Ukraine Sanctions Aside, U.S. Carmakers Eye Russia Market

Never mind the Ukraine crisis and Washington's sanctions against Moscow: U.S. automakers say the Russian market is their next big frontier.

Russia is simply too large and too important for carmakers to ignore, experts said this week.

"The Russian market is going to be larger than Germany," said John Branch, a professor at the University of Michigan Ross School of Business.

Branch said the structure of the Russian auto industry is in flux as the demand for imports increases despite barriers imposed by the Russian government.

But that means that automakers, particularly those with global ambitions, simply can't afford to ignore the market's potential there, despite its volatile nature.

- Wanted: small SUVs -

Branch was speaking at a conference at the University of Michigan focusing on the opportunities and hurdles for U.S. carmakers to sell to and in Russia.

General Motors is already partly involved. It has invested in a joint venture with AvtoVaz, which builds the Lada, Russia's most popular automotive brand.

But the Lada brand is a holdover from the Soviet era and their sales are mostly concentrated in what Branch said were third- and fourth-tier cities and rural areas.

In major cities such as Moscow and St. Petersburg, consumers are becoming more brand conscious. They like imported cars and have developed a preference for small sport utility vehicles that can navigate the country's rugged roads and streets.

GM-AvtoVaz produces the Chevrolet Niva, a mini-SUV popular within Russia end exported to neighboring countries formerly part of the Soviet Union.

David Teolis, an economist with General Motors, cautioned that predictions about the growth of the Russian market have to be regarded cautiously.

The slow expansion of the Russian economy and Russian middle class since 2008 is hindering sales growth.

Russian car sales dropped by 50 percent in 2009 in the wake of global crisis but grew briskly to reach nearly three million units in 2012.

But last year, they dropped by 5.5 percent as the Russian economy hit the brakes, and are expected to fall again this year.

The chronic air of crisis that surrounds the country also has hurt Russia's economic development.

The cuts to its economic growth forecast, 0.5 percent this year or less according to the Ministry of Finance even without sanctions pressure, raise questions about the potential for the automobile sector to quickly expand as China's has.

"Russia needs to become a normal country," Teolis said.

- More business, less sanctions -

 Daniel Russell, a former American diplomat who serves as president of the US-Russia Business council, said even with the current crisis over Ukraine, Russia is simply too important a country for US businesses to ignore.

Relations between the two sides could actually benefit from strong commercial ties, he argued.

For instance, Russell noted that Moscow is now involved in negotiations aimed at keeping North Korea in check and in nuclear talks with Iran.

"There has been a dramatic jump in the Russian economy in the last 10 years," he said.

And it is doubtful other countries are willing to forgo business with Russia.

The US pressure for sanctions on Moscow over its annexation of Crimea has run into that fact. 

Western European countries have closer business and financial ties with Russia, have been more reticent to ratchet up sanctions on Moscow.

And while Japan issued a statement condemning Russian action in Crimea, it hosted some 200 Russian business executives the same day.

"Sanctions don't work," Russell said, reminding that Russia survived the threat of sanctions in 2008 after a brief war with neighboring Georgia.