The Russian car market has taken a step back, reverting to the structure it had in the 2000s and potentially heading towards becoming more like China

The automotive sector is one of the sectors of the Russian economy hit hardest by the war and the resulting disruption of economic ties with the West. In 2022, less than 630,000 new cars were sold, compared to 1.5 million in 2021. The market lost almost 60% of its volume, and its value halved. Sales of domestically assembled foreign cars declined even more sharply (-66%), as did domestic cars, although this decline was less severe it was still dramatic (-48%), according to a study by 'Technologii Doveriya' (formerly PwC Russia). For instance, AvtoVAZ sales for the year decreased by almost half, 48%, while UAZ sales declined by 43%.

According to Rosstat data, the decline in production was almost as significant, reaching -67%. In total, 450,000 cars were assembled in Russia during the year, compared to the previous record low of 597,000 in 2009. Prior to the war, there were more than ten factories in the country assembling cars from manufacturers such as BMW (Avtotor), Citroen, Mitsubishi, Peugeot (PSMA Rus), KIA, Hyundai (Hende Motor Manufacturing and Avtotor), Mazda (Mazda Sollers Manufacturing Rus), Mercedes-Benz (Mercedes-Benz Manufacturing Rus), Renault (Renault Russia), Škoda, Volkswagen (Volkswagen Group Rus), and Toyota (Toyota Motor). All of them have now ceased operations. Prior to the war, domestically assembled foreign cars accounted for nearly two-thirds of sales, with imported cars representing around 15%. Modern AvtoVAZ models were developed in partnership with Renault, and their production also had to be halted due to a shortage of components. As a result, the market structure has undergone a radical transformation, as indicated by data from 'Autostat.' The share of sales of domestically assembled foreign cars decreased from 61% in February 2022 to 20% in February 2023. The share of sales of Russian brands (primarily Lada) increased from 20% to 40%, while imports rose from 19% to 29%. Additionally, a new significant segment emerged — 'alternative imports' - accounting for 11% of the market.

The Russian car market in 2022

The 'Trust Technologies' study offers two scenarios for market development in 2023: a baseline scenario and an optimistic one. According to the baseline scenario, sales will reach 670,000 units, representing a growth of 7%. The market is expected to recover at an average annual rate of 22% thereafter. In the optimistic scenario, sales are projected to grow by 28% in 2023 and continue to increase by a further 18% annually. However, this scenario requires an 'improvement of the geopolitical situation' and a simultaneous expansion of domestic production and parallel imports (which accounted for 12% of sales in 2022, according to 'Autostat' data). The baseline scenario does not foresee any significant growth in domestic production in the near future. In any case, a return to  pre-war levels is expected no earlier than 2027. Other experts have made similar forecasts. For instance, B1 (formerly EY's division in Russia) has given the market three to five years to recover.

The expansion of domestic production following the exodus of leading global manufacturers from the Russian market is dependent on the scale of collaboration with Chinese companies. The 'Moskvich' plant (formerly 'Renault Russia') plans to assemble 50,000 Chinese vehicles under its own brand in 2023. 'Avtotor' (which previously assembled the BMW, KIA, and Hyundai models that left Russia) and 'Sollers' (Ford and Mazda) have also started the assembly of various brands of Chinese cars. However, the production volumes are still unclear, and official statements suggest that these are more pilot projects. Moreover, Chinese companies are only in discussion about large-scale assembly cooperation with Russian partners. Full localisation requires significant investment and government support. Additionally, deeper integration into the Russian market carries the risk of secondary sanctions. Major Chinese companies have entered the global market through M&A deals, so they have reason to be cautious. Russia lacks leverage to pressure its new partners, as it has no viable alternative negotiation partners.

Further, according to analysts from the Central Bank, in their  'Trends in Focus' report, ownership of passenger cars in Russia is below the average level of developed countries and is comparable to the average level of emerging markets. The government's Automotive Industry Development Strategy adopted in 2018 aimed to produce 1.8 million passenger cars in 2022 and 2.2 million in 2025. In the absence of new cars, the resurgence in demand is partially satisfied by used vehicles. Used car sales in 2022 were not significantly affected, declining by 19% according to 'Autostat' data. The authors of the 'Trends in Focus' report highlight a significant increase in credit financing for used car purchases. It has already surpassed the volume of credit financing for new car purchases, although historically it has been several times lower. This is a consequence of the limited supply of new vehicles, which as the Central Bank analysts have explained, has not been able to keep up with growing demand, leading to an ageing car fleet.

Looking ahead, the Central Bank forecasts three potential scenarios. First, demand will be met by expanding production at existing facilities, which requires addressing supply issues for Russian manufacturers (following Renault's departure, AvtoVAZ also hopes to establish partnerships in China) and creating attractive conditions for investors from 'friendly countries,' by which it also primarily means China. Second, imports will increase, including both new vehicles from 'friendly countries' and used cars. Third, if the expansion of supply through the first two channels is insufficient, consumers will have to extend the lifespan of their existing vehicles, replacing the shortage of new cars with auto service repair. Acknowledging the high level of uncertainty, the Central Bank analysts do not exclude the possibility that 'all three scenarios will likely be realised to some extent.' In essence, the structure of the Russian car market has regressed by one to two decades.

The analysts caveat that authorities can influence the course of events through economic measures (import duties on new cars and components, tightening or relaxing localisation requirements, tax regime), but this 'requires understanding the balance of risks and benefits of the decisions made.'