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The political tension in Ukraine has led to a significant drop in the value of the rouble, which has fallen by 11% against the euro since January 2014. The exchange rate stood at around RUB50 to the euro during the first days of March. Europe is one of Russia’s main import partners and further devaluation of the rouble will increase fears of snowballing import prices and inflation. The growing tension and possible trade restrictions from the US and Europe pose a threat to the country’s import-dependent markets – machine tools, electric engines and automotive parts – these being important components in Russia’s main heavy industries.

Rouble/Euro Exchange Rate, 1 February 2013 – 2 March 2014

Source: European Central Bank

The further exchange rate movement will depend on the policy of Russia’s central bank and the development of global events. On 3 March 2014, the Bank of Russia increased its key lending interest rate to 7% to support the weakening rouble.

Risks to the Heavy Machinery and Automotive Industries

Most of the components which are used in the heavy machinery and electricity production industries in Russia are imported. The machine tools industry is heavily dependent on imports, which account for 79% of its total size. Although the import share of machine tools from China has increased fourfold since 2005, Germany and Italy combined still account for a third of all imports.

Electric motors, transformers and generators, which are mainly used in the production of machinery for heavy industry, the automotive and electricity industries, are also primarily produced abroad, with imports commanding up to 77% of the total market. European countries such as Germany, Italy, France and the UK accounted for a substantial 35% share of imports in 2012.

The automotive industry is also heavily dependent on imported goods from Europe. The imports accounted for 75% of bearings, gears, and driving elements market size. In 2012, Germany accounted for around 26% of all imports, followed by China with 13%. Other important trade partners were Ukraine and Kazakhstan, accounting for 11% of imports each. Similarly, around 60% of accumulators, primary cells and primary batteries were of foreign origin, with around 30% deriving from European countries.

Russia’s Trade Partners in Selected Categories, 2012

Source: Euromonitor International

Impact

The current tension between Russia and Ukraine could lead to economic sanctions. If trade restrictions were to be imposed in the short term, the limited supply of imported goods could slow the operations of the Russian automotive and machinery industries. If the rouble continues to lose value, Russian producers could face a higher component price burden, which for some smaller producers could lead to the collapse of their business. However, over the long term, it could be expected that Russian producers would turn towards cheaper alternatives provided by China, thus continuing to fuel China’s importance as a trading partner.

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