Car output stalls as sanctions pummel Russian manufacturing hub

Thousands of car workers have been furloughed and food prices are soaring as Western sanctions pummel the small Russian city of Kaluga and its flagship foreign carmakers, with more sanctions likely to come.

The Kaluga region, 190km southwest of Moscow, says it has attracted more than 1.3-trillion roubles ($15bn) in investment, mostly foreign, since 2006.

But Western sanctions imposed in recent weeks after Russia invaded Ukraine have worsened component shortages and halted production at two flagship car plants, Germany’s Volkswagen and Sweden’s Volvo.

A third, the PSMA Rus plant — a joint venture between Stellantis and Mitsubishi and employs 2,000 — may halt production soon due to a lack of parts, the CEO of Stellantis said last Thursday.

“It is not clear what will happen. They don’t give us any concrete information,” said Pavel Terpugov, a welder at the PSMA Rus plant.

Terpugov said he needs twice as much money to buy groceries than before the sanctions. Analysts have forecast Russian inflation could soar to 24% this year, while the economy may shrink to 2009 levels.

The US and Europe are weighing more sanctions after Ukraine accused Russian forces of civilian killings in northern Ukraine, where a mass grave was found in Bucha, outside Kyiv.

Hope source

Kremlin categorically denied any accusations related to the murder of civilians, including in Bucha.

One source of hope for some in Kaluga, with its 325,000 residents, is the West may be reluctant to hurt its own companies.

“Does it make sense to impose sanctions on its own plant and lose money?” said Valery Uglov, a mechanic at the Volkswagen plant. “Does it make sense to lose the Russian market? We hope to return to work as soon as possible and everyone will have confidence in the future again.”

Volkswagen, whose factory employs 4,200 people, suspended operations in early March. A spokesperson said production remains frozen. Volvo Group, which employs more than 600 people to build trucks, also suspended production.

Even before the sanctions, Russian car sales contracted from 2.8-million units from when the Volkswagen factory opened in 2007 to 1.67-million units last year, damaged by sanctions after the 2014 annexation of Crimea and the Covid-19 pandemic.Some factories cut output last year due to disruptions caused by the pandemic.

Price increase

“We have had similar furloughs at the factory ... but now the situation is different, more serious,” said Alexander Netesov, a warehouse foreman at the Volkswagen plant. “But we are waiting anyway, we are not losing hope,” he said.

In a sign of the squeeze workers are feeling, Netesov said a new Polo car he ordered with a factory discount has increased in price by 20% since his pre-order.

Others in the city, which also boasts production by pharmaceutical and food companies as well as Samsung televisions, derive optimism from the fact that almost every crisis that has ravaged the Russian economy over the past two decades has been followed by a boom.

“I hope, we all hope, that in the near future everything will stabilise,” said Angelina Minnigulova, a marketing executive at Volkswagen dealer KorsGroup, which has seen a fall in demand as car prices soar.

Reuters