Automakers that build cars in Russia as Volkswagen and Ford Motor have been hit hard by the sharp fall of the ruble, which has increased the cost of foreign parts dependent, forcing them to raise prices and reduce exports.
Western sanctions on Moscow's role in the crisis in Ukraine and oil prices have led to an economic crisis and ended the decade of the car market annual sales growth of over 10 percent.
Domestic car sales in Russia have halved from their peak in 2012-2013 when, for a few months the country ranked ahead of Germany as the largest market in Europe by auto sales and the eighth largest in the world. Now it ranks fifth in Europe and 12th worldwide. In the first seven months, sales are down 35 percent to 913 181 vehicles, according to the Association of European Businesses in Russia (AEB).
While a weaker local currency usually makes the most lucrative exports, dependence on automakers in expensive foreign components has made them uncompetitive. The Russian authorities have introduced incentives to encourage automakers to start small production of most parts locally, but the most expensive and technologically advanced parts, such as electronics, engines and suspensions are imported.
Volkswagen Group and Ford Motor both import more than half of all the parts used to assemble its cars in Russia. Even the market leader AvtoVAZ, which produces the number one selling brand of Russian Lada, supplies a fifth of its production abroad.
Stung by their low level of local manufacturing, General Motors is closing its factory in St. Petersburg and ending sales of Opel and the main models of Chevrolet in Russia later this year.
In 2012-2013 the ruble was trading at around 30 per dollar, whereas now the current rate is about 65. This has forced automakers to raise prices - a desperate move in a country where the economy head rotor 149701-0520 shrank 4.6 percent in the second quarter of 2015. Employers have cut staff and salaries, while annual inflation in food prices is running at over 20 percent, leaving many Russians with little money for large purchases.
Kia, which produces cars in Russia's second most popular - the Rio hatchback at a price of 460,000 rubles ($ 7,235) - has raised prices by 15 percent in the first six months. In the same period, average prices of cars have increased 18 percent year on year to 1.16 million rubles ($ 18,420) and sales have fallen 36 percent, according to research group Autostat and AEB.
"The devaluation of the ruble increases costs for manufacturers," said Yulia Dytchenkova, director Rolf Khimki Mazda dealer. "They are coming to a head in the new revision of price lists is inevitable."
The Russian car exports fell 27 percent to 49,000 vehicles in the first six months, customs data showed. The bulk of vehicle exports go to the Commonwealth of Independent States (CIS) countries like Belarus and Kazakhstan.
A renewed drop in the ruble - has fallen 15 percent against the dollar since early July and is trading near a new six-month low - is set for further price increases and further erode sales.
"If the ruble stabilizes at current rates until the end of the year, the market is set to decrease by 28-30 percent," said VTB Capital analyst Vladimir Bespalov. "But if the ruble continues to weaken, prices will rise and the market could fall by up to 35 percent."
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