The Association of European Businesses (AEB) gathers the largest European foreign investors in Russia and celebrates its 20 years of existence on Thursday 24th September. The AEB was established in 1995 […] to represent and promote the interests of European companies conducting business in and with the Russian Federation. It is chaired by Philippe Pegorier, also President of Alstom in Russia.
The AEB is also the source of independent Russia statistics and industry analysis, and the main source for sales statistics of the Russian automotive market.
Ms Lara Kaute used information published by the AEB, among other sources, to write a master thesis about “Perspectives Of Foreign Direct Investments Into The Russian Automotive Sector In The Current Economic And Political Crisis”. We invited Ms Lara Kaute to share some of her work in a guest post.
Perspectives of FDI into the Russian automotive sector
The economic, financial and political crisis that broke out in Russia in 2014 has contradictory impacts on foreign direct investments. On the one hand, the Russian government strengthened its “import substitution” policy, currency risks made imports risky if not unprofitable, and the fall of the ruble made Russian assets and labour force much cheaper. All this should stimulate foreign businesses to localize their Russia-targeted production in Russia, i.e. to increase the inflow of foreign direct investments into Russia. On the other hand, Western sanctions against Russia restrain various kinds of FDI to the Russian market. Western banks strongly limit their Russia-related activities, which in turn limits the inflow of FDI to Russia.
The automotive sector was the most successful in attracting FDI to Russia until 2013 because of a strong growth in consumer demand from the early 2000’s and policies of the Russian government giving strong advantages to foreign carmakers partly localising their production in the country. Nowadays, about 70% of car manufacturing in Russia is done by foreign companies, which makes foreign involvement key to this sector.
But the automotive industry is also the one which suffers most from the current economic and financial crisis in Russia, with sales of some companies like PSA Peugeot Citroën or Ford about 35% lower in 2014 compared to 2013. The devaluation of the ruble lowered the purchasing power of the population and made imports of tier parts to Russia from abroad much more expensive. The increase in interest rates by the Russian central bank in order to stop the fall of the ruble made new consumption credits unaffordable to Russian consumers, it also made refinancing most difficult to car manufacturers and tier parts suppliers, triggering critical financial situations and defaults. The consequence of both the fall of the ruble and the increase in interest rates is that Russian consumers can afford cars only at lower prices, while car manufacturers face a stringent need to increase their prices, which in turn has a very negative impact on sales volumes. According to Association of European Businesses’ prognosis, only 50% of Russian car production capacities will be used in 2015, i.e. around 1.5 million cars will be produced and sold.
Nevertheless, this study shows that only very few foreign car manufacturers decide to leave Russia. It is believed that the crisis will not last longer than 2 to 3 years and that on a longer term perspective the Russian market stays an attractive one. As far as FDI are concerned, the results of the study are as follows:
– An increase of production capacities is very unlikely to happen in the 2-3 coming years, except for Chinese manufacturers who probably bet on an increase in the low-cost part of the Russian car market.
– An increase in localisation of production activities stays a crucial objective for any car manufacturer planning to stay in Russia: it will take place even though it is a very difficult task.
– Financial support to Russian subsidiaries of foreign companies is likely for any OEM staying in Russia.
– A significant decrease of FDI inflows for a given period and temporary stops of production are the fate of most vulnerable OEMs on the Russian market (with the smallest degrees of localization and less adapted marketing strategies).
– Outflows of FDI (i.e. leaving the Russian market) are a strategic decision of very few companies (e.g. GM)
In order to get the full-fledged analysis, please contact Lara Kaute at lara.kaute(a)sciencespo.fr.
About Lara Kaute,
FDIMagnet is NamSor™ offering for Investment Promotion. We use our unique data mining software to offer differentiated Foreign Direct Investment (FDI) services:
– Diaspora Direct Investments (DDI)
– Smart Investors Targeting & CRM
– FDI Targeted Communication
We leverage the ‘big data’ and large commercial databases covering all countries/regions, including the Russian Federation. Follow @FDIMagnet, join the LinkedIn group or email us at firstname.lastname@example.org