Foreign automakers press pause in Russia amid sanctions and supply shortages

·6 min read
Alexander Abrosimov has worked as a mechanic at Volkswagen in Kaluga, Russia, since 2010. In early March, Volkswagen said it has suspended its production in Kaluga because of Russia's invasion of Ukraine. (Dmitry Kozlov/CBC - image credit)
Alexander Abrosimov has worked as a mechanic at Volkswagen in Kaluga, Russia, since 2010. In early March, Volkswagen said it has suspended its production in Kaluga because of Russia's invasion of Ukraine. (Dmitry Kozlov/CBC - image credit)

At the Volkswagen plant in Kaluga, an industrial city 180 kilometres south of Moscow, the parking lot is full of new cars, but the factory sits nearly empty after production was suspended last month.

Volkswagen is one of three auto manufacturers in this city that halted work due to the fallout of Russia's invasion in Ukraine, and the impact it has had on the global supply chain. According to Yale School of Management, more than 750 companies have pulled out of Russia or curtailed their business since the invasion.

"The problems started when we stopped getting parts," said Valery Uglov, who works as an auto mechanic at the Volkswagon plant. "We can't really put a car together without parts."

Volkswagen, along with Volvo and Stellantis, a Netherlands-based manufacturer whose models include Peugeot and Citroen, together employ 7,000 people in the city.

While all workers are receiving at least part of their wages for now, it is unclear when they can return to work, and how foreign corporations will function going forward in Russia, given that it is increasingly isolated from the global market through sanctions.

Since Russia invaded its neighbour on Feb. 24, thousands in Ukraine have been killed, towns and cities have been reduced to rubble, and more than five million people have fled abroad. The invasion also fractured global trade, and as more countries have banned Russian energy exports, commodity prices have spiked.

The World Bank predicts Russia's GDP will shrink by 11 per cent this year.

Evgenia Novozhenina/Reuters
Evgenia Novozhenina/Reuters

Manufacturing suspended

In Kaluga, a city of 320,000, most of the people who spoke with CBC News said they weren't overly concerned about the work suspensions at the auto factory, and believed the setbacks would be short-lived.

Uglov's co-worker, Alexander Abrosimov, has worked at Volkswagen for 12 years and said there are always worries when it comes to employment in the auto sector. He said there were cutbacks during the early days of pandemic, and says this, too, will be temporary.

"It's a good thing that Europe and the U.S. are not the whole world, " he said, referring to the fact that most sanctions have come from the West.

"We still have Asia ... and I guess we will be co-operating with them "

In a statement posted online, Volkswagen said it has suspended its production in Kaluga and in Nizhny Novgorod, which lies 400 kilometres east of Moscow, since early March because of the "overall situation" and the "great uncertainty and upheavals."

The company also halted the export of its vehicles to Russia. Volkswagen, which has some suppliers in western Ukraine, said it was fully implementing the sanctions that had been imposed.

The statement said the situation in Ukraine, along with sanctions and counter-sanctions, have made the transportation of parts and supply difficult. Rail and vehicle routes have been interrupted and many shipping companies refuse to stop at Russian ports.

Natalia Kolesnikova/Reuters
Natalia Kolesnikova/Reuters

Auto sector struggling

Evgeny Eskov, the editor in chief of the Moscow-based AutoBusiness Review, told CBC News that the impact of sanctions on Russia's auto sector are "enormous."

He said most of the country's factories that produce passenger cars aren't currently operating because Russia's auto sector is closely tied to foreign companies. According to the Association of European Businesses, car sales in Russia were down nearly 63 per cent this March compared to March last year.

The Russian government has repeatedly said it will innovate and find other suppliers.

In a speech to lawmakers in St. Petersburg on April 27, Russia's President Vladimir Putin said Russia will "counter any crude and often inept external restrictions," and that many of Russia's industries are now seeing "good, new and modern opportunities opening up."

WATCH | Russia cuts off Poland and Bulgaria from natural gas:

But Eskov doesn't think it will so easy for Russia to smooth out its supply-chain woes.

He says while Russia may be able to source parts from a "friendly" country, the challenge will be actually getting them into Russia.

"Everything will depend on how long the special operation in Ukraine will last," said Eskov. "It is clear that factories cannot stand idle for a long time, they need to do something."

French carmaker Renault has a 68 per cent stake in Russia's largest carmaker, AvtoVAZ, which produces the best-selling Lada, but on April 27, Russia's trade minister reported that Renault agreed to sell its share to a Russian scientific institute for one ruble.

The trade ministry also reported that Renault's factory in Moscow, which produced Renault and Nissan brands, would be turned over to the city's government.

Russia has warned that it could expropriate foreign assets if companies pull out of Russia, and in its online statement Volkswagen says it is watching those discussions with concern.

Fear of prosecution

A tire factory in Kaluga, owned by German-based multinational manufacturer Continental AG, said it restarted some of its production because it was concerned that local employees could face criminal penalties.

In a statement to CBC News, Marc Siedler, who works in media relations for Continental AG, said the company was taking this step in order to "fulfil our duty of care to employees in Russia" and that Continental's decision to restart was in "no way motivated" by profit.

The company wouldn't clarify what criminal penalties it was concerned about, but Russia's State Duma is considering a draft law that could allow prosecutors to go after local managers or directors for complying with sanctions

Dmitry Kozlov/CBC
Dmitry Kozlov/CBC

'We survived on bread and potatoes and we'll survive this'

Still, many residents in Kaluga said they were optimistic about the future. Aside from the auto sector, the city has a number of other factories, including those that produce railroad equipment and electronics.

"We have to start producing our own things at these plants, said Victor Petrovich, who spoke to CBC News in the city centre.

Several residents told CBC News that they had noticed an increase in food prices since the war, and there had been shortages of Russian staples including sugar and buckwheat, but Petrovich wasn't too concerned.

"In the '90s we survived on bread and potatoes and we'll survive this. "

Dmitry Kozlov/CBC
Dmitry Kozlov/CBC

In Kaluga, large posters hang on the side of buildings bearing the letter Z, which has become a symbol of support for Russia's invasion in Ukraine. Like other Russian cities, Kaluga is preparing for Victory Day on May 9 when Russia celebrates the military's achievements during the Second World War.

A billboard with a picture of a decorated military hero stands along one of the boulevards, where a young family stopped to take photos.

Many in the city feel a strong sense of patriotism, but not a middle-aged woman who stopped to speak with CBC News and would only give her first name.

"I don't think there is anything good at all awaiting us," she said.

"Everyone around me supports the war and says we will survive the sanctions but I'm the total opposite. I'm against the war."

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