Despite government efforts to jumpstart auto financing and boost sales, the Russian sector continues to be pummelled by the harsh economic downturn. The market reported a staggering 56% year-on-year (y-o-y) fall in new vehicle sales in June, taking H109 sales down 49% compared with H108. With the economic crisis, banks are increasingly reluctant to offer new car loans or loans with difficult terms and high rates.

Conditions have been further aggravated by soaring unemployment, which the World Bank estimates could hit 13% by the end of the year.

This has weighed heavily on most carmakers, who have reported double-digit falls in sales for H109. In order to stay afloat, manufacturers continue to resort to idling production and cutting costs. Market leader AvtoVaz has revealed plans to cut production to only 20 hours a week from September 2009 to February 2010. Meanwhile, General Motors Company (GM), the second largest operator in Russia, intends to suspend production at its St Petersburg plant for two months starting in July, and Gorkovsky Avtomobilny Zavod (GAZ) plans to dismiss around 7,000 workers at its Nizhny Novgorod factory.

The government has launched a program to make low-cost auto loans available, but this has not been able to offset the sharp rise in unemployment, which is approaching double-digit figures. It is believed the scheme, even after being expanded to include more expensive cars, may not improve sales significantly as better financing is unlikely to be enough to entice out-of-work Russians to make big purchases.

Pricewaterhouse Coopers estimates new and used car sales could slump as much as 60% by year-end if the Russian government doesn’t step up its efforts to resuscitate the sector.

It is believed sales and production will continue to get hit by the consumer pullback and economic recession. We forecast sales to grow just 6% y-o-y to 3.82mn units. That’s a sharp slowdown from the 45% y-o-y sales growth posted just two years ago. Likewise, the report forecasts total vehicle production growth to moderate 5% y-o-y to 2.1mn units.

Nonetheless, we maintain a positive long-term outlook for the market, as Russia’s growth potential cannot be ignored. Foreign carmakers are still relying on the Russian engine of growth. At the same time, the Russian government is looking to benefit from the boom by strengthening the position of its own manufacturers. We are closely watching the bidding for GM’s European business, Opel. The Kremlin is throwing its support behind a Canadian-led bid for Opel which would give Russian bank Sberbank a stake in Opel. A successful Russian-backed bid could lead to Opel production at GAZ and significant technology upgrades for domestic producers.

While the pace of the rebound will depend on the speed of the economic recovery, we expect credit conditions and overall demand to start showing improvements in 2010. The growing consumer appetite should help sales surge to 5.75mn units by 2013 and elevate car ownership levels to 21.8%. We forecast total vehicle production to reach 3.34mn annual units by end-2013, substantially higher than the 2.1mn vehicle estimated to be produced in 2009.