U.S. carmakers plot Russia assault

Country seen as next sales frontier despite sanctions over Ukraine crisis


Never mind the Ukraine crisis and U.S. sanctions against Russia: American automakers say the Russian market is their next big frontier.

Russia is simply too large and too important for carmakers to ignore, experts said last week.

“The Russian market is going to be larger than Germany,” said John Branch, a professor at the University of Michigan Ross School of Business.

Branch said the structure of the Russian auto industry is in flux as the demand for imports increases despite barriers imposed by the Russian government. But that means automakers, particularly those with global ambitions, cannot afford to ignore the market’s potential there, despite its volatile nature.

General Motors is already partly involved. It has invested in a joint venture with AvtoVaz, which builds the Lada, Russia’s most popular automotive brand. But the Lada brand is a holdover from the Soviet era and sales are mostly concentrated in what Branch said were third- and fourth-tier cities and rural areas.

In major cities such as Moscow and St. Petersburg, consumers are becoming more brand conscious. They like imported cars and have developed a preference for small SUVs that can navigate the country’s rugged roads and streets. GM-AvtoVaz produces the Chevrolet Niva, a mini-SUV popular within Russia and exported to neighboring countries that were formerly part of the Soviet Union.

David Teolis, an economist with GM, cautioned that predictions about the growth of the Russian market have to be regarded cautiously. The slow expansion of Russia’s economy and middle class since 2008 is hindering sales.

Russian car sales dropped by 50 percent in 2009 in the wake of the global crisis but grew briskly to reach nearly 3 million units in 2012. But last year, they dropped by 5.5 percent as the Russian economy hit the brakes, and are expected to fall again this year.

The chronic air of crisis that surrounds the country also has hurt Russia’s economic development. The cuts to its economic growth forecast, 0.5 percent this year or less according to the Ministry of Finance even without sanctions pressure, raise questions about the potential for the automobile sector to expand as quickly as China’s has.

“Russia needs to become a normal country,” Teolis said.

Daniel Russell, a former American diplomat who serves as president of the U.S.-Russia Business Council, said even with the Ukraine crisis, Russia is simply too important a country for American businesses to ignore.

Relations between the two sides could actually benefit from strong commercial ties, he argued. For instance, Russell noted that Moscow is now involved in separate negotiations aimed at keeping North Korea in check and at halting Iran’s nuclear program.

“There has been a dramatic jump in the Russian economy in the last 10 years,” he said.

And it is doubtful other countries are willing to forgo business with Russia. The U.S. pressure for sanctions on Moscow over its annexation of Crimea has run into that fact.

European countries have closer business and financial ties with Russia, have been more reticent to ratchet up sanctions on Moscow. And while Japan issued a statement condemning Russian action in Crimea, it hosted 200 Russian business executives the same day.

“Sanctions don’t work,” Russell said, reminding that Russia survived the threat of sanctions in 2008 after a brief war with neighboring Georgia.