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Russia Vehicle Sales Continue to Plummet: Rough Road Ahead

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The Russian auto industry is in complete disarray in the wake of President Vladimir Putin’s invasion of Ukraine. Since the inception of the war, the country has been hit by a barrage of sanctions from the United States and its allies that have battered Russia’s auto industry with supply chain snafus and parts crunch.

Sales Going Downhill

Russia relies heavily on imports for its car production. The sanctions have crippled domestic production due to parts shortages and factory shutdowns. The war prompted many auto giants, including Volkswagen (VWAGY - Free Report) , Toyota (TM - Free Report) , Renault (RNLSY - Free Report) , Ford (F - Free Report) and Mercedes-Benz Group AG (DDAIF - Free Report) among others to re-evaluate their business and pull back operations in Russia.

Vehicle sales have been falling drastically since March as sanctions have blocked supply chains. Per the Association of European Businesses (AEB), car sales crashed 62.9% year over year in March. In April, the sales decline worsened to 78.5% on a year-over-year basis, marking the biggest plunge ever. Last month, car sales tanked to another historic low with only 24,268 vehicles sold, marking a year-over-year drop of 83.5%. Sales of Russia’s most popular and affordable car brand, Lada, plunged 84% to just 6,012 units, compared to 38,284 units in May 2021. For the first five months of 2022, overall vehicle sales plummeted 52% from the corresponding period of 2021.

Auto Bigwigs Pull Out of Russian Operations

Since the sanctions came into effect, many auto biggies have either exited the country or suspended operations. French automaker Renault has been more exposed to the Russian market than any of its competitors. Renault commands a huge presence in Russia, with the country being the company’s second-biggest market. The company halted operations at its Moscow plant from Mar 23. Renault also has a controlling stake of 69% in Russia-based automaker, AvtoVAZ, best known for its Lada brand. Last month, RNLSY notified its intention to sell its stake in Avtovaz to a state-run research institute NAMI.  This would mark the first major nationalization of a foreign business since the war began. Renault also plans to divest its factory in Moscow to the city government. The company currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Japan’s top automaker Toyota halted production at its St-Petersburg plant from Mar 4. The plant manufactures RAV4 and Camry models. The company has also suspended vehicle imports due to supply chain disruptions. It should be noted that TM had been Russia's top Japan-based brand, producing about 80,000 vehicles at the St. Petersburg plant.

Volkswagen suspended production in Russia at its sites in Kaluga and Nizhny Novgorod effective Mar 3.German automaker VWAGY made up for around 12% share of Russia’s auto output. The company also stopped vehicle exports to Russia.

U.S. auto giant Ford also issued a statement in early March, notifying its intention to suspend operations in Russia, effective immediately, until further notice. As it is, in recent years, Ford has scaled down its operations in the country. The company has been focusing on commercial van manufacturing and sales through a minority interest in the Sollers Ford joint venture. However, the operations of the JV have been suspended since March in the wake of the war.

German carmaker Mercedes-Benz took to Twitter on Mar 2 to declare that it is suspending the export of passenger cars and vans to Russia as well as local manufacturing in the country until further notice. The company is alsocontemplating legal options to divest its 15% stake in Kamaz. On Feb 28, Daimler Truck announced that it was freezing all operations in Russia until further notice.

Many other automakers including Ferrari, Stellantis, Volvo, Hyundai Group, BMW, General Motors, Harley-Davison, Jaguar Land Rover and Aston Martin have been halting or fully exiting business activities in Russia since the Ukraine invasion.

Brace For More Pain?

Sanctions and international isolation have hit Russia’s auto industry brutally. Supply chain disruptions, chip famine and exodus of foreign automakers have worsened the country’s heavy reliance on imported auto parts. Most of the country’s factories are shut down amid a lack of components. To add to the woes is Russia’s economic slump, which is likely to erase 15 years of economic gains.

According to the Institute of International Finance, Russia’s economy is expected to contract 15% this year with various companies exiting the country amid a wave of Western sanctions. With the auto industry being highly cyclic, prospects of vehicle sales in Russia appear glum. As it is, household income is on the decline and inflation spiked to a 20-year high of 17.8% in April amid war and sanctions. The Russian Ministry of Economic Development expects the unemployment rate to rise to 6.7% and the real disposable income of Russians to drop around 7% in 2022. The slowdown in economy is likely to reduce vehicle demand further, especially as prices of cars have jumped close to 50% since the beginning of 2022, per the Russian statistic agency Rosstat. AEB expects vehicle sales in Russia to shrink at least 50% year over year in 2022.