Like many other major energy producing nations, Russia was heavily impacted by the oil price crash of 2014-2015. The falling price of crude pushed GDP into negative growth in 2015 and 2016 and sparked a significant depreciation of the Russian rouble. 

According to IHS Markit, Russian unemployment increased to 6% in 2016 leading to a decline in the purchasing power of the Russian consumer. This was clearly reflected in the sad state of Russian auto sales, which had halved in just three years.

However, as energy prices started to improve in 2016, the rouble stabilised. Improving external conditions have led the UN to forecast a return to positive growth for Russia in 2017. A similar improvement is expected in real fixed investments, investment spending that is, among other things, driving the demand for heavy construction machinery. The investment level has been decreasing significantly since 2014, but is expected to turn for the better in 2017.

Light vehicle sales should pick up again
The automotive industry was hit hard by the economic downturn, which saw light vehicle (LV) sales slashed in half from 2013 to 2016. The fall in sales from 2.8m units to 1.4m units saw Russia drop from the 7th largest market for automotive sales market to the 13th largest. 

As recently as 2014, analysts at the Boston Consulting Group predicted that the Russian LV market could hit 3m units sold by 2016 and 4.4m by 2020. The market is clearly behind that curve, but underlying fundamentals still support a positive development.

With a relatively poor public transit system and a large rural population, the fundamental need for light vehicles in Russia hasn’t changed. Now that the economy looks healthier, and consumer sentiment has improved, there are reasons to expect a more positive outlook for LV sales. In fact, several analysts expect small positive increases for Russian LV sales during 2017. 

Renault-Nissan alliance remains dominant
The domestic Lada brand, now under the Renault-Nissan umbrella, was Russia’s bestselling light vehicle in 2016. Combined with other group brands, these sales contributed to making the Renault-Nissan alliance by far the largest player in Russia, followed by Hyundai and Volkswagen. Going forward, Hyundai volume is expected to stay flat, while Renault-Nissan and Volkswagen volumes are expected to increase.

For domestic manufacturing the key success factor has been the degree of localisation of parts manufacturing. Companies that import parts from abroad in a foreign currency while selling their final product in Russian roubles are at a huge disadvantage in today’s market because of the weak rouble. The most successful OEMs in Russia have 70% local sourcing of parts. Manufacturers operating at a lower level than this would be struggling to keep domestic manufacturing competitive.

Deep sea volume might be positively impacted
LV imports carried by deep sea declined from 400,000 units in 2013 to fewer than 150,000 units in 2016. In 2013 more than 80% of the volume came from Asia with Toyota and Mitsubishi leading by volume. As the Russian light vehicle market now looks likely to improve, analysts expect there will be increased volumes shipped from Asia to Russia, but due to sourcing changes volumes might not reach the high of 2013.

The recent volatility of the Russian auto market has been a major challenge for all involved but there are signs of a turn for the better going forward. If the positive development continues, we should expect the country to return to the top ten markets for LV sales within the next 3-4 years.