Stalled Engines: The Uncertain Future of Russias Auto Industry Amid Economic Strain

Russia’s automotive industry is facing significant challenges as declining sales and worsening financial situations create pressure within the sector.

AvtoVAZ, the nation’s largest car manufacturer, has shifted to a four-day workweek due to low demand stemming from high car loan costs and an increasing inventory of unsold vehicles. The company has reduced its production forecast from 500,000 to approximately 300,000 units, while sales of its leading Lada models are anticipated to drop by as much as 25% this year.

The governor of Samara region, where AvtoVAZ’s primary factory is located, has requested government assistance. In his appeal, Governor Vyacheslav Fyodorishchev emphasized the company’s significance as a major employer, providing jobs for 40,000 individuals at the factory and an additional 15,000 in related sectors, yet he noted that employee workloads are dwindling.

According to the Ministry of Economic Development, the motor vehicle and trailer manufacturing sector was among the most severely affected during the first eight months of 2025, with production falling by 19.9% compared to the previous year. This follows an 18.2% increase in 2024, which had marked a recovery for the sector.

Prior to Russia’s invasion of Ukraine in 2022, the country’s automotive strategy was focused on attracting foreign manufacturers and progressively localizing production to enhance domestic value-added output.

“A strategy that has been in place since the 2000s involved maintaining Russian production facilities by incrementally integrating European technologies and frameworks at the expense of local research and development,” remarked a business analyst who worked on auto industry projects prior to 2022 in an interview with The Moscow Times.

“This was considered a compromise between importing finished vehicles from Western countries and investing the necessary time and resources for comprehensive local production — an approach that would only be viable in a considerably larger domestic market,” he explained, requesting anonymity.

During the boom years of the late 2000s, the industry attracted substantial foreign investment, reaching nearly 3 million vehicle sales in 2012 and maintaining around 2.5 million from 2013 to 2014. Some manufacturers, including South Korea’s Hyundai, constructed new factories, while Renault-Nissan acquired a controlling stake in AvtoVAZ.

By 2020, Russia had established roughly 15 investment partnerships with international automotive firms, including the Chinese automaker Haval. The government offered tax incentives and other support in return for increased investments and higher local content, including the domestic manufacturing of components such as engines.

However, this model collapsed following the exodus of Western companies in 2022, leaving Moscow reliant on imports from China and hastily reconfigured production facilities. The proportion of vehicles produced outside of Russia surged from 18% in 2021 to 60% in 2024, with Chinese brands overwhelmingly dominating the market.

Production numbers dropped from 1.5 million vehicles in 2021 to 600,000 in 2022, with a partial rebound to 756,000 in 2024.

While the sector has managed to survive, its future remains uncertain.

Retrofitting abandoned Western factories is a costly endeavor, and Chinese manufacturers have been hesitant to localize production significantly. Only a handful of Chinese brands, notably Haval, have set up assembly operations in Russia.

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

Discussions with JAC are in progress to transition to an SKD (semi-knocked down) assembly approach, which involves the assembly of larger pre-manufactured modules and retains only 5-10% of a vehicle’s value within Russia.

“It’s a deadlock,” the business analyst commented. “Manufacturing cars entirely within Russia continues to be prohibitively expensive and technically impractical, while Chinese automakers tend to favor lowering prices rather than investing in local production — particularly as a basic model from AvtoVAZ, without subsidies, could cost approximately the same as several robust Chinese alternatives.”

Additionally, sanctions and a sluggish domestic market are dissuading Chinese manufacturers from making long-term commitments in Russia.

Even Lada, which is the most popular brand in Russia, faces challenges in sales.

“A significant portion of our sales is reliant on government subsidies,” stated a salesperson at a Lada dealership. “In their absence, customers generally lean towards Chinese brands.”

By 2024, Chinese brands made up 84.5% of all imported new vehicles and approximately 60% of total new car sales in Russia.

Weak consumer demand continues to hinder local producers and discourage Chinese companies from localizing. Rising prices and concerns over quality have led many Russians to refrain from purchasing new cars.

The average price of vehicles surged nearly 50% between 2021 and 2023, from 1.99 million rubles ($24,650) to 2.96 million rubles ($36,670), while the average age of vehicles on the road escalated to 15.5 years in early 2025, up from 13.9 years in 2021. Currently, 70% of cars on Russian roads are over a decade old.

High interest rates and stricter lending regulations further suppress demand.

As much as 85% of Lada Vesta sales depend on financing, yet the aggregate value of car loans issued from January to September totaled only 1.03 trillion rubles ($12.8 billion) — a decline of 45.5% compared to the same timeframe in 2024, according to the National Credit History Bureau (NBKI).

In the first half of 2025, Russian vehicle production saw a slight decline of 2.6% to 326,000 units, whereas sales plummeted by 26% to 530,375. Anticipated full-year demand stands at around 1.3 million vehicles, marking a 17% reduction from 2024.

Moreover, Russian car manufacturers cannot rely on exports to counterbalance domestic declines.

AvtoVAZ exported 6,500 Ladas in 2023 and about 21,000 in 2024, a drop from 35,800 in 2021.

Sales to Kazakhstan plummeted from 9,359 in 2021 to just 1,085 in 2024 as consumers shifted their preferences to Chinese and Western brands. In Uzbekistan, where Chevrolet holds a dominant market position, Lada has dropped out of the top 10 brands.

In an effort to stimulate domestic auto sales and promote localization, the government has implemented measures beyond direct financial aid for manufacturers.

These initiatives strive to provide a pricing advantage to Russian-made vehicles over Chinese imports while encouraging Chinese automakers to establish local assembly operations.

Subsidized discounts of up to 25% on domestically produced vehicles are funded through 2026, amounting to 113 billion rubles ($1.4 billion). These discounts also apply to locally assembled foreign vehicles, such as the Haval Jolion, until their prices surpass the 2-million-ruble ($24,780) threshold.

Additionally, Moscow has increased import tariffs and the vehicle recycling fee, imposed when a vehicle is imported or registered.

Chinese vehicles with 1-2-liter engines are now subject to approximately $7,400 in recycling fees alongside a 15% import duty. These fees will gradually rise, while locally manufactured vehicles will benefit from discounts.

Starting in 2026, stricter localization requirements will be enforced for taxi fleets in most regions, and from 2033, only domestically produced or contracted models will be permitted to operate.

These regulations can be adjusted to align with market conditions and investor sentiments. Authorities relaxed certaines requirements in August, lowering the localization threshold for recycling fee compensation from 3,701 to 1,500 points in an effort to attract Chinese investments, as reported by Vedomosti.

Rising import costs may compel certain large Chinese manufacturers to follow Haval’s lead and initiate local assembly, according to the business analyst.

Haval manufactured 100,000 vehicles in Russia in 2023 and aims to double this output after upgrading its plant, while Moskvich’s goal stands at just 50,000 units.

Though Russia remains a significant market, substantial localization is unlikely—relying on government subsidies—as the market is too limited to sustain all Chinese brands and justify their large-scale investments, particularly in light of potential new Western sanctions.

With Russia increasingly dependent on Chinese vehicles and parts, automakers from Beijing are likely to postpone localization efforts and leverage their influence to secure more favorable terms.

“Comprehensive localization isn’t a viable option at this moment,” the analyst concluded. “Establishing engine production for passenger vehicles is impractical unless you are manufacturing at least 300,000-500,000 units.”