Foreign firms flee Russia

By bne IntelliNews March 19, 2015

bne IntelliNews -


Having made a fortune in Russia in the boom years, today, with no end to the current economic downturn in sight, more and more foreign companies are deciding to pull out.

The latest in a growing list of global brands shuttering or reducing their Russian operation is US carmaker General Motors, which said that it would close its St Petersburg car plant and stop selling its Opel marque in Russia by the end of this year.

The group is not departing entirely. GM said that it would focus instead on the premium end of the market with its Cadillac brand, while it will stop producing Chevrolet cars, but will import them from the US instead. It will also stop the contract assembly of Chevrolet vehicles at the plant of the Russian carmaker GAZ this year as well.

Sales of Chevrolet, which was the eighth best-selling brand in Russia last year, fell 29% in 2014, while Opel sales fell 20%, both falling faster than the overall market decline of 10%.

GM has been one of the longest standing foreign investors in Russia having set up operations in the 1990s in the progressive region of Kaluga a few hundred kilometers south of Moscow.

GM expects to take a net charge of up to $600mn in the first quarter of 2015 as a result of its decision.

After briefly becoming the largest car market in Europe in the first half of 2008, Russian car sales tumbled as the crisis that year unfolded, dropping by half year-on-year in 2009. Sales started to recover in the following years, but collapsed again after an orgy of buying in December as Russians rushed to convert their cash into tangible assets and protect their savings from the rapid devaluation of the ruble. Car sales were down 38% in February year-on-year and there is little prospect of a recovery this year.

The Kremlin was understandably disappointed by GM's decision as it has invested a lot of time and effort into building up the domestic production of cars in partnership with foreign producers.

"The company, unfortunately, disadvantages itself amid the period when the market starts its activation phase. Anyway everything develops in a cyclical manner and growth will come after the sales drop. We can say it for sure now. Then the company will find itself among the losers," Russian President Vladimir Putin's spokesman Dmitry Peskov said.

GM's main rival Ford also plans to cut production, but as it has less exposure to Russia the cuts will not be as dramatic. Last year, GM sold 189,000 cars in Russia, making it the fifth-largest producer, while Ford sold 66,000 vehicles, according to data compiled by Bloomberg. Nissan Motor decided to suspend production at its St Petersburg plant between March 16 and March 31 because of weak sales in the Russian market.

Everyone suffering

Banks have been even harder hit by the devaluation than manufacturers or industry. Austria's Raiffeisen Bank International said in February it would cut back in Russia as part of a radical overhaul to protect the bank's core capital.

The move mirrors similar decisions following the 2008 crash when several foreign owned banks beat a tactical retreat. Italy's Unicredit shrank its Russian business and both Britain's HSBC and Barclays bank abandoned efforts to roll out retail services in Russia, incurring very large loses in the process.

In other sectors the damage has been less visible but one noticeable departure was the US PR firm Ketchum, which ended the bulk of its work for the Russian Federation in the US and Europe. However, Ketchum's decision to give up on Russia was probably driven was much by the political tensions with the West that have made its job impossible than for business reasons.

Still, if the European and American companies are pulling out then other companies from the emerging world are happy to come in and fill their shoes: Chinese investment into Russian economy will match those from Europe within two to three years, CEO of Russian Direct Investment Fund (RDIF) Kirill Dmitriev said on March 11.

"We think that this year and next year there will be much more money coming from China, which will replace the European money. Within two to three years the investment inflow from China may be equal to that from Europe in recent years," Dmitriev said, adding that he was referring to tens of billions of dollars worth of investment all across Russia. 

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