July 4, 2022

Russia's auto industry boom is set to come to a halt due to Ukraine sanctions

Russia’s auto industry boom is set to come to a halt due to Ukraine sanctions

  • Car factories in Kaluga stopped production
  • Demand for cars is falling, food prices are rising
  • Some hope that Western resolve will not continue
  • Others have experienced crises before

(Reuters) – Thousands of auto workers have been furloughed, food prices have soared as Western sanctions rise on the small Russian city of Kaluga and its leading foreign automakers, with more sanctions likely.

The Kaluga region, 190 kilometers (120 miles) southwest of Moscow, says it has attracted more than 1.3 trillion rubles ($15 billion) in investment, mostly foreign, since 2006.

But Western sanctions imposed in recent weeks after Russia sent tens of thousands of troops into Ukraine have exacerbated persistent component shortages and halted production at two major car manufacturers, Germany’s Volkswagen. (VOWG_p.DE) The Swedish Volvo (VOLVb.ST).

Register now to get free unlimited access to Reuters.com

Third, the PSMA Rus plant which is a joint venture of Stellantis (STLA.MI) and Mitsubishi (7211.T) And employs 2,000, production may soon halt due to a shortage of parts, Stellantis’ CEO said last Thursday. Read more

“It is not clear what will happen. They are not giving us any specific information,” said Pavel Terbogov, a welder at PSMA Rus.

Terbogov said he needs twice as much money to buy groceries than he did before the sanctions. Analysts have expected Russian inflation to rise to 24% this year, while the economy may shrink to 2009 levels.

The United States and Europe are considering further sanctions against Russia after Ukraine accused Russian forces of killing civilians in northern Ukraine, where a mass grave was found in Bucha outside Kyiv. Read more

Russia has called its actions in Ukraine a “special operation” and the Kremlin has categorically denied any accusations of killing civilians, including in Bucha.

One source of hope for some in Kaluga, which has a population of 325,000, is that the West may be reluctant to do harm to its businesses.

“Does it make sense to sanction its own factory and lose money?” said Valery Oglov, an auto mechanic at the Volkswagen plant. “Is it possible to lose the Russian market?”

“We hope to be back in business as soon as possible, and everyone will have confidence in the future again,” Oglov said.

Volkswagen, whose plant employs 4,200 people, suspended operations in early March. A spokeswoman said production remained frozen.

Volvo Group, which employs more than 600 people to build the trucks, has suspended production.

Even before the sanctions, Russian car sales had shrunk from 2.8 million units since the Volkswagen plant opened in 2007 to 1.67 million units last year, hit by both sanctions after the 2014 annexation of Crimea and the COVID-19 pandemic.

Some factories cut production last year due to disruptions caused by the pandemic.

“We got similar licenses at the plant … But now the situation is, of course, different and more serious,” said Alexander Netsov, a warehouse foreman at the Volkswagen plant. “But we are waiting anyway, we are not losing hope,” he said.

Noting the pressure workers are feeling, Netesov said the new Polo he ordered at the factory discount has increased by 20% since its pre-order.

Others in the city, which also boasts of producing pharmaceutical and food companies as well as Samsung TVs (005930.KS)The optimism derives from the fact that every crisis that has plagued the Russian economy over the past two decades has been followed by a boom.

“I hope, we all hope, that everything will settle down in the near future,” said Angelina Minegulova, marketing director at Volkswagen dealer KorsGroup, which has seen a drop in demand as car prices soar.

Register now to get free unlimited access to Reuters.com

Reporting by Reuters. Written by Conor Humphreys. Editing by Lisa Schumaker

Our criteria: Thomson Reuters Trust Principles.