Global Automakers Get Blasted in Russia by Ruble Crash

Russians are watching with trepidation and with memories of what happened last time to their rubles: near total destruction. They trust their banknotes as far as they can throw them. And they’re taking action. They’re converting their rubles into dollars and euros, thereby contributing to the crash of the ruble. And what they can’t convert into hard currency, they spend on “hard assets” of all kinds, furniture, iPhones, jewelry…. And wealthy Russians are going for luxury cars.

Lexus sales soared 63% in November, and dealers had to hire staff to come to grips with this onslaught of business. Porsche sales jumped 55%. Sales at Nissan’s luxury unit, Infiniti, rose 23%. Mercedes booked a 7% gain. In a year that has otherwise been terrible for automakers in Russia.

In March, as the Crimean crisis played out, Karl-Thomas Neumann, CEO of GM’s Opel unit, told the Automobilwoche, “We’re already feeling the pressure of the ruble exchange rate.” Russia is the key growth strategy for long-suffering Opel, as car sales in many European countries have tumbled since 2008. At the time, he didn’t think the debacle would last long: “It’s certain that Russia will be the largest automobile market in Europe by 2020,” he said, echoing the sentiment among automakers that Russia would overtake Germany.

Then the price of oil plunged 50%, and the ruble nearly as much. And auto sales dropped 12% this year through November.

But November itself didn’t turn out that bad. The luxury-car buying binge in conjunction with a subsidized cash-for-clunkers program slowed the sales swoon to just 1.1%. And December, the month when the ruble spiraled out of control, looks even better.

“Cars, no matter budget or premium, are being sold like hotcakes currently,” Tatyana Lukovetskaya, CEO of dealer chain and auto importer Rolf Group, told Bloomberg. “We can’t recall such a boom in the market over the past decade.”

Russians are trying to make the best of a horrible situation. Sticker prices and wholesale prices are set by manufacturers well in advance of the final retail sale, and when the currency plunges 20%, or 30%, or 40% or more in the interim, buyers who pay with increasingly worthless rubles for prices that were set months earlier are getting a great deal: an “asset” that loses its value more slowly than the ruble, has some utility, and can be sold for hard currency.

But global automakers see their sales get slashed each time the ruble drops as they have to convert their revenues in Russia into their home currency. With the recent out-of-control ruble crash, they’re taking hefty losses on each car they shipped to Russia. The profit equations fall apart even on cars they build in Russia, as components and assemblies, which account for a big part of the cost of the car, come from China, Thailand, Korea, Europe, the US, and other places.

The buying binge by desperate Russians is expected to collapse once price increases have been implemented or once ruble savings have been depleted, whichever comes first. Automakers are preparing for it.

Volker Treier,  Deputy Chief Executive of the Association of German Chambers of Industry and Commerce (DIHK), said that German companies already have been hit hard “by the dramatically falling purchasing power” of Russians. Next year looks worse. Companies are slashing their investments in Russia, he said. And automakers started switching to part-time work and laying people off.

One of them is Volkswagen, which had invested $1.3 billion in Russia and is, or was, planning to spend $1.2 billion more. But now it cut output at its Kaluga plant and is laying people off. Its sales in Russia are down 13% this year.

Automakers are losing too much money. And they want to put a stop to it. On Tuesday, GM reportedly halted wholesales to dealers in Russia. On Wednesday, Jaguar Land Rover, a subsidiary of Indian automaker Tata Motors, halted wholesales. On Thursday, GM and Volkswagen’s Audi unit admitted that they’d halted wholesales. Due to “the volatility of the ruble exchange rate and with the aim to manage its business risk,” GM explained, with a nod to a currency that had accomplished the feat of crashing 10% and even 20% in less than a day, producing big losses for automakers in just a few hours.

BMW had proactively cut back on exports to Russia this summer. And they’re all trying to figure out how to price vehicles so that they can be sold at a profit as the ruble goes to heck, but answers remain elusive. Hence the cutbacks and outright suspensions of wholesales in the market that used to be the greatest hope for growth on a continent where growth is hard to come by.

This is what happens when a currency spirals into a collapse. Recklessly managed fiat currencies tend to do that. The ruble isn’t the only one getting whacked by oil, sanctions, its central bank, corruption, capital flight, or other circumstances – there’s a long list of other currencies. But it’s the biggest one. Its collapse and the havoc it wreaks in Russia are felt around the world.

As Russians binge-buy to save what they can, and as bankers fret while companies try to stop the bleeding, the government is selling its crown jewels to stem the chaos for a day. Read…  Ruble Spirals Elegantly out of Control as Functional Currency

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  4 comments for “Global Automakers Get Blasted in Russia by Ruble Crash

  1. Alex
    Dec 19, 2014 at 9:59 am

    It is true that there are no Porsche’s left in Moscow’s stores but think this: don’t you think that russian Central Bank was very well aware of the effects of so called sanctions (that cut the ability of russian companies to refinance their debts in western financial markets)? CB knows the name of the game and that is precisely why it allowed to happen what happened. Look at the benefits and consequences of the event and you will clearly see that russian CB got it all.

  2. Julian the Apostate
    Dec 19, 2014 at 10:51 am

    The Central Bank may reap a short term windfall but to quote Mr. Spock “you have opened the bottle and allowed the genie to escape.” they have squandered any good will they had with the Russian people and it will be hard to get it back. since the one thing the banksters can’t afford is attention focused on their machinations. it could be that they are believing in their own Big Lie, in which case they will be hoist on their own petard.

  3. brian t
    Dec 19, 2014 at 12:10 pm

    My first thought was “dealers should therefore price their vehicles in a stable currency, such as the Euro”. My second thought was “but that’s probably illegal there”, and sure enough, it’s illegal.

    But … I found some information (*1) from 2010 that indicates that, at that time, you could see prices a few marked in “Y.E.” or “standard units” (a euphemism of sorts). That seemed to go away over the years, as the Ruble stabilized, but I expect to see Y.E. prices make a comeback. I’m not the only one (*2):
    “The ruble has been falling so fast that Russian sellers start revisiting the practice from the 1990s, setting prices in a foreign currency equivalent, i.e. a conventional unit, known in Russia as y.e. Formally, this is prohibited under amendments to the Law on Consumer Protection from 2004, but the rapid devaluation of the ruble forces entrepreneurs to “turn back time.”

    *1 http://www.waytorussia.net/Practicalities/Money.html
    *2 http://english.pravda.ru/russia/economics/16-12-2014/129318-russian_ruble-0/

  4. Schadenfreude
    Dec 19, 2014 at 5:37 pm

    More evidence of wreckage of Ruble collapse being felt in the EU nations, not only in Russia. The sanction/counter-sanction actions between the West and Russia are causing extensive damage to both sides.

    My questions:
    1. Who is benefiting from the sanctions/counter-sanctions game, if anyone?
    2. Is this playing out as expected, or has it assumed unexpected dimensions and given unexpected effects?
    3. Since it seemed obvious that when the EU imposed sanctions on Russia, its fastest-growing export market and major energy supplier, there would be harm to the EU GDP and political stability, why did EU leaders go along so readily with sanctions proposed by the US?

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