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Renault could turn Russia crisis to its advantage

Renault, the major carmaker with most at stake in Russia, could turn a market crisis to its advantage as Moscow considers a subsidy scheme to steady demand and a weaker ruble undermines rivals that make fewer parts locally.

The French carmaker, alliance partner Nissan and their Russian subsidiary AvtoVAZ were among those showing new models at the Moscow auto show this week amid escalating tensions between Russia and the West over Ukraine that have already sent Russian car sales into a steep decline.

Renault bought into AvtoVAZ, maker of the Lada, in 2008 and increased its holding to a controlling stake this year.

While not ruling out production cuts if the slump persists, Renault’s Russia chief has no plans to review or postpone vehicle development, believing a previous move to invest during a downturn in 2009 was vindicated when Russia became one of the carmaker’s most profitable markets in the following years.

“Now isn’t the time to make bad decisions not to do things,” Bruno Ancelin told Reuters in an interview on the sidelines of the auto show. “It’s precisely when the market is disrupted that you should invest.”

The Russian car market is down 10 percent so far this year, and the outlook worsened with last month’s downing of a passenger jet over Ukraine – blamed on pro-Russia separatists – which triggered new Western sanctions against Russia’s banks and oil sector.

Leading forecaster LMC Automotive slashed its full-year Russian car sales forecast in response, predicting a decline of 15.8 percent instead of the 10.5 percent previously expected.

Concerns over Russia, Renault’s third-biggest market, have also weighed heavily on Renault’s shares, which are down 10.7 percent since it published first-half earnings on July 29.

But Renault and the Lada brand it indirectly controls enjoy the benefit of a relatively high proportion of parts supplied from inside Russia and billed in rubles – while rivals such as Ford are squeezed by mounting import costs. The ruble is down about 10 percent against the U.S. dollar so far this year.

“There’s no question Renault-Nissan did a good job getting ahead of most of the foreign industry on localization,” said Ted Cannis, chief executive of Ford Sollers, the U.S. carmaker’s Russian joint venture. “But we’re going to close the gap faster than they imagine,” he said.

According to 2013 data, Ford sources just 30 percent of parts in rubles for its Russian-built Focus model. By comparison, the Renault-badged Logan sedan and Sandero hatchback achieved a 75 percent localization rate, with the Renault Duster offroader at 66 percent and Lada Largus at 62 percent.

Volkswagen’s Russian-made cars came in at 50 percent ruble-billed content. General Motors, whose sales have also lost ground, was trailing at 20 percent, excluding some shared production with AvtoVAZ.

Government sales subsidies under consideration may be accompanied by import restrictions, according to Russian press reports, potentially making life even harder for those importing vehicles or parts.

With or without new import barriers, any swing in favor of domestic brands would stand to benefit Renault and Nissan through AvtoVAZ, which is Russia’s largest carmaker. Together, the three companies control 30 percent of the Russian market.

“We’re using the patriotism to strengthen our regions where we are already strong,” AvtoVAZ boss Bo Andersson said. “With new products we are also attracting customers in Moscow and St Petersburg,” the Swedish-born chief executive added, citing Lada market share gains in both cities.

The GM veteran took over in January and immediately set about cutting 7,500 jobs at Lada, which is betting on new models such as the XRay SUV unveiled this week to stem a steady decline in market share. New budget hatchbacks were also unveiled by Renault and Nissan’s Datsun brand.

Lada expects to begin recovering lost market share next year on the strength of the new launches, Andersson said.

Andersson this week cut planned production by another 25,000 vehicles as he pursues a goal to return AvtoVAZ to breakeven this year from a 7.9 billion ruble ($218 million) loss in 2013, despite the market tailspin.

The slump itself may be softened or even reversed if Moscow unveils significant new subsidies to prop up demand. Auto executives including Renault’s Ancelin said they believed an announcement was imminent.

Ford Sollers chief Cannis said: “We’ve had good discussions off and on over the last month or so and I think something’s coming and sooner rather than later.”

Carmakers are pushing for “broad-based” sales subsidies on vehicle trade-ins, he added, rather than a repeat of credit subsidies that reduce car financing costs but had little effect when offered last year.

Any market support is likely to favor domestic production over imports “given the current climate,” Cannis said.

It could also play heavily to Renault’s strengths.

“If there’s some government support and the market turns out to be going up then that’s potentially very good for Renault-Nissan,” London-based Barclays analyst Michael Tyndall said. “If Russia turns out to be not quite the disaster the market’s expecting, you’d expect some sort of relief rally.”