Fall­ing ru­ble leaves Rus­sian car mak­ers with nowhere to turn

The Pak Banker - - BUSINESS -

A steep de­cline in the rou­ble has ham­mered Rus­sian car­mak­ers by driv­ing up the cost of the for­eign parts they rely on, forc­ing them to raise prices at home and mak­ing them un­com­pet­i­tive abroad.

Af­ter a decade of an­nual sales growth in ex­cess of 10 per­cent, the Rus­sian car in­dus­try is now a vic­tim of an eco­nomic cri­sis fu­eled by lower oil prices and Western sanc­tions over Moscow's role in the Ukraine cri­sis.

Do­mes­tic car sales have halved from their peaks in 2012-2013 when dur­ing some months the coun­try ranked ahead of Ger­many as Europe's largest car mar­ket by sales, and the eighth big­gest in the world. It now ranks only fifth in Europe and 12th glob­ally. The ru­ble's de­cline has pushed up Rus­sian car­mak­ers' costs as - un­like ri­vals in other lead­ing car­mak­ing na­tions - they heav­ily de­pend on im­ported parts, which they pay for in dol­lars and eu­ros.

Back in 2012-2013 the rou­ble was trad­ing at around 30 per dol­lar; the cur­rent rate is about 65 - which ef­fec­tively makes im­ported parts about twice as ex­pen­sive. This has forced au­tomak­ers to raise prices - a des­per­ate move in a coun­try where the econ- omy shrank by 4.6 per­cent in the sec­ond quar­ter of 2015. Em­ploy­ers have cut staff and wages, while an­nual food price in­fla­tion is run­ning at over 20 per­cent, leav­ing many Rus­sians with lit­tle money for big pur­chases.

A re­newed drop in the rou­ble - it has fallen 15 per­cent against the dol­lar since the be­gin­ning of July and is trad­ing near a new six-month low - is set to prompt more price hikes and fur­ther erode sales. "If the rou­ble stead­ies at the cur­rent rate un­til the end of the year, then the mar­ket is set to de­cline by 28-30 per­cent," said VTB Cap­i­tal an­a­lyst Vladimir Bes­palov. "But if the rou­ble con­tin­ues to weaken, prices will rise and the mar­ket could fall by up to 35 per­cent." While a weaker do­mes­tic cur­rency usu­ally makes ex­ports more lu­cra­tive, Rus­sian car­mak­ers' re­liance on ex­pen­sive for­eign com­po­nents has left them un­com­pet­i­tive against ri­vals from the likes of Ja­pan and South Korea who source the vast ma­jor­ity of parts at home.

Rus­sia's auto ex­ports fell 27 per­cent to 49,000 ve­hi­cles in the first six months of 2015, year-on-year, cus­toms data showed. The bulk of ve­hi­cle ex­ports go to Com­mon­wealth of In­de­pen­dent States (CIS) na­tions such as Be­larus and Kaza­khstan.

Volk­swa­gen and Ford both im­port more than half of all parts used to as­sem­ble their cars in Rus­sia. Even mar­ket leader Av­tovaz, which pro­duces Rus­sian brand Lada among other mod­els, sources about a fifth of its pro­duc­tion abroad. Stung by its low level of lo­cal man­u­fac­tur­ing, U.S. car­maker Gen­eral Mo­tors Co quit Rus­sia's ail­ing mar­ket in March.

Rus­sian author­i­ties have in­tro­duced in­cen­tives to en­cour­age car­mak­ers to grad­u­ally start pro­duc­ing most parts lo­cally, but the most ex­pen­sive and tech­no­log­i­cally ad­vanced parts such as elec­tron­ics, en­gines and sus­pen­sions are still im­ported.

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