Russia's car industry is in crisis

Moscow. Autumn is off to a stormy start for the Russian economy. The government has had to significantly revise its growth forecasts of 2.5 percent for the year, as Minister Maxim Reshetnikov admitted at the economic forum in the Far Eastern city of Vladivostok.

According to German Gref, head of the country's largest financial institution, Sberbank, the July and August figures indicate "that we are approaching zero" in growth. He called for a significant reduction in key interest rates to revive the economy.

Even though Kremlin chief Vladimir Putin gave a more optimistic outlook in Vladivostok and spoke of a “soft landing” for the economy, he admitted that the “situation in individual sectors is difficult.”

One of these crisis sectors is the Russian automotive industry. Yet the Russian automotive market was once considered a growth driver. Back in 2008, three million new vehicles were sold in Russia – and experts were no longer speculating about whether, but when, Russia would overtake Germany as Europe's largest car market. The country is far from that. In 2024, sales were just half that – and this year, the decline continues rapidly.

Lada producer Avtovaz, the country's largest automaker, has barely returned from its mandated summer holidays when its workforce is threatened with short-time work. The company's press service warned as a precaution that the company could introduce a four-day work week starting September 29th due to "general trends."

General trends include the high key interest rate for loans in general, the tightened requirements for car loans in particular, and the high import of imported cars.

High-ranking economic experts predict an economic downturn for Russia at the economic forum in Vladivostok. President Vladimir Putin dismissed these concerns during his speech. But the question remains as to how long he can finance the war in Ukraine in the long term.

AvtoVAZ is not alone in its misery. Before the industry leader, the former Volga producer GAZ in Nizhny Novgorod—now primarily known for the production of Gazelle vans in Russia—truck manufacturer Kamaz, and bus manufacturer Liaz have already switched to short-time work.

The situation is certainly worrying. Bus sales have plummeted by 60 percent. The decline in heavy trucks is similarly high, according to Kamaz. The company estimated its own sales decline in civilian vehicles at 30 percent. Even the continued flourishing sales of military trucks for the war that Russia has been waging in Ukraine for three and a half years has not helped Kamaz out of the crisis.

GAZ, in turn, reported a 30 percent drop in demand for small vans. According to the industry association AEB, the decline for cars in the first seven months was 25 percent compared to the previous year.

The result: Vehicles are piling up in warehouses. While inventories have now fallen slightly from their peak of around half a million cars to 400,000, this is likely due more to the carmakers' production pause in the summer than to the economic upturn, even though the resumption of government subsidy programs has increased demand somewhat.

The Russian government now intends to at least provide social cushion for the short-time work. Authorities are developing a plan for "alternative employment," said Denis Manturov, the Russian deputy prime minister responsible for industry. This plan is intended to offset income losses and preserve the workforce as a whole.

Manturov did not provide further details. Experts assume that some of these are retraining programs for employees in the automotive industry.

In addition to the downturn, imported vehicles are also posing a problem for the domestic auto industry. New Western cars have become a sought-after rarity, just as they were in Soviet times. Instead, Chinese vehicles are flooding the market.

This is bad news for Russia's automotive industry: Most of the Western companies had built up production facilities in the country with tens of thousands of jobs in the pre-war period.

VW, for example, had built a factory in Kaluga for several billion euros, while Toyota, Nissan, Hyundai, as well as General Motors and Ford, had built a car production center around St. Petersburg. Even Mercedes, after years of hesitation, finally invested more than 250 million euros to build a factory near Moscow, primarily for SUV models. That was in 2019. Three years later, with the outbreak of war, all Western car manufacturers withdrew from Russia.

Since then, the Chinese have taken their place. In the first half of the year, Chinese vehicles held a market share of approximately 55 percent in new car sales. By August – figures have not yet been published – this could have even risen to 60 to 65 percent, estimated Sergei Zelikov, director of the consulting agency "Avtostat." Brands such as Haval, Cherry, and Geely are now seriously challenging Lada for market leadership.

The problem is that the localization of production is generally significantly lower than it was for European or Japanese cars. Only Haval has built a full-fledged car factory in Tula, south of Moscow. Most of the others only have assembly plants in Russia and import the majority of their vehicles. They shy away from large investments because the Russian market has become too unstable and small.

RND/dpa