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Evolving Russian vehicle market will reshape aftermarket sales

Monday, August 28, 2017 - 06:00
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It was June 1992 and barely six months had passed since the fall of the Soviet Union. A professor of engineering at a well-regarded Moscow university was struggling to make ends meet. A teacher’s government-paid wages couldn’t possibly keep up with the rampant inflation Russia was experiencing.

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A neighbor asked the professor, Yevgeny, to help diagnose a problem with his car. As an engineer, Yevgeny often helped his neighbors find “workarounds” because parts were always scarce. In his neighbor’s case, there was no workaround. He needed a new fuel pump. Since there were none to be found in or around Moscow, Yevgeny offered to find one on an upcoming trip to Istanbul.

The fuel pump was found, and Yevgeny returned a hero, at least to his neighbor. But this gave Yevgeny an idea. He knew of many people who needed parts desperately to repair their vehicles, but they had no logistical means to acquire them. Soon after, Yevgeny began monthly trips back to Istanbul, where he would fill his two oversized suitcases with auto parts and return to Moscow. On each trip, he netted more profit than his annual university salary.

His success inspired others to try this, and it became known as the “luggage trade” in Istanbul, where vendors made small fortunes throughout the 1990s. No one knows Yevgeny’s fate exactly, but many lament that those days are in the past. As one would expect, the Russia that grew out of the former Soviet Union has matured, and it has established more traditional supply chains.

The Russian Federation, as it’s formally known, is geographically the largest country in the world. Its 17 million square kilometers of area is nearly double the size of the next biggest country, Canada. Yet for its size, Russia remains sparsely populated. Given Russia’s population of 143 million people, the country ranks as the tenth most populous in the world.

Russia faces significant demographic challenges as it has an aging population, and a smaller replacement work force to fill jobs as older workers retire. The stagnation is likely to continue as only 25 percent of the population is less than 25 years old versus 32 percent for the U.S., 39 percent for Brazil and 42 percent for Indonesia. China, which faces similar demographic issues, has 30 percent of its youth under 25 years old.

Economically, Russia has been under pressure from a multi-national sanctions regime stemming from Russia’s annexation of Crimea in 2014. Just prior to those events, the Russian economy had reached a peak in 2013, with a $2.2 trillion gross domestic product (GDP), which ranked them as the world’s eighth largest economy. By 2016, their GDP had fallen 46 percent to $1.2 trillion and their economy was ranked twelfth in the world. To put that in perspective, that would be slightly less than the combined GDP of Pennsylvania and Ohio. Total aggregate trade between the U.S. and Russia was approximately $20 billion in 2016, well off the $38 billion peak reached in 2013.

Many Russia scholars believe that 2017 will be a turn-around year for the Russian economy. According to a 2017 Ernst & Young CIS Region Transportation & Infrastructure Group (E&Y) market report on Russia, “The main drivers of growth will be the ruble exchange rate, oil prices, auto loans interest rates, the effectiveness of government support measures and the potential to reduce vehicle ownership costs.”

Sanctions hurt Russia's vehicle market

To understand where the Russian automotive market is today, it’s helpful to understand where it’s come from. While most countries generally follow a long-term growth trend, Russian vehicle sales have been lethargic during the last 30 years. Total new vehicle sales in the former Soviet Union pinnacled in 1985, reaching 2.2 million cars and trucks. More recently, Russian new vehicle sales peaked at 2.78 million units in 2013.

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