Driving Into a Dead End: The Challenges Facing Russias Automotive Sector

Russia’s automotive industry is encountering significant challenges as declining sales and worsening financial conditions put pressure on car manufacturers.

AvtoVAZ, the largest automaker in the country, has implemented a four-day workweek due to weak demand, which has been driven by high car loan rates and a growing inventory of unsold vehicles. The company has revised its production goals from 500,000 vehicles down to approximately 300,000, and sales of its flagship Lada models are anticipated to drop by up to 25% this year.

The governor of the Samara region, where AvtoVAZ’s main factory is located, has requested state support. Governor Vyacheslav Fyodorishchev emphasized the company’s significance as a major employer, supporting 40,000 jobs at the plant and another 15,000 in related industries, but he noted that job opportunities are declining.

According to the Ministry of Economic Development, the motor vehicle and trailer manufacturing sector experienced the steepest declines in the first eight months of 2025, with production down by 19.9% compared to the previous year. This follows a recovery period in 2024, when output increased by 18.2%.

Prior to Russia’s invasion of Ukraine in 2022, the country’s automotive strategy focused on attracting foreign car manufacturers and gradually localizing production to enhance domestic value addition.

«The approach since the early 2000s was to keep Russian factories operational by slowly adopting European technologies, rather than investing in domestic research and development,» a business analyst familiar with the auto sector before 2022 explained to The Moscow Times.

«This was considered a compromise between importing finished vehicles from the West and making the long-term commitment needed for extensive local production — an investment more feasible in a larger domestic market,» he stated, speaking on condition of anonymity.

During the industry’s boom in the late 2000s, foreign investments surged, with vehicle sales peaking at nearly 3 million units in 2012 and maintaining around 2.5 million during 2013-2014. Several automakers like South Korea’s Hyundai set up operations from the ground up, while Renault-Nissan acquired a controlling interest in AvtoVAZ.

By 2020, Russia had approximately 15 partnerships with global car manufacturers, including the Chinese carmaker Haval. The government provided tax incentives and other benefits in exchange for investments and increased localization, which included local component manufacturing like engines.

However, this model collapsed after Western companies pulled out in 2022, forcing Russia to rely on imports from China and hastily converted facilities. The proportion of vehicles manufactured abroad surged from 18% in 2021 to 60% in 2024, predominantly consisting of Chinese brands.

Vehicle production plummeted from 1.5 million units in 2021 to 600,000 in 2022, before making a partial recovery to 756,000 in 2024. While the sector has managed to endure, its outlook remains bleak.

Retrofitting abandoned Western factories is expensive, and many Chinese manufacturers are hesitant to localize production. Only a handful of Chinese brands, such as Haval, have established assembly operations in Russia.

The Moskvich-3, assembled near Moscow, is based on a Chinese JAC model and utilizes the CKD (completely knocked down) method, with most components imported for local assembly.

Discussions are ongoing with JAC to transition to the SKD (semi-knocked down) method, which entails assembling larger pre-manufactured modules and leaves only 5-10% of a car’s value within Russia.

«This situation is at a standstill,» the analyst remarked. «Manufacturing cars entirely in Russia remains prohibitively costly and technically impractical. Chinese manufacturers would prefer to lower prices rather than invest in local production, particularly since a basic AvtoVAZ vehicle without subsidies can be priced similarly to some reputable Chinese models.»

The impact of sanctions and weak domestic demand is also discouraging Chinese companies from committing to the Russian market, he added.

Even Lada, the best-selling brand in Russia, is facing challenges in sales.

«Most of our transactions are dependent on government subsidies,» a salesperson at a Lada dealership shared. «Without them, customers tend to opt for Chinese alternatives.»

By 2024, Chinese brands represented 84.5% of all new car imports and approximately 60% of total new car sales in Russia.

Weak consumer demand continues to hinder domestic manufacturers and deter Chinese localization efforts. Rising prices and concerns about quality have led many Russians to hold off on purchasing new vehicles.

Between 2021 and 2023, the average vehicle price surged nearly 50%, increasing from 1.99 million rubles ($24,650) to 2.96 million rubles ($36,670). Meanwhile, the average age of cars on Russian roads rose to 15.5 years in early 2025, up from 13.9 in 2021. Now, around 70% of vehicles in use are over a decade old.

High interest rates and stricter lending criteria are also suppressing demand.

Up to 85% of Lada Vesta sales rely on car loans; however, the total value of car loans issued between January and September was only 1.03 trillion rubles ($12.8 billion), marking a 45.5% decrease compared to the same period in 2024, according to the National Credit History Bureau (NBKI).

In the first half of 2025, Russian car production saw a minimal decline of 2.6% to 326,000 units, whereas sales plummeted 26% to 530,375. Full-year demand is anticipated to reach around 1.3 million vehicles—a 17% decrease from 2024.

Russian automakers cannot expect to compensate for domestic downturns through an increase in exports either.

AvtoVAZ exported 6,500 Ladas in 2023 and around 21,000 in 2024, down from 35,800 in 2021.

Sales to Kazakhstan dropped from 9,359 in 2021 to just 1,085 by 2024, as buyers turned to Chinese and Western brands. In Uzbekistan, where Chevrolet dominates, Lada has fallen out of the top 10 brands.

The government has implemented initiatives that extend beyond direct financial aid for automakers, aiming to rejuvenate domestic auto sales and promote localization.

These measures seek to give Russian-made vehicles a competitive price advantage over Chinese imports, while also encouraging Chinese automakers to establish local assembly.

Subsidized discounts of up to 25% on domestically manufactured vehicles are scheduled for funding through 2026, amounting to a cost of 113 billion rubles ($1.4 billion). These discounts also apply to locally assembled foreign cars like the Haval Jolion until the price exceeds the 2-million-ruble ($24,780) limit for eligibility.

Moscow has also increased import duties and the so-called vehicle recycling fee imposed when a car is imported or registered.

For Chinese vehicles with 1-2 liter engines, approximately $7,400 in recycling fees plus a 15% import tax are now in effect. These fees will gradually rise, with local car production benefiting from reduced fees.

From 2026, stricter localization requirements will be enforced for taxi fleets in most regions, and starting in 2033, only locally produced or contracted vehicles will be permitted to operate.

These regulations can be adjusted according to market fluctuations and investor feedback. In August, authorities relaxed some of the conditions, lowering the localization threshold for recycling fee compensation from 3,701 to 1,500 points to attract more Chinese investment, as reported by the Vedomosti business daily.

Rising import expenses may encourage some large Chinese automakers to adopt Haval’s model and initiate local assembly, the analyst noted.

Haval managed to produce 100,000 vehicles in Russia in 2023 and is planning to double that output following upgrades to its production facility this year, while Moskvich is aiming for just 50,000 units.

Although Russia remains a significant market, substantial localization is unlikely—relying on government subsidies—since the market size may not justify large investments from Chinese brands, especially considering the potential for new Western sanctions.

As Russia becomes increasingly dependent on Chinese vehicles and parts, Chinese manufacturers are likely to delay localization initiatives and leverage their position to negotiate better terms.

«Complete localization is not feasible at this moment,» the analyst pointed out. «Establishing engine production for passenger cars is impractical unless you’re aiming to manufacture at least 300,000 to 500,000 units.»