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Russian Sanctions May Cripple a Once Promising Car Market

The auto industry might have to face a different kind of war, as the likelihood of another supply-chain crisis increases.

Trappings of war typically include ruthless mass destruction and systemic and deep rooted pain to a country's economy.

And Russia's invasion of Ukraine is leading to precisely that. Western nations and their allies have retaliated and imposed targeted sanctions on Russia to curtail its power, and some experts have predicted a near collapse of the Russian economy.

In particular, the region that was once considered a lucrative car market is currently in flux. Global automakers including French car maker Renault  (RNSDF) , Japanese auto major Toyota  (TM) - Get Free Report, U.S. automaker Ford  (F) - Get Free Report and South Korean car giant Hyundai  (HYMLF)  have all halted their respective Russian production units due to the ongoing crisis. 

Pulling Out of Russia

Ford said it has suspended operations with its Russian joint venture partner, Sollers. 

"In recent years, Ford has significantly wound down its Russian operations, which now focus exclusively on commercial van manufacturing and Russian sales through a minority interest in the Sollers Ford joint venture," the company said in a statement.

"Given the situation, we have today informed our [joint venture] partners that we are suspending our operations in Russia, effective immediately, until further notice."

Ford exited its Russia business and shut down factories in 2019.

A looming supply-chain crisis for the auto sector is waiting in the wings, even though it's not yet fully recovered from the first wave of supply interruptions. Semiconductors used in cars, smartphones and laptops were in short supply during the worst of the coronavirus pandemic.

Russia's war on Ukraine has also spilled over to the European business units of car companies because of lagging production from partners and vendors in Ukraine.

Volkswagen has also suspended production of vehicles in Russia until further notice. The decision to indefinitely suspend the production of vehicles in Russia applies to the Russian production sites in Kaluga and Nizhny Novgorod, the company said.

Vehicle exports to Russia will also be stopped with immediate effect, said Volkswagen.

"With the extensive interruption of business activities in Russia, the executive board is reviewing the consequences from the overall situation, during this period of great uncertainty and upheaval," Volkswagen wrote in a statement.

Likewise, Mercedes-Benz Group, which invested more than $284 million (€250 million) in a factory to build its luxury E-Class sedans and SUVs, has suspended export of cars to Russia and suspended local production, Reuters reported.

The situation has escalated from last week when most of these companies were closely monitoring the impact of the Russian invasion.

Ukraine Fallout Could Prompt Supply Chain Shortages 

Germany's Volkswagen has also said "production would soon be affected at its flagship plant in western Germany because of missing parts from Ukraine," The Wall Street Journal reported.

Suppliers of auto parts systems with plants in Ukraine have also shut down their factories in the country, according to the Journal. That will lead to production halts for a number of auto companies due to missing car parts.

The companies with significant presence in Ukraine include Germany's Leoni, Japan’s Fujikura, Aptiv of Dublin, and Nexans NXPRF of Paris, according to a report by the Journal.

Separately, Porsche "has halted production at its factory in Leipzig, where it builds the Panamera sedan and Macan sport-utility vehicle," the Journal report added.

Czech car maker Skoda has said it "suspended operations at a plant in Solomonovo, Ukraine, where its partner Eurocar assembles Skoda models such as the Superb, Kodiaq, Karoq and Fabia for the Ukraine market," per the Journal report