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Foreign Carmakers Shift Into Reverse In Russia

Cars drive past the Kremlin along the Moscow River last December. Foreign automakers had been ramping up production in Russia, but the country's economic woes have caused car sales to drop sharply. Several foreign automakers have cut back production, and General Motors is pulling out of Russia.

General Motors announced last week that it's closing its auto plant in St. Petersburg, Russia, and Volkswagen says it will lay off workers and reduce shifts at a plant in central Russia.

The latest auto industry troubles highlight a dismal picture for foreign investment in Russia, which could see a 35 percent drop in sales this year.

Seven years ago, GM was looking at a bright future in the Russian market. Cars sales were taking off and would eventually grow at a rate of more than 10 percent a year.

The company promoted its newest auto plant with a video that praised Russian government cooperation with the industry, which had already attracted companies such as Ford, Nissan and Toyota.

Now, GM has announced that it will close that plant and take a $600 million charge to pay for the restructuring. Like many foreign automakers in Russia, GM is facing a car market that's near collapse.

Low oil prices and Western sanctions, imposed on Russia for its annexation of Crimea last year, drove the ruble down by 40 percent, and with it, consumer buying power, says Mark Adomanis, an analyst who has covered the subject for Forbes.

"Given what Russians' average incomes are," he says, "big-ticket items like cars have never been easy to afford. But if all of a sudden, you make that car 50 percent more expensive, 30 percent more expensive, it's just beyond people's reach."

GM's costs rose more than many other automakers in Russia because the company imported many of its parts, Adomanis says, instead of sourcing them locally.

GM workers in St. Petersburg say the company failed to address a problem that many people saw coming.

Pyotr Letkeman, chairman of the union shop committee, says the workers feel they are being made to pay for management's mistakes.

"As far back as 2013, it was clear that sales were declining in Russia," Letkeman says. "GM had very little localization of production in Russia, so foreign parts became expensive when the ruble lost value. GM couldn't compete."

But GM isn't the only foreign carmaker having problems in Russia. Volkswagen announced that it's cutting back. The Korean company Ssangyong says it didn't ship any cars to Russia in January and February, because there simply wasn't a market for them.

The Russia government announced plans to provide carmakers with $166 million in subsidies to help tide them over.

Letkeman says the workers are angry and scared by a closure that will affect thousands of people.

"It's very painful," he adds. "People are calling me, asking 'What should I do? How will I feed my kids? How will I pay my mortgage?' "

Adomanis, the analyst, says that although it's very hard on people who lose their jobs, the overall job loss probably won't be felt in an economy where many people are employed by the government.

He says the real danger is the signal this sends to potential foreign investors.

"The automobile industry is one of the very few where they did a good job of attracting foreign investment," he says, "and to see one of the few industries where they have some real success stories to tell — to see people slashing production or in GM's case, pulling out entirely — is very worrying."

Adomanis says it's a sign that foreign investors no longer see the costs of doing business in Russia as being worth the benefits.

GM's plant closure will stop production of Chevrolets in Russia and wind down production of its German-designed Opel brand.

During its hot-selling days in Russia, Opel hired supermodel Claudia Schiffer to appear in an ad touting the car's engineering.

The ad closes with Schiffer speeding down a ramp in a parking garage.

These days, that downward spiral could just as well represent the auto market in Russia.

Copyright 2015 NPR. To see more, visit http://www.npr.org/.

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