Automakers Wary of Russia Crisis, But Long-Term Damage Unlikely

Crimea’s decision to rejoin Russia has heightened tensions in the global community, but it’s unlikely to have a dramatic effect on Russia’s auto industry, experts say.

In response to the Crimean election, in which 95% of voters in the Ukrainian region favored annexation by Russia, President Obama imposed sanctions on two of President Vladimir Putin’s top aides and nine others involved in Russia’s military incursion into Crimea. But widespread sanctions have not been levied, which limits the potential for damage to the auto industry.

On March 5, NBC News and Reuters reported that Andrei Klishas, head of Russia’s constitutional legislation committee, inked a bill that would allow Moscow to seize property owned by Western companies and individuals, including automotive plants, in the event of sanctions.

“(The bill) would offer the president and government opportunities to defend our sovereignty from threats,” Klishas is quoted as saying.

However, such a move would be detrimental to Putin, as the Russian economy likely would suffer, says Warren Browne, president of WP Browne Consulting and one-time point man for General Motor’s Russian operations.

“Local production creates jobs and Putin is not going to shoot himself in the foot,” he tells WardsAuto. “The last thing Putin is going to do is something that would result in potential jobs lost. That just creates internal political pressure.”

A number of foreign automakers operate plants in Russia, including Ford, GM, Mazda, Hyundai, Volkswagen, Renault and Toyota. In all, there are 38 car and truck plants in Russia, the majority foreign-owned.

Output in Russia totaled 1,911,891 units last year and is expected to grow to 2,143,935 this year and 2,373,430 in 2015, according to a WardsAuto forecast.

Weakening Ruble Factor for Ford

While it’s unlikely multinational plants would be seized by the government, Browne says it’s conceivable automobile imports could suffer.

“(Most) imports into Russia come from Western Europe and Korea,” he says. “There are a whole bunch of things Russia can do to keep things out, including not clearing vehicles (at the ports). Every little step yields another step.”

Automakers contacted by WardsAuto remain wary, but do not predict a dire outcome from the Crimean conflict.

“‎The situation in Ukraine is of great concern and we hope that a political solution is found,” GM says in a statement. “We are closely monitoring the situation with our staff and partners.

According to multiple reports, Ford has put its Russian joint venture, Ford Sollers, under review and may cut production due to worsening economic conditions. However, the automaker in an email to WardsAuto says no decision has been made.

“The weakening of the ruble puts additional pressure on the Ford Sollers business,” a Ford spokesman says. “As always, we are constantly monitoring the overall economic situation and will act according to the changing environment. We have nothing to announce.”

Fiat Chrysler CEO Sergio Marchionne expresses greater concern, noting if the situation escalates it could affect the auto industry.

“There is not a single doubt in my mind there is a situation in Russia and Ukraine that (if it) remains as tight as it is, or it worsens, that it will dampen demand in Western Europe,” he says. “My sincere hope is somehow the political leadership involved in this issue will have the wisdom to resolve it.”

Western European markets could be affected should Putin cut back on oil and gas exports, but that’s a move that would hurt Russia more than the affected countries, Browne says.

“Russia’s economy thrives and lives on that,” he says. “So, if Putin says he’s going to cut off gas and oil exports, what’s going to happen to the economy?”

Even if the situation does not escalate, the Russian domestic auto market could be impacted negatively by jittery consumers concerned over possible economic sanctions and the devaluation of the ruble.

Russia is an important growth market for most global automakers, as it is part of the so-called BRIC nations, which also include Brazil, India and China.

The Russian market, after years of steady growth, has been in a decline, with light-vehicle sales dropping 5.3% in 2013 to 2,777,447, according to WardsAuto data. Through January, LV deliveries were off 5.8% to 152,662.

David Cole, chairman-AutoHarvest and chairman emeritus for the Center for Automotive Research in Ann Arbor, MI, says he expects the situation to resolve itself without major consequences, noting Russia largely is dependent on Western investments.

“They’ve gone overboard to attract investment from the West. In many ways it’s like China,” he says. “They badly need auto plants and activity for their economy.”

– with James M. Amend in Geneva

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