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. Last Updated: 07/27/2016

Crisis Forces Carmakers To Scale Back Forecasts

MTA Lada, made by AvtoVAZ, on display at the Interavto car show in August.
The country's car market, which was fast becoming the largest in Europe, has not stagnated yet, but the main drivers of its success have been buried under the weight of the global financial crisis.

Less than two months ago, some of the world's automotive giants unveiled plans to increase their sales in Russia by tens of thousands of cars this year. Now, they are scaling back their growth forecasts, despite sporadic buying sprees among consumers.

In October, car dealers noted strong demand, as Russians were eager to spend money on something tangible.

Memories of the ruble's collapse during the 1998 crisis are tempting many to spend cash now rather than risk another devaluation of their currency.

But such trends are not a lasting source of growth for the market.

"Without a doubt, everyone is going to have to rethink their sales plans," said Ivan Bonchev, an analyst at Ernst & Young.

A key factor in the downturn is the effect of the credit crunch on the market for auto loans, experts said, noting that many lenders have simply stopped granting them.

The suspension of construction projects throughout the country, caused by a sudden lack of financing, has likewise cut into demand for heavy trucks and noncommercial vehicles.

"There isn't going to be that kind of growth anymore, the kind that we saw in the previous three years. That growth was anomalous," said Boris Alyoshin, president of AvtoVAZ, the country's biggest carmaker.

"Now, if we even see growth of a few percent, it will be normal," he said.

According to the Association of European Businesses, growth in sales of foreign cars stood at 20 percent in August on an annualized basis and 22 percent in September. This compares with growth of 40 percent seen last year.

"We are no longer trying to catch up with too much demand. ... There is less activity, less action in the showrooms," said Olga Sergeyeva, spokeswoman of Renault's Russian unit.

The country's largest chain of dealerships, Rolf, which specializes in the sale of Mitsubishi brand cars, cut the prices for its entire lineup Oct. 10 because of plummeting demand -- which in August had fallen 19 percent and 25 percent in September.

Much of this is because of the unavailability of credit. This summer, about half of all cars were bought on credit, and half of all trucks were leased, said Bonchev, of Ernst & Young, adding that this figure was now likely to fall to 30 percent or lower.

Partly because of this, overall sales growth for the car market will be no higher than 20 percent, Bonchev said. This compares with more than 60 percent in 2007, when 2.76 million cars were sold in Russia for $53.4 billion.

Even that growth rate is inflated, experts said, by the consumers still willing to spend their savings on a car for fear of a ruble default. Once this pocket of demand is exhausted, sales rates will continue to slide.

"People right now are taking out all their cash and turning it into tangible goods, and that process is unlikely to end anytime this year," said Sergei Solovyov, the financial director of Incom-Auto.

His comments have been echoed by some in the art market. Auction house Sotheby's recently said it expected paintings worth tens of millions of dollars to be snatched up by investors.

"For next year we expect the growth rate for the automotive market to be 5 percent," Solovyov said.

This week, Incom-Auto announced plans to sell 30 percent of its share capital to raise money for refinancing loans.

Alyoshin, of AvtoVAZ, said tight credit could be deadly for the sales side of the industry.

"Dealerships are in no condition to pay so much for loans. This is simply killing their business," he said. Many banks are charging rates of 18 percent or more for business clients.

On the manufacturing side, demand is also wreaking havoc. GAZ Group, the country's largest producer of light commercial vehicles, had to shut down its production lines for four days in October, citing weak demand. The company said sales of its main product, a light truck called the GAZel, had dropped 10 percent.