Trade Wars

Tension at Ukrainian border threatens automotive supply chain | News

Tensions have skyrocketed in recent months in Eastern Europe as Russia reportedly massed more than 100,000 troops and heavy weapons on its border with Ukraine, raising fears of an invasion. High-stakes talks between Russia and the West have so far failed to defuse a tense standoff between the two sides. Meanwhile, local businesses are warning that a possible outbreak of violence in the region could be devastating for the auto industry.

Political strife over the past decade has already weighed on the cost of automotive logistics in Eastern Europe, according to Alexandra Dubrovskaya, compound and vehicle operations coordinator at Chrysler Group in Russia. In the past, a substantial share of finished vehicles and automotive components were supplied to Russia from Europe via Ukraine. Now it’s not that much.

“Since 2014, transit supplies [between Russia and Europe] across Ukrainian territory were closed to us. Due to problems [with migrants] on the border between Belarus and Poland, supplies passing through Belarus have also decreased. We are left with only a narrow corridor in the Baltic states, with which we also have strained political relations,” Dubrovskaya said.

She added that adjustments to the supply chain over the past few years have resulted in increased distance, delivery times and logistics costs.

“Global turmoil in the logistics market due to trade wars and the coronavirus means supply systems have been disrupted,” Dubrovskaya said. “Unfortunately, because of the political problems, these problems have multiplied like an avalanche. In Russia, we do not expect an escalation of the conflict on our part, but the fears expressed by our partners mean that they are making their own adjustments. .

mother of all penalties
US officials are poised to approve “the mother of all sanctions” against the Russian economy, warning there will be no appeasement as the Russian president plots an invasion of Ukraine.

Among other things, the sanctions are expected to target US exports of auto components to Russia. The announcement has prompted some automakers to urgently look into their list of suppliers, analyzing possible risks.

“We will only be able to assess the depth of the impact after a thorough analysis of the list of components obtained from the United States and the possibility of replacing them with local components, or those from other countries,” said Roman Skolsky. , Director of Communications for Nissan RBU East.

“Since our patterns are deeply localized [in Russia]we do not expect a significant impact on automotive production in Russia,” Skolsky added.

“I will not say that the restrictions on the supply of automotive components from the United States will have a very negative impact on Russian companies,” said Dmitry Babansky, director of the Moscow-based analysis agency SBS Consulting. . He added that Russian imports from the United States – mainly fuel tanks, exhaust pipes, steering wheels and similar products – could come from elsewhere.

However, things are set to get really ugly for Russia’s auto industry if the European Union joins US sanctions, and even more so if the country disconnects from Swift – the Society for Worldwide Interbank Financial Telecommunications is the global standard for the payment and securities trading. transactions.

“The Russian cut [from Swift] would shut down all international transactions, trigger currency volatility and cause massive capital outflows,” says a report by domestic and foreign policy think tank Carnegie Moscow Center.

Russia established its own payment system, SPFS, after being hit with Western sanctions in 2014 following its annexation of Crimea earlier this year. Its existence means trade between Russian companies would continue once the country is disconnected from Swift, but paying foreign companies for car components and logistics services would become next to impossible.

“Major international restrictions on auto components imported into Russia would virtually end production of finished vehicles in the country,” commented a Russian auto industry source who wished to remain anonymous. The source cited as an example Gaz Group, a Russian automaker that has remained under threat from US sanctions for several years. The company has promised to cease production if the restrictions are indeed introduced.

Gaz Group owner Oleg Deripaska warned in 2019 that the day the sanctions come into full effect could be the last functional day of Gaz Group production operations.

Speaking during a meeting with the Russian Parliament at the end of 2021, Minister of Industry and Trade Denis Manturov estimated that the average localization rate in the Russian automotive industry was 67%, reaching 75% on some particular models.

“Our authorities are proud to have exceeded certain localization targets, but it doesn’t matter if you have 10%, 50% or 90% localization. You cannot produce a finished vehicle using only 90% of the components,” the source said, adding that Russia’s revenue withdrawal issues would also push some localized Western companies out of the country, which would be like an effect. domino, ruining the Russian automobile. the industry from top to bottom.

Back-up plans
On the other hand, Dubrovskaya said she is convinced that the extended sanctions promised against Russia will probably have an impact in the short term.

“Finished vehicles assembled in Russia are successfully exported to Europe, and with the current shortage of finished vehicles, no one will refuse them,” she said.

In recent years, Russia has made some progress in exports of finished vehicles. In the first nine months of 2021, the country exported 73,200 finished vehicles, up 43% from the same period a year earlier. In monetary terms, exports jumped more than 50% to $1.1 billion. Most of the exported finished vehicles are assembled in the northwest of Russia and exported to Europe through the seaports of St. Petersburg.

“Perhaps for some time deliveries will be suspended to establish new schedules,” Dubrovskaya said, adding that such things had already taken place in the post-Soviet space when, in 2014, some goods subject to to economic restrictions were re-exported. to Russia via Belarus.

“All these threats don’t add stability but I think experienced people who have been in this business for a long time have already calculated the risks and outlined several back-up plans in case the situation unfavorably develops,” Dubrovskaya said, adding that, as always, there would be losers and winners.

“Let’s not forget that in business, all circumstances can turn into both losses and profits; a lot depends on the managers,” she added.

Money loves silence
The Russian-Ukrainian conflict does not promise anything good for Ukraine either. Anna Derevyanko, executive director of the Ukrainian Association of European Companies, said the automotive logistics sector now faces considerable uncertainty due to the standoff.

“Without a doubt, an escalation of the conflict would mean that all industries would be more or less impacted, including the automotive industry and logistics. However, the degree of that impact will depend on the size and depth of the escalation,” Derevyanko said, adding that the company has cautious optimism regarding the current conflict.

Derevyanko also admitted that the ongoing tension in the region is impacting business and investment flows to Ukraine, including its automotive industry.

In recent years, several major global automotive component suppliers have launched production facilities in Ukraine, including Fujikura, Kromberg & Schubert and Leoni, to take advantage of cheap but experienced labor and a free trade area with the EU.

“Potential investors can observe the situation in the country from a distance at the moment and not make serious breakthroughs to enter the local market,” Derevyanko said. “As the saying goes: money loves silence.”

Derevyanko said the Ukrainian auto industry hopes the current situation won’t last long and no plan B or C will be needed.

A global shock
However, the harsh sanctions could actually backfire on Western economies, as Russia accounts for 45% of global palladium production. Restricting palladium imports from Russia could cause a global shock to the auto industry, some analysts say.

As sanctions were threatened, the global price of palladium jumped 30% in January this year, from $1,750 an ounce to $2,400 an ounce, according to Dmitry Skryabin, head of Moscow-based financial firm Alfa -Capital. Coupled with the recovery in global demand for vehicles, Russian palladium export restrictions could lead to severe shortages of some crucial components and push the price of palladium to an all-time high.

“We assume that a fairly high pent-up demand for new vehicles has formed in the market over the past year and, with chip supplies normalizing, manufacturers can expect record numbers of demand. of vehicles. [in 2022]said Skryabin.

Oksana Lukicheva, commodity market analyst at Otkritie Broker, said: “The [automotive] The market is concerned about the possible cessation of palladium supplies from Russia due to new sanctions. She added that the degree of risk in the market is currently quite high.

By contrast, a possible shortage of palladium in the global market could be met by producers in Zimbabwe and South Africa, according to Maxim Khudalov, director of the corporate ratings department at Russian consultancy Akra. Still, it would take time for other suppliers to ramp up production, and by then the damage to the auto industry will have already been done.