Russian vehicle market in 2017 hinges on oil price performance

One more difficult year – that was the verdict from the Association of Russian Automakers in November 2016, which predicts that growth in one of the world’s most challenging automotive markets could resume in 2018. Until then, there will be uncertainties both old and new for Russia’s economy to contend with, not least the continuing situation in Ukraine. That said, some are taking a more optimistic view, suggesting that growth could resume sooner than predicted. This will depend largely on two variables, one of which is oil prices. On this front, the news looks good – Brent crude soared to a 17-month high of US$56.64 a barrel in December 2016 following an agreement between OPEC member states and non-OPEC oil producing countries such as Russia. OPEC will cut production by 1.2 million barrels a day from 1 January 2017, whilst those from outside OPEC will slash production by 558,000 barrels a day. It is the first deal of its kind in over 15 years, and should help to stabilise prices. The second variable is the question of sanctions currently imposed on Russia by the West, which first materialised in the wake of Russian annexation of the Crimean Peninsula. US President-elect Donald Trump’s choice of ExxonMobil Chief Executive Rex Tillerson as Secretary of State bodes well in this respect – the oil magnate’s close relationship with Putin is well known, and as some have pointed out, Exxon itself has lost out on potential earnings as a result of the sanctions. However, European leaders such as Angela Merkel and Francois Hollande have doubled down, calling for sanctions to be extended due to Russia’s clandestine involvement in continued fighting in Eastern Ukraine. Russia denies having any part in the conflict. Alexander Klimnov, an industry expert at Togliatti-based analytics agency Autostat, sees a varied year ahead, but agrees that conditions are now right for improvement. What were the most significant developments for the Russian automotive industry in 2016, and where do they leave the industry now? Some of the most significant developments were model launches. Brand new and updated vehicles included the Lada Vesta sedan, the Lada XRAY crossover and the UAZ Patriot PickUp. In the LCV market, there was the launch of the GAZelle Next and the Gazon Next City. The truck market saw launches from Ural and KamAZ, and within the bus market, there was the PAZ Vector Next and the LIAZ Kursor. The minimal contraction of the market, which between January and November 2016 shrank by only 12%, was a result of the extensive set of state programmes for customer support. These ushered in policies such as vehicle recycling, preferential credits and leasing. Between January and October 2016, light motor vehicle production declined by 11.3%. Specifically, production of Russian cars declined by 17.4%, and production of localised foreign models by 9%. By the end of the year, we expect the market to have bottomed out, and that growth will resume. What can we expect in terms of sales for 2017? Which vehicle segments could perform particularly well? Previously, the 2017 forecast for light vehicles and LCV sales predicted a decline of between 10% and 12%. But with a stabilisation of oil prices at between US$50 and US$60 a barrel, and a partial lifting of sanctions, market growth could be realised by the middle of 2017. This will lead to the stabilisation of market growth at between 0% and 5%. This includes a revival of demand for imported models, especially in the C, D and premium SUV segments. Moreover, the demand for both imported and domestic trucks and buses will also increase. Some analysts have predicted ‘one more difficult year’ before growth resumes in 2018. Would you agree with this analysis? Yes, this is possible, if oil prices remain low. For example, should it remain less than US$40 a barrel, this would worsen the Russian Federation’s budget shortfall. With growth ahead, could you envisage companies such as GM, which abandoned the market, later regretting their decisions? The exit of GM from the market took place within the framework of general pressure on Russia, but it did not cause a total exodus of other companies from our market. The main losses for GM are reputational losses amongst dealers and customers. With regards to sanctions, what sort of developments can we expect in 2017? Sanctions have had a significant impact on Russia, and not just in the financial sphere. The prolongation hereof will have a negative impact on Russian GDP, but this impact may be weakened by the increase of average weighted oil prices, as well as by a possible partial dilution of sanctions in the second half of 2017. To what extent will government-driven localisation efforts continue? Are the government’s goals realistic, and who will benefit? The policy on localisation continues, as is reflected in the increase of specific weight of localised foreign models from 6.9% to 9.9% in the period between January and October 2016, leading to an overall decrease of imported cars. The feasibility of the government’s localisation-related tasks depends significantly on the general state of the economy. However, the import of motor vehicles will no longer play such a key role. Volkswagen, Hyundai and Renault-Nissan will all begin to reap further benefits from localisation. What is the importance of the relationship with CIS markets, and how might this develop over the next year? The optimism in respect to exports is premature, but through localisation, including Russian brands it is possible that the Kazakhstan market could partially recover. As to the Ukrainian market, the outlook is uncertain, but there will surely be no large absolute increase. Russia has recently shown it has high-tech aspirations, including within the automotive sector. Might we see this having an impact on the sector in 2017? A number of innovative projects, including those related to remotely piloted vehicles such as the Volgabus Matrёshka and KamAZ, may soon reach performance levels where they are ready to be trialled. We can also expect a wide range of user projects to spread, such as car-sharing. However, from 1 January2017, all vehicles sold in Russia must be equipped with a GLONASS system [a global satellite navigation system used largely in Russia, comparable to GPS]. This requirement cannot be ignored, and as such it cannot be ruled out that some premium brands will abandon the market, specifically those for which extremely severe certification rules are disadvantageous due to a small volume of sales.

Russian vehicle market in 2017 hinges on oil price performance

The automotive industry has been waiting with baited breath for Russia’s recession to bottom out. Autostat's Alexander Klimnov tells Xavier Boucherat that recent developments could see this happening sooner rather than later

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