Boston, MA -- (SBWIRE) -- 03/27/2014 -- BMI remains bearish on the near-term outlook for domestic vehicle sales and production in Russia. A combination of sluggish demand for new cars, and a deteriorating economic backdrop, means that we continue to target declines in both sales and production over 2014.

Light vehicle sales in Russia declined by 6.4% in 2013, to 2,834,753 units, according to figures from the Association of European Businesses (AEB). BMI had long maintained that 2013 would see a slowdown from 2012 levels, when light vehicle sales in the country had increased by 11%. Despite strong annual sales growth in the early part of 2012, autos sales moderated on the back of subdued private consumption in the second half of the year. We maintained that such growth in the segment was on the back of an unsustainable rise in consumer sentiment, fuelled by cheap credit, which was likely to unwind over the course of the year. This played out, and these dynamics continued to impact sales in 2013.

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We believe this erosion of private consumption will continue as unemployment creeps upward, real wages dip, and access to credit slows. Furthermore, the ongoing weakness in the rouble will serve to make imported autos more expensive in local currency terms. These dynamics have partly informed our bearish sales forecast of a 3% decline in the passenger car segment and a 2.4% drop in LCV sales in 2014. Looking at early trends for 2014, light vehicle sales in Russia declined by a further 5.8% y-o-y in January, to 152,662 units.

A deteriorating sales outlook is also leading to a negative near-term stance towards Russian auto production. Indicative of the worsening outlook for domestic auto production, in January 2014, leading domestic player AvtoVAZ announced that it is to cut 7,500 jobs, some 11% of its workforce, in an attempt to revise its business and restore profitability amid declining sales volumes and operating weakness in its domestic market.

AvtoVAZ's partner, the Renault-Nissan Alliance, is aiming to increase its ownership stake in the company to some 74.5% in 2014, and plans to boost market share in Russia over the coming years by introducing new models and investing in increasing production capacity. However, these plans are cast into doubt by the latest job cuts and it remains unclear whether this is still the company's strategy.

Indeed, we are increasingly of the opinion that the ongoing declines in the country's auto sales may prompt a number of vehicle manufacturers to reconsider their long-term investment decisions in the market. BMI believes that AvtoVAZ will continue to struggle in the market over the medium term, and this will lead to over-capacity issues over the long term.

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