President Joe Biden last Thursday announced new sanctions on Russia after it launched attacks on Ukraine as a part of an invasion. They include cutting off the nation's largest banks, preventing the Russian government and its state-owned businesses from raising money from U.S. and European investors, and increasing the number of sanctioned oligarchs in the country.
The actions are expected to cut off more than half of Russia's tech imports, the president said, hampering its military capabilities, its space program and its international shipping ventures.
He said the moves are intended to "maximize long-term impact on Russia and to minimize impact on the United States" and allies.
More sanctions could create disruptions that come as major industries in Michigan — especially the automotive sector — already have faced pressures on their supply chains. Ports are backed up. Companies are struggling to recruit workers and dealing with rising prices. Automakers continue to battle a shortage of semiconductors and other parts, which have depleted dealership inventories and caused vehicle prices to climb — all in the midst of a historic transformation toward electrified vehicles.
"The reality is we are living now in an economy that does not have the shock absorbers of just kind of a general pool of inventory," Dan Hearsch, managing director in the automotive and industrial practice at consulting firm AlixPartners LLP, said during an Automotive Press Association webinar in Detroit. "Forget about actual strategic inventory that we want to put in place, and so every little blip gets amplified. It gets that much worse and hits the stock much harder."
The escalating conflict and accompanying sanctions, experts say, present yet another hurdle in an era filled with them, even as the specific economic impacts remain unclear at this early stage.
“I think one of the biggest challenges is just that, we’ve had two and a half years of constant uncertainty and supply chain issues and disruptions," said Stephanie Brinley, principal analyst at information provider IHS Markit, "and this is going to add another element to it."
Oil Prices
In 2020, the United States imported just $265,000 in passenger vehicles from Russia, according to the U.S. Census Bureau. The country also isn't a significant supplier of automotive components for the U.S. industry. There were $5.255 million in engine and engine parts like carburetors, $49.79 million in tires and tubes and $4.188 million in other parts that came from Russia.
It's the secondary effects that could mean more for U.S. automakers, experts says. In particular, that's rising oil and gas prices, as Russia is the world's third largest oil producer.
Tensions overseas had an impact on oil prices leading up to Russia's Thursday attack on Ukraine, according to the American Automobile Association. Crude oil prices topped $105 per barrel on Thursday for the first time since 2014 before closing at $93.27. The national average price at the pump was $3.54, $3.36 in Michigan.
Other oil-producing nations like the United States, Canada and Saudi Arabia may increase production to offset price increases. Biden said the administration is working to control prices, but also noted that sanctions take time to take effect and urged the American public to "show resolve."
Efforts include coordinating with other oil producing and consuming countries to secure global energy supplies, encouraging other countries to release some of their strategic petroleum reserves, and considering releasing more U.S. oil "as conditions warrant."
"I know this is hard, and that Americans are already hurting. I will do everything in my power to limit the pain the American people are feeling at the gas pump," Biden said.
"This is critical to me. But this aggression cannot go unanswered. If it did, the consequences for America would be much worse."
If prices continue to climb to $110 or $120 per barrel, though, that could lead automakers to prioritize their smaller vehicles like sedans and crossovers over the larger SUVs and trucks they've been favoring amid the chip crunch.
"If oil is $110," said Warren Browne, a supplier consultant and General Motors Co.'s former managing director of Russia, "that's a unique advantage for the Asians in the passenger car market and the mainstream SUV market, no question."
The Semiconductor Industry Association on Thursday said it didn't expect further immediate supply disruptions from the sanctions.
"We are still reviewing the new rules to determine their impact on our industry," John Neuffer, the association's CEO, said in a statement. "The semiconductor industry has a diverse set of suppliers of key materials and gases."
Rising fuel prices also increase the costs of transportation of parts and vehicles, added Dave Andrea, a principal of the accounting firm Plante Moran and member of its automotive strategy team. Cybersecurity may be a concern, as well, for fear of a response to sanctions. Plus, sanctions against Russia from other countries may create disruptions for suppliers and production in other nations.
"The vehicle manufacturers and suppliers are part of a global network," Andrea said. "You can’t just look at the U.S. sanctions."
Meanwhile, the crisis initially sent stocks down Thursday, but major U.S. benchmarks had rebounded into positive territory by market’s close.
But uncertainty around the situation prompted many investors to abandon risky assets in favor of safer bets such as gold and U.S. Treasury securities, noted Paolo Pasquariello, a finance professor at the University of Michigan’s Ross School of Business.
“This is remarkable, because … for the last several months, the bond markets have been” down, he said, amid signals from the U.S. Federal Reserve that it will raise interest rates and otherwise pull back on support for the economy as inflation rises.
“This was going to be the norm in a world in which Putin does not invade Ukraine," said Pasquariello. "But now you have this flight to safety. The same way that people fearing a bombardment will find refuge in the subway, during an episode of turmoil or dislocation in the world economy, market participants look for safety.”
Automotive
The crisis and sanctions are unlikely to directly affect the U.S. car market because most vehicles produced in Russia are sold there and not exported, but manufacturers could lose access to some natural resources needed for production, said Brinley of IHS Markit.
Russia is a major exporter of palladium, for example, an element used in catalytic converters. Ukraine is a major source of neon gas, which is used in the production of semiconductor chips. It's also an exporter of graphite, which is used in lithium-ion batteries.
It's too early and there are too many unknowns to estimate the impact, Brinley said: "But what it really is doing is creating more uncertainty and creating more risk to the supply chain" — a supply chain already battered by the coronavirus pandemic, a global semiconductor shortage, factory fires, natural disasters and more over the last two years.
Western nations do supply plenty of components for Russia's auto industry. If that source of revenue disappears, they may seek to make it up elsewhere or production could be affected.
"The largest effect on Western companies will be on their bottom line from parts or vehicle sales and production in that region," said Sam Fiorani, vice president of global vehicles forecasting for AutoForecast Solutions LLC. "Last year, the Russian market itself sold nearly 1.7 million vehicles. That's considerably down from historic highs, but it's a sizable market on a global scale."
Ford Motor Co. and Stellantis NV both have a presence selling and making vehicles in Russia and other countries in eastern Europe like Slovakia, Poland, Romania and Turkey. The Dearborn automaker has a minority stake in a joint venture that produces commercial vehicles in Russia.
“We’re deeply concerned about the situation in the Ukraine and the safety and well-being of people there and throughout the region," Ford Motor Co. spokesman Ian Thibodeau said in a statement Thursday. "We’re following and will manage any effects on our business in real time. However, our primary interest is in the safety and well-being of people in the Ukraine and throughout the region.”
After doubling production of Peugeot, Opel and Citroёn vans in its Kaluga plant in Russia in 2021, Stellantis began exporting vehicles to elsewhere in Europe this month. The automaker has plans to add the Fiat Scudo and transmission assembly before the end of the year, too. Stellantis spokeswoman Shawn Morgan said the automaker is monitoring the situation and ensuring the well-being of its employees.
"It's normal we mention the geopolitics in the world that have not been very helpful over the past couple of years, and they don't seem to becoming better this year," CEO Carlos Tavares said during an earnings call on Wednesday.
General Motors Co. doesn't have manufacturing facilities in Russia, though it does have a national sales company. The company says it has limited supply exposure there, as well, though it's working with suppliers to mitigate negative effects.
Other automakers like Renault SA and Hyundai Motor Co. may be more exposed as they represent 38 percent and 16 percent of production in Russia, respectively, according to AutoForecast Solutions. The country is Renault's largest market outside France. It has a controlling stake in Lada maker AvtoVAZ, which is the market leader in Russia, though it sources many parts locally. Volkswagen AG also has significant production there.
Russia is home to some 34 car, truck, van, bus and engine plants, which primarily produce products for their home market. Sanctions "(threaten) to bring production lines to a standstill in Russia," Stefan Bratzel, founder and director of the Center of Automotive Management in Germany, wrote in an analysis released Thursday.
And even a short-term conflict will result in a loss in assets in the region, he said: "The automotive industry will not make relevant investments in Russia for many years."
Overall, though, Russia is a relatively minor player in the global auto industry, noted Ferdinand Dudenhöffer, director of the Center Automotive Research in Duisburg, Germany, making up just 2.3 percent of car sales worldwide last year.
"The future of the auto industry lies in Asia, North America and the EU, but certainly not in Russia," he said via email. "The loss of Russia is easy for the industry to cope with, but for Russia the sanctions will further increase the technological gap and increase poverty in the country."
©2022 www.detroitnews.com. Distributed by Tribune Content Agency, LLC.
Related Articles
