There was no escaping it – the proverbial elephant in the room formed the backdrop to this week’s Moscow Motor Show just as it had in St Petersburg earlier this year at the International Economic Forum.
Everyone’s, well, just a bit twitchy in Russia concerning what is happening down south on the border and with The Moscow Times headline this morning screaming: ‘Russia denies incursion into Ukraine,’ the Motor Show was dominated by the rapidly deteriorating political situation.
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The economic gamble Russia is playing is enormous – let alone military – the parameters are well known – spooked markets have put the Rouble under intense pressure – interest rates and inflation are creeping up and wise birds are taking their savings from Moscow nests and secreting them elsewhere.
But despite those fears, there is a view this is smoke and mirrors – bluster and noise – designed to project Russia as a genuine superpower once more.
I talked to Association of European Businesses (AEB) automotive chairman, Joerg Schreiber, this week in Moscow and this was his take on The Kremlin’s hard line, particularly with a view to rising rumours Russia could target the auto sector with sanctions.
“If that became some sort of reality, you would see people rushing towards showrooms,” says Schreiber. “In my view, I would hope it is just show and the next possible step of escalation…in case the West takes further sanctions.
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By GlobalData“This what I think the government wanted to hint. Like the Spanish inquisition when they said ‘show him the [torture] instruments.’
“It would massively impact the business – think about the share of imported material in automotive components. That would be unthinkable.”
Quite why President Vladimir Putin – who if anecdotal evidence is anything to go by this week in Moscow – has pretty significant backing still – would target auto is a mystery.
The sector is a genuine success story in Russia – admittedly not at the moment as the AEB tracks ever plunging monthly sales – but the industry rebounded even stronger after the crash of 2008 and many tip it to reach the three million unit mark if the current squaring up ends.
And in any case, any auto sanctions would likely affect only direct imports – although there is a nagging fear the component sector might have to rapidly readjust to providing more Russia-sourced parts.
I’ve been with Renault this week in Russia looking at its Avtoframos plant right in the heart of Moscow – surely only a former command economy could have placed a huge manufacturing site cheek by jowl with commuting Muscovites? – and the French automaker is pretty confident it can ride out the storm.
“We want to enhance local content – minimise the impact of the Russian Rouble,” says Renault Russia general director, Bruno Ancelin.
“Here you can be the King if you localise. You pay tax to import cars from other countries – you pay roughly 30% import tax on the price. If you are localised, you pay almost nothing, which is why Renault chose very high localistion.
“We benefit from State support because we are installed locally.”
Such insurance policies clearly appear a smart way of avoiding the worst of any firepower The Kremlin might throw at the auto industry and it is frankly a mystery why the Russian government would target the sector at all, given its crucial role in rejuvenating a moribund economy, seemingly beset on sides by hostile forces.
The once powerhouse of BRIC fame – Russia is surely playing with fire on this one and has far more to lose in terms of the long term knowledge flight with engineering know how and manufacturing prowess.
And yet the speculation isn’t going away as the AEB AMC chairman told me at the show.
“Medvedev recently talked about import restrictions concern [ing] cars, ships and vessels,” said Schreiber.
Feint and parry, thrust and swerve. We used to be like this in the Cold War – East and West shouting at each other through rhetorical megaphones, but the current volatile situation seems to have a fuse straight to the powder keg.
What is known is absolutely unknown to paraphrase a certain former American Defence Secretary and while all the brave talk barks forth from politicians and the boots on the ground become noisier, potential future OEMs or suppliers may well be looking twice at Russia, three million market or not.
Even those hedged against the vagaries of sanctions by localising may think twice if the market continues to tumble at such an alarming rate, but for the moment, they are, publicly at least, resolutely committed to this endlessly changing country.
