Although Russia’s new car market is posting a strong recovery, it will continue to play second fiddle to Germany for some years yet.
The first quarter of 2011 has seen Russia’s new car market start to recover in earnest, after suffering badly in 2009’s global financial and economic crisis. But the government is taking no chances and has found Rb5bn (US$180m) of extra budget cash to extend the sector’s scrappage scheme to the end of 2011. As a result, some trade groups are predicting that Russia may once again be in a position to overtake Germany as Europe’s largest car market, although the Economist Intelligence Unit thinks this is unlikely to happen for another three years at the earliest.In the first three months of this year, new car sales in Russia soared by 77% compared to the previous year. Some 517,304 new cars were registered during that time, compared to 292,437 in the year-earlier period, according to data just released by the Association of European Businesses (AEB). Meanwhile, in the first two months of the year, which are the latest figures available, Russian car production rocketed by 115%.
"A very impressive growth for March and the first quarter puts down a strong foundation for growth in the rest of 2011 and for the development of the Russian car market back towards its pre-crisis level," the chairman of the AEB Automobile Manufacturers Committee David Thomas said in a statement.
Several factors are behind the recovery. New car demand was extremely weak in the early part of last year, which provides a favourable base of comparison. This situation only changed when a state-funded scrappage scheme was introduced in March 2010 which gave buyers Rb50,000 (US$1,787) if they traded in a car that was more than 10 years old for a new car, as long as it was produced in Russia. That scheme had been due to expire this month (April 2011) but prime minister Vladimir Putin has recently pledged an extra Rb5bn of budget cash to enable the programme to run until the end of 2011.
High oil prices are also playing a role. As the world’s top oil exporter, Russia is benefiting from the extra revenues despite its own higher costs. As a result, Russia is firmly putting its worst recession in 15 years behind it, with consumer confidence and purchasing power once again on the rise.
Getting carried away?
So what does the future hold for the country, which until 2008 was able to boast one of the fastest-growing car markets in the world and which had been poised to overtake Germany as Europe’s largest new car market? The fact that the government is extending the scrappage scheme at a time when the economy is in recovery mode anyway, and when all other national scrappage schemes have long come to an end suggests that it wants to take no chances with revival of this all-important sector.
The AEB has said that for now its forecast for 2011 remains at 2.24m units, but it will likely increase its forecast for 2012. Previously, the AEB has suggested that, next year, annual sales could return to pre-crisis levels of 2.8m - 2.9m units. Our view is less optimistic. The strong year-on-year growth rates in the first quarter are mainly thanks to the comparison with the depressed sales before the scrappage scheme was introduced in April 2010. These growth rates will therefore slow into the second quarter. Nevertheless, the government’s decision to extend the scrappage scheme through the rest of 2011 will support car sales throughout the year. However, the inevitable payback will be more modest growth in 2012.
Furthermore, Russia's economy is always prone to volatility. With oil accounting for two-thirds of Russia’s exports and close to half of federal budget revenue, the country needs to unlock new supplies urgently as its current reserves are dwindling and production from existing wells is expected to stagnate. There could be enough oil hidden underneath the Russian Arctic to increase its oil reserves by 50% and its gas reserves by a quarter, but so far the country has not found a way of accessing these supplies.
There are other blots on the horizon too. Most Russian economic indicators have actually been mixed in the early part of 2011 while uncertainty created by the forthcoming elections could harm consumer confidence in the short-term. In terms of new car sales, therefore, Russia is unlikely to overtake Germany again (as it did in 2008) until 2014 at the very earliest, and more likely not until 2015.
