this crisis untouched, and Russia’s traditional top selling market segments have suffered most, as retail buyers have held off purchasing decisions. City car sales have dropped 57%, small car sales by 24%, and the lower medium sector is down by around 44%.

Loyalty to home manufacturers

Loyalty to home based makers remains strong. All Lada’s models feature amongst the best sellers – with the price leading Granta topping the first quarter sales chart. Market development investment has seen the Hyundai Solaris and Kia Rio both improve their share year on year, to comfortably take second and third places. These three models alone accounted for over 20% of all cars sold in Russia in the first quarter of 2015 – and the Rio went on to top the sales chart in May.

Overall the impact on manufacturers has been very uneven, but Suzuki, Peugeot, Citroën and Honda have been hit hard, each with sales down by over 75% this year. Commentators have begun raising questions about future production prospects, after General Motors announced the ending of manufacturing operations and withdrawal of the Opel nameplate from Russia later this year. Chevrolet will also disappear, though its specialist sporting models seem likely to remain available.

Premium sector growth

Meanwhile the premium market sector contains a hint of good news. Sales growth has been charted by JATO dynamics in the largest upper medium, executive and luxury saloon sectors since 2010, when large executive car sales grew by 50%, and luxury SUV sales almost doubled in a year. Premium marques, mostly from Germany and Japan, have been in demand ever since, and more luxury saloons were sold in Russia in the first three months of 2015 than in the same period last year. The contrast is clear: sales of the top 20 luxury cars have fallen 9.8% year on year; in the mainstream market equivalent sales are down over 18%.  

Russian buyers see luxury cars as very desirable products. Regional automotive analyst for Frost and Sullivan, Anna Ozdelen, says: “Premium vehicles have been in demand not only among high-income customers, but also among middle-class buyers, who like to display their social status. So they purchase premium cars, rather than invest in real estate and property. Also, at the end of 2014, demand for premium vehicles rose as buyers tried to protect themselves from devaluation of the Rouble.”

Two Autostat Analysis polls late in 2014 showed how much Russian consumers value premium auto brands. In one, owners were asked if they would recommend their brand to others: 70% named Mercedes Benz, which topped the list, followed by Land Rover and BMW. A second poll asked how likely respondents were to buy another car from the same maker. Amongst 31 brands, Mercedes Benz again came top, with Volvo second, and BMW, Lexus, Land Rover and Audi all in the top ten.

A great image and high perceived status helped premium cars to a 6% market share in Q1 2015, against 4.4% last year. Current premium market leader Mercedes Benz sold almost 10,000 cars in three months, entering Russia’s top ten best selling manufacturer list for the first time, but to stay on top the marque faces a growing problem: unlike principal competitors BMW and Audi, it does not make cars in Russia.

Local manufacture

For makers determined to stay in this market, currency devaluation and political uncertainties underline the importance of local manufacturing capability. But there’s another worry for premium and luxury car makers: local manufacture is becoming necessary to secure purchasing by state and official bodies, which are increasingly being directed to choose locally built vehicles over imports. Mercedes-Benz parent company, Daimler AG, will not want to risk losing such business to competitors, and is reportedly finalising a joint venture for local assembly of its S-Class saloons.

Audi builds A6 and A8 models in a Volkswagen plant at Kaluga, though its Q3 and Q5 SUV's are proving more popular. BMW currently assembles its 5 and 7 Series saloons and SUV’s – including the X5, top luxury SUV so far in 2015 – in a joint venture with Avtotor in Kaliningrad. Other lower-volume premium brands available in Russia include Land Rover, Porsche, Lexus and Infiniti.

Anna Ozdelen of Frost and Sullivan believes Daimler AG is seeking a partner and location to build many more of its cars locally: “It’s no surprise that Daimler is looking to open a plant in Russia to build A, E, and S-Class models, and ML and GL-Class SUVs,” she says. “Their sales volumes have been high, and rivals Audi and BMW already have the competitive advantage of local assembly.” However, latest reports suggest political uncertainties may have delayed Daimler's project.

Government assistance

Looking to help secure the industry's future, since April the Russian government has offered subsidised car loans, and consumer leasing has been introduced, with facilities available to both company buyers and individuals. The Ministry of Industry and Trade expects these and other measures to add 300,000 car sales in 2015 – but its still forecasting a 24% market decline, to just 1.98 million vehicles.

Analyst Anna Ozdelen expects that, in time, current market forces will rearrange the Russian automotive landscape. She says: “With declining sales across all segments, weaker brands will leave the marketplace, with temporary production stoppages likely. Much depends on the political situation, but we still expect strong brands like Mercedes-Benz to increase their share, and by 2016 demand for premium vehicles may be picking up.”