Russian carmakers braced for turbulence as US sanctions promise to bite

Russian carmakers braced for turbulence as US sanctions promise to bite

Automotive News Europe — 2023-10-16

Automotive Industry

A recent round of US sanctions against the Russian automotive industry threatens to hurt the supply chain contingencies established in the country since it invaded Ukraine.

The US Treasury’s Office of Foreign Assets Control (OFAC) has imposed sanctions against leading Russian automakers Avtovaz, Sollers and Moskvich for the first time.

Russian officials and representatives of the sanctioned companies have tried to downplay the effect of the restrictions. Sollers said that the company does not expect any consequences from the measures because it switched to sanction-resistant components supply channels and financial settlement mechanisms. Avtovaz is a flagship of the Russian automotive industry and its general director, Maxim Sokolov, said the company was “morally ready” for the sanctions. Lada production will not stop as a result of the restrictions, but certain problems with imported components are expected to persist, Sokolov added.

Over the past year, Avtovaz localised nearly 1,000 components which it previously sourced from abroad. However, the risks of supply disruptions remain unpredictable, as they are reliant second and third-tier suppliers, Sokolov admitted.

Denis Manturov, Russian industry and trade minister, said US sanctions will only accelerate the import-replacement programme in the Russian automotive industry, adding that Avtovaz’s production plan to assemble 400,000 finished vehicles in 2023 is still in force.

A warning shot 
Independent analysts have warned that the US restrictions also aim at non-Russian companies that continue to do business with the sanctioned automakers.

Despite a major import replacement push in the past years, quite a few components are still imported to Russia, particularly from China, said Eugene Zhitukhin, director of Fresh, a Moscow-based automotive marketplace. According to him, the US regulator has also imposed sanctions on Finnish, French and Estonian businesses, sending a clear signal across the industry that it may not be safe to continue working with the Russian companies.

Western countries are attempting to weaken Russian vehicle production and technology in the automotive industry. To countervail the restrictions, Russian businesses may need to further adapt the logistics chains and financial settlement schemes, Zhitukhin said.

Alexey Tuzov, an independent Russian automotive industry analyst, also admits that the Russian industry remains highly dependent on imported components, technologies and raw materials. He echoed the fears that the fresh round of sanctions could discourage companies from friendly countries from keeping their business with Russia.

For example, he said, Chinese companies mulling a plan to localise their production capacities in Russia may opt to expand their export to European countries instead to avoid sanction risks.

At this point, it is hard to say how the new restrictions will affect Russia’s carmakers, Ilya Zharsky, a managing partner of the Russian think tank Veta, said. In the first place, it is yet to be seen how the Chinese partners of Moskvitch will react to this news because they are also not immune to the sanctions, though China did not join Western sanctions against Russia, Zharsky added.

Some changes in logistics and payment terms may be in order to mitigate the sanction risks for foreign partners of the Russian automotive firms, he said.