Russia's threat to nationalize assets could cost auto industry billions - Automotive News

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Russian President Vladimir Putin is considering seizing the assets of companies that have left the country in response to its invasion of Ukraine, putting billions of dollars in automotive assets at risk.

"I think it's a high risk," said Joe McCabe, CEO of AutoForecast Solutions. "Putin's not shy about walking away from an industry that supports employment in his country, that builds product for local consumers. There are high odds that companies that have left, or ones that are leaving, are nationalized for the sake of his country's economy."

Facing intense economic pressure and the prospects of a deep recession because of Western sanctions, Putin has proposed introducing "external management" of foreign companies that have exited the market, with an eye toward transferring them to enterprises "who want to work," according to a CNN report.

Auto companies including Volkswagen, Stellantis, Ford, Mercedes-Benz and Renault are among the major companies that have suspended their Russian operations in recent weeks. Those moves, along with a barrage of economic sanctions from the U.S. and other global powers, have hit the Russian economy and financial sector hard, putting pressure on Putin's government to respond.

"If foreign owners close the company unreasonably, then in such cases the government proposes to introduce external administration," Russian Prime Minister Mikhail Mishustin said this month, according to CNN. "Depending on the decision of the owner, it will determine the future fate of the enterprise."

Billions of dollars of automotive assets are at risk.

Mercedes-Benz said in an annual report this month that it has about €2 billion ($2.2 billion) of assets in Russia at risk of expropriation, including a factory near Moscow that opened in 2019.

While plants could be at risk of seizure, it would be difficult for Russian authorities to simply restart their assembly lines, analysts said. McCabe said it would be tough for plants isolated from global commerce to quickly re-source all the components they need.

"You can't build a new supply chain overnight," he said. "Look how difficult it is with the global semiconductor issue — that is not conflict-related."

"Either they find a way to make it internally — and you can't just turn that on magically — or they find a way to do it with friends. But it's a difficult route," he said.

McCabe said Russia could turn to the Chinese auto industry to reestablish supply chains and boost its automotive sector in the long run. But it is unlikely that China would want its automakers to take over auto factories that Russia potentially seizes while the internationally unpopular war in Ukraine is still underway, he said.

There also would be little economic incentive for China to want to take over a seized automotive plant in Russia, said Martin French, U.S. managing director for Berylls.

"China would go, 'I don't need this. We've been doing this in our sleep for 20 years, and we're way more technologically advanced than Russia,' " French said.

The threat of nationalization has existed in Russia for years and is something auto companies have had on their radar, even as they continued to operate there, said Mark Wakefield, global co-leader of the automotive practice at AlixPartners.

"It's always been a threat in Russia, given the way the country behaves," he said. "It's one of the reasons there hasn't been a Mexico-style, mass investment into Russia to support vehicle manufacturing and components supply in Europe."

Most suppliers and automakers in Russia have somewhat limited presences there, Wakefield noted, making their Russian operations "not so mission critical" to their global financial fortunes.

"The pain is real, but it's not life-threatening to the vast majority of Tier 1s," he said. "If they lose their plants in Russia, it doesn't threaten the company."

Still, some companies are more exposed than others. According to AlixPartners, the Renault-Nissan-Mitsubishi alliance relied on Russia for about 7.8 percent of its global vehicle sales, while Russia accounted for about 5.7 percent of Hyundai's global sales. Globally, Russia made up 2.1 percent of all new-vehicle sales in 2021.

McCabe said even if the halted auto plants came back on line, they are likely to produce fewer vehicles than normal because of the country's economic woes.

"We see a big downturn in vehicle production there," he said. "When your ruble is decimated, it's difficult to find a buyer of a vehicle — even if you could build it."

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