Russian automotive giant in trouble. Not even China can help

AvtoVAZ, the largest automotive company in Russia, is grappling with significant difficulties following the implementation of new sanctions. Even the company's leadership concedes that their circumstances are grim and the future of the company appears uncertain. The United States is largely to be blamed for this turn of events.

AvtoVAZ was established in 1966 partially due to Fiat's involvement and has since been a trailblazer in popular automotive production. The 2008 Renault investment in its Togliatti facility near Samara seemed optimistic. Over time, modern models influenced by French engineering designs were introduced. However, Russia's assault on Ukraine radically changed everything. Western companies, including Renault, withdrew from Russia.

Though the Kremlin reassured its citizens that these changes would boost the Russian economy by cultivating independence from external suppliers, Russia's most prominent automotive company swiftly depleted its parts supply. Production had to be suspended, and when resumed, only specific outdated technological models were brought back. Additionally, their equipment is compared to European cars from three decades prior, reflecting the imported components' shortage.

In the ensuing months, Russian companies were able to negotiate with Chinese conglomerates, which started supplying Russia with components necessary for car production. Business operations resumed, and a semblance of normality was restored to the production process. However, it wasn't without setbacks. From May 29 to June 19, 2023, AvtoVAZ announced a "corporate vacation", a euphemism for a halt in operations due to a hurdle in transporting components from overseas. Now, they are up against even more significant challenges.

In September 2023, AvtoVAZ was added to the US SDN sanctions list, practically branding them as international financial pariahs. "This resulted in numerous new rejections from foreign suppliers, financial institutions, banks... Foreign banks obstruct our outgoing and incoming payments to AvtoVAZ, particularly on exported goods. This issue is not confined to hostile territories; it permeates almost all foreign banks," said Maksim Sokołow, the director of AvtoVAZ, as quoted by autostat.ru.

This situation highlights a fact that has been speculated upon for a long time: Russian automotive production heavily relies upon imported parts from ostensibly allied nations, with China topping the list. Several Chinese automotive companies aim to expand beyond their domestic markets. Those contemplating operations in Europe or the US will be compelled to sever ties with Russian outfits or at least avoid transactions involving the international financial system.

If other Russian companies encounter similar difficulties, the consequences could be staggering. The impracticality of swiftly balancing accounts could effectively deter foreign partners. Is this an insurmountable roadblock? Probably not. Though circumventing the sanctions may be risky and expensive, it's not impossible. However, it may prove unprofitable for several companies providing parts to Russian enterprises.

On the bright side, this situation may boost those Chinese companies that manufacture or sell entire vehicles in Russia. These companies may deem the risk associated with sidestepping American sanctions worthwhile. Advanced plans are already in place. Soon, the new model, Lada X-cross 5, is expected to hit the Russian market. It's a rebranded version of the Chinese FAW Bestune T77. The relaunched Moskvich brand also manufactures Chinese cars from JAC company under its banner. China's brands are also experiencing growth, with Geely reportedly selling 3.6 times more SUVs and crossovers in Russia in the first nine months of 2023 than in the comparable period of 2022.

Despite the unfolding scenario, sanctions spell bad news for Russian automotive companies. Undeniably, the Kremlin is bound to put forth a strong front.