Shaky Economy Threatens Russia Vehicle Sales, GM Manager Says

ANN ARBOR, MI – Being a BRIC nation does not guarantee Russia’s vehicle sales will follow an upward trajectory, says David Teolis, General Motors senior manager-Economic and Industry Forecasting-International.

Rather, Teolis says Russia’s economy is cause for concern, as the nation has taken a series of missteps that put its economic future in doubt.

“In 2001, everyone associated Russia with BRIC (the emerging nations of Brazil, Russia, India and China), and I felt it wasn’t really a BRIC,” he says during a University of Michigan Transportation Research Institute conference here. “It has different fundamentals that don’t make it sustainable, and we saw that during the (economic) crisis.”

Prior to the recession in 2008-2009, many analysts predicted it wouldn’t be long before Russia became the top-vehicle market in Europe. However, the country’s lackluster recovery reinforced concerns Teolis had about Russia’s economy and its ability to maintain strong vehicle sales.

Russia light-vehicle sales in 2008 were 2,897,459, plummeting to 1,465,917 the following year in the midst of the global recession, according to WardsAuto data. In 2010, deliveries rebounded somewhat to 1,910,573, before hitting 2,654,408 in 2011. Last year, sales were 2,777,447, down 2.3% vs. like-2012.

A primary concern of Teolis is the Russian economy’s reliance on oil and natural-gas exports, which leave it exposed to boom-bust cycles tied to fluctuating energy prices.

“Russia needs high oil prices, in the $100-$110-a-barrel range, to balance its budget,” he says. “The challenge there is (that) there is going to be a gradual weaning of oil and natural gas away from Russia. Europe is going to be more energy-efficient.”

The energy sector contributes about 25% to Russia’s overall economy, 50% of government revenues and to more than 50% of total exports, Teolis says.

Russia’s Gross Domestic Product also has contributed to the uncertainty surrounding its automotive market. During the boom years of 1999-2008, GDP per capita increased 88%, but it since has dropped to levels near those recorded during the breakup of the Soviet Union.

Potential growth of Russia’s GDP is being curtailed by the conflict in the Ukraine, which leaves Russia open to possible economic sanctions by the U.S. and other Western nations, Teolis says.

Lack of Investment, Aging Population Hurdles

Without strong GDP growth, Russia has become less attractive for investors, lowering the country’s credit ratings.

“It’s a challenging environment for Russia,” Teolis says. “It still lacks competitiveness, as shown by outside sources and indicators, and has a very low investment grade.”

Damage caused by lack of investment is exacerbated by a declining population. By 2024, 35% of Russia’s population is expected to be 50 years of age or older, with 23% under the age of 20, according to data from Haver Analytics.

“The working-age population is declining,” Teolis says. “To offset that (Russia) needs investment to increase labor market productivity and offset the decline.”

If Russia wants to solidify its economy it should join the European Union rather than the Eurasian Union, a proposed economic union of post-Soviet states including Kazakhstan, Kyrgyzstan and Tajikistan.

Teolis says nations included in the Eurasian Union are at a lower level of economic development, less competitive, more corrupt and have less economic freedom.

“Russia needs to be more of a participant in the global economy, not feel like it has to be separate from it,” he says. “They need the competitive pressure of the global economy to make them better. Trying to create their own union is contrary to facing competitive pressures that make them more competitive.”

Despite the challenges facing Russia’s economy and potential future vehicle sales growth, Teolis says if the issues are addressed the country has a chance of becoming the top European vehicle market, which many projected it would become prior to the recession.

“Automakers need to be in Russia because there is plenty of upside,’ he says. “It’s a big market with highly educated workers, but it’s the policies holding the economy back. If they could correct some of these issues, it’s all upside.”

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