Russia’s car market to return to pre-war levels only in 2027

Russia’s car market to return to pre-war levels only in 2027
Car sales crashed by 45% in 2022 and won't recover to pre-war levels until 2027, according to experts, but even the 45% fall in sales can be considered a good result and China and Iran are set to help rebuild the market. / bne IntelliNews
By Ben Aris in Berlin March 30, 2023

Russia’s passenger car market sales will only return to pre-war levels in 2027, even with an improvement in the geopolitical situation, an increase in production, and parallel imports, according to a study by Technologies of Trust (TeDo), The Bell reported on March 30.

Heavily dependent on the import of parts from Europe, the Russian automotive sector was the hardest hit of all industrial sectors by the extreme sanctions following the invasion of Ukraine a year ago.

Since then, almost all the European Original Equipment Manufacturers (OEMs) and US producers have suspended operations or pulled out of the market completely. As of March only two of the 11 foreign operations car plants in Russia are still working, according to reports, and the remaining two are both owned by Chinese producers. Russia’s two leading domestic producers, AvtoVaz and Gaz, are still working and struggling to replace imported parts with domestic analogues.

TeDo forecasts two scenarios for the recovery of the Russian automotive sector. In the basic scenario, the passenger car market is predicted to grow by 7% in 2023, to 670,000 units. In the optimistic scenario, growth of 28% is expected this year and a further increase in sales of 18% per year thereafter. However, both scenarios project that the market will approach pre-crisis levels of 1.5mn cars only by 2027.

Russia’s sales of new cars and light commercial vehicles (LCVs) plummeted by 62.1% on the year to 41,900 in February (chart), the Association of European Businesses (AEB) said in a statement on March 5. The data does not include China’s car producer Chery, whose sales ranked fifth in Russia in 2022, as well as sales of car producers BMW and Mercedes-Benz, which haven’t reported their output to AEB.

However, the AEB figures have become misleading, as they don’t capture the Chinese sales, which have soared in the last year, as Chinese manufacturers rushed in to fill the gap in the market left by departing Western multinational producers. The combined market share of Chinese and Russian brands has jumped from 29% in February 2022 to 76% now.

Another factor the forecasts have yet to factor in is what role Iran will play in the recovery. As bne IntelliNews reported last August, Iranian carmakers are already joining China in moving into the Russian market as Russia hopes to learn from Iran’s long experience of building up car production while being under a US sanctions regime.

Two of Iran’s leading producers, Iran Khodro Company (branded as IKCO) and its rival SAIPA, as well as a raft of smaller players, have already begun shipping cars suitably adapted to colder climes to Russia to test the waters, and are expected to ramp up sales as they adapt to the new market.

TeDo's forecast is considered to be quite realistic by experts, reports The Bell, given the difficult situation in the Russian auto industry. Last year, sales of new passenger cars in Russia fell by 58.7% compared to 2021, and the market lost 40.9% in terms of money. In the first two months of this year, sales of new passenger cars decreased by 45% in annual terms, while the weighted average price of a new car in Russia increased by 20% to RUB2.4mn ($31,177).

The shortage of new cars has resulted in an increase in demand for spare parts to maintain the existing fleet. TeDo notes that the market for spare parts needed for car maintenance and repair grew by 4.6% last year. Meanwhile, the market of auto components for primary assembly in production fell by 41.8%. The trend is anticipated to intensify in 2023, with prices for auto parts predicted to increase by 20-40%.

TeDo's forecast is the most pessimistic of all that have been cited so far, with other experts predicting that Russia will be able to reach pre-crisis levels in sales of new cars in the next two years, The Bell reports. Nevertheless, the shortage of new cars in the Russian market is likely to continue for at least a few more years, leading to higher prices for cars, spare parts and transportation. In the long term, this could affect road safety.

However, other exports have pointed to the speed at which the automotive industry has been able to react to the shock of the departure of almost all the main producers. Russia’s car output came to a screeching halt  in the middle of last year, with a mere 3,000 cars produced in the whole country that month, against the typical output of circa 140,000 a month. In this light the drop of only 44% over the whole of 2022 can be seen as an achievement, say some analysts.

And output will continue to recover on low base effects. Russia’s light car output rose 53% in February year on year, compared to the collapse in production a year ago. What remains unclear is the pace of this recovery.