The Russian giant is in trouble. Even the Chinese won’t help

AvtoVAZ is a company founded in 1966 with the participation of Fiat, which for decades set the tone for popular motoring in the Soviet Union and later Russia. When in 2008 Renault invested in the plant located in Togliatti near Samara, it seemed that everything was on track. Over time, more modern models based on French technical thought were introduced into the offer. However, Russia’s attack on Ukraine changed everything. Western companies have withdrawn from Putin’s state, including Renault.

Although the Kremlin informed its citizens that the changes would only strengthen the Russian economy because it would become independent from external suppliers, the warehouses of Russia’s largest automotive company quickly ran out of parts. Production had to be stopped, and when it was restarted, only some, technologically older models returned to the line. Plus theirs the equipment brought to mind European cars from 30 years ago. Of course, all due to the lack of imported components.

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The following months allowed Russian companies to establish contact with Chinese companies, which began to supply the Russian side with components for car production. The work started and the cars gained some equipment. However, not everything went as the Russians wanted. From May 29 to June 19, 2023, a “corporate holiday” was announced at AvtoVAZ plants. He was hiding behind this name downtime forced by a delay in the transport of parts from abroad. Now the problems are even greater.

In September 2023 AvtoVAZ was placed by the US authorities on the SDN sanctions list. In the world of international finance, it’s like a wolf’s ticket. “The consequence of this were new, massive refusals by foreign suppliers, financial institutions, banks (…). Foreign banks block both our outgoing payments and those to AvtoVAZ, if we are talking about export products. This happens not only in the case of unfriendly places, but also – taking into account the risk of secondary sanctions – in almost all foreign banks,” said Maksim Sokolov, head of AvtoVAZ, quoted by autostat.ru.

The website confirms what has been suspected for a long time. The Russian automotive industry is currently dependent on the import of parts from the so-called friendly countries. Mainly from China. Many automotive companies in the Middle Kingdom have ambitions that go beyond the domestic market. Those who are thinking about operating in Europe or the United States will have to cut off contacts with Russian entities. Or at least give up settlements using the international financial system.

If other Russian companies also have similar problems, the effect could be devastating. The inability to settle receivables quickly may effectively discourage foreign contractors. Is this an insurmountable obstacle? Probably not. However, bypassing sanctions will be both risky and expensive. For many companies supplying parts to Russian entities, this may be unprofitable.

On the other hand, Chinese companies that will produce or sell complete cars in this country may gain a stronger presence in Russia. Such entities may benefit from the risk of circumventing US sanctions. And the plans are already advanced. It is expected to appear on the Russian market soon new model – Lada X-cross 5. In fact, it is a copy of the Chinese FAW Bestune T77 with a different stamp. The revived Moskvicz brand produces Chinese cars from JAC under its name. The Middle Kingdom also sells cars under its own brands. Geely sold 3.6 times more SUVs and crossovers in Russia in nine months of 2023 than in the comparable period of 2022.

Regardless of the scenario, sanctions for Russian automotive companies mean very bad news for them. Although the Kremlin will probably put a good face on the bad game, even representatives of local companies openly talk about the problems.