© andrei katyshev Analysis | September 26, 2014

Russian sanctions hit Russia itself the hardest

The economic downturn and political uncertainty have kept revenues in the Russian automotive market on a downward trend for months now.
In the first eight months of the year the market fell 12 percent, even tumbling by some 25 percent in July and August. And there's no sign of a recovery any time soon, as Russia struggles with an ailing economy, rising inflation and a volatile currency. The uncertain outcome of the Ukraine conflict and the harsher sanctions imposed by the European Union and the United States are adding to the pressure.

Any decision by Russia to retaliate and impose sanctions on car imports from Europe and the U.S. could undermine the Russian economy even more. In their study " Russian automotive market update: what would be the real cost of sanctions?" experts from Roland Berger Strategy Consultants devised three scenarios to illustrate the impact of sanctions on the Russian automotive industry.

Embargo on car imports – three scenarios

Scenario 1: Ten percentage point rise in import duties for European and American OEMs

The forecasted market volume of 2.2 million new cars for 2015 would see only a slight drop. "European and American OEMs with production facilities in Russia could increase their local production to circumvent the higher import duties. This would raise the price level only marginally," explains Roland Berger Partner Jürgen Reers. Even Russia itself would benefit: "Notwithstanding the lower income from taxes on sales, an increase in import duties would boost Russian state coffers by an extra 55 million euros," says Roland Berger Partner Uwe Kumm.

Scenario 2: Import ban on cars from the EU and the U.S. with retail price of EUR 30,000 or less

If Russia banned imports of cars in the lower to mid-range price segment, in other words those priced up to EUR 30,000, the hole this would leave in the Russian market could largely be filled. Here, too, increased imports from Asia and ramped-up production volumes from the European and American OEMs' local plants could take the heat off the market.

Scenario 3: Embargo on all car imports from the EU and U.S.

This scenario would see almost 110,000 fewer vehicles sold on the Russian market in 2015. The country could then expect falling revenue from sales taxes and import duties. "By imposing such measures, the Russian state would hurt itself the most," comments Uwe Kumm. "Our calculations indicate that Russia would lose around 1.4 billion euros in tax and duty income in 2015."

European and American automakers would be hit hard as well: Profits from their Russian business could shrink by 550 million euros in the coming 12 months. "The only winners in these sanction scenarios are the Asian car manufacturers from China or Korea, who would be able to greatly expand their market share within a very short time," adds Reers, an automotive expert.

Improving the conditions for the car industry in Russia

The Roland Berger experts believe the Russian crisis will last another year or two and continue to dampen the Russian automotive market. So Western OEMs need to prepare themselves for this now. "Automotive companies should adjust their cost base and their capacities to the ailing market," advises Reers. "They should also increase their level of value creation in the country at minimal investment and they should look into any support programs they might qualify for."

But the Russian government, too, should eschew further sanctions and focus instead on improving the underlying conditions so as to stabilize the market long term and make local production more competitive. There are various conceivable options here, from banning the use of old vehicles to implementing funding programs to stimulate sales. The country should also foster local component production in particular as a means of improving the local cost base for OEMs. "In the long-term view, producing cars in Russia needs to make more economic sense than importing vehicles," says Uwe Kumm in conclusion.


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