More investment in Russia may offset sanction effects, execs say

Article by Andrew Christian, on October 10, 2014

Western sanctions imposed against Russia may not be advantageous for foreign businesses, but auto executives are still bent on overcoming such dilemma. Several of them say that it would be best if carmakers continue investing in Russia, as the current crisis in the country failed to dampen their hopes of cashing in heavily from this prime growth market.

They have reasons for their continued optimism. For instance, they believe that Russia’s sour relationship with the United States and Europe may sweeten in a few years. They also cite the declining value of the Russian ruble and the possibility of higher Russian import tariffs – which encourage local auto production and more investment in the country.

Fiat Chrysler chief executive Sergio Marchionne remarked that in the medium term, “this thing” will settle and the auto industry will be back to some level of normality. He, however, noted that alternatives to such move are “relatively ugly,” not just for Europe, but in general.

Roland Berger recently said that import embargoes against Western vehicles would hurt Russia by cutting tax and tariff revenues, warning that “automotive sanctions” are possible. Roland Berger said that the current situation in Russia would benefit Asian carmakers.

With the ruble dropping 11 percent in value since Feb. 28, carmakers are adopting the strategy made Japanese makers when the yen was depreciating – producing where they are selling. Carlos Ghosn, CEO of the Renault-Nissan Alliance, noted that devalued ruble and higher tariffs mean that selling imported cars is “quasi-impossible” in Russia, which could be circumvented by localizing production.

Ford of Europe Chief Operating Officer Barb Samardzich quipped that Russia push for local production is “in our best interest.” So far, Ford has not slowed its investment in the country since the more it localize and get in rubles, the less exposed it is to the current crisis. Light vehicle sales in the country dropped 12 percent in the first eight months of 2014, according to consulting firm Roland Berger.

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