Russia’s efforts to boost domestic vehicle production by courting Chinese automakers are running into obstacles, from economic volatility to strategic caution among OEMs. As Russian policymakers push new incentives, analysts warn that structural challenges could undermine the country’s localisation ambitions.
The Russian government’s ambitious plans to boost finished vehicle production by the end of the decade meet harsh reality, as Chinese OEMs remain reluctant to embark on nearshoring plans. The authorities believe that the same set of tools that once lured Western firms to localise production in the country can work again, though independent analysts describe it as wishful thinking.
The Russian government has set ambitious targets for the automotive industry, aiming to increase production from 760,000 finished vehicles in 2024 to at least 1.4 million in 2030 and 1.6 million by 2035, as forecasted in the long-term automotive industry development programme by the Russian Industry and Trade Ministry.
Although this is not directly stipulated in the programme text, the lion’s share of the growth is projected to come from localisation projects of Chinese automakers.
“Russia and China are working on transferring of production of Chinese cars to Russia,” Russian President Vladimir Putin outlined during a conference in Moscow in December 2024, emphasising that encouraging nearshoring trends among Chinese OEMs is considered one of the key priorities for the government in the domestic automotive market for the next years.
Imports from China saved the Russian finished vehicle market from collapse after automakers from the US, EU, Japan and Korea bid farewell to the local market in 2022, but now the country is growing increasingly unhappy with the import dependence.
“Any country in the world, any economy strives for maximum localisation, including the production of automotive components at our production facilities,” Putin said, also shedding some light of how the authorities plan to beat the goal. “There is a well-known instrument for this, a special investment contract (SPIC), in which the level of support from the state is directly proportional to the localisation level.”
The future of the Russian automotive market directly depends on whether the Russian authorities succeed in urging Chinese OEMs to set up production on local ground, according to a study by the Institute of Economic Forecasting of the Russian Academy of Sciences.
Between 2000 and 2021, the Russian automotive industry was developed under the nearshoring banner with OEMs from the US, EU, Japan and Korea massively investing in localised production of finished vehicles and automotive components, Sergey Milyakin, senior researcher at the Institute of Economic Forecasting said.
In the next several years, the trend can be similar, but this time, it will be driven by Chinese companies, Milyakin projected.
As a result of the government import-replacement campaign in the 2000s, foreign OEMs reached a production peak of 1.4 million finished vehicles in 2012, meeting nearly half of the demand on the Russian market of 2.93 million in that year.
According to analysts, the potential of the new import-replacement campaign is also huge, as last year, China exported 1.16 million finished vehicles to Russia.
As a part of the trend, Chinese automakers are expected to first move from complete knocked down (CKD) to semi-knocked down (SKD) with consequent localisation of automotive components production, Milyakin indicated. Under this scenario, the Russian finished vehicle production is set to reach 1.5 million by 2030, the Russian researchers projected.
Europe vs. Russia for China
While Chinese OEMs have been cautious about nearshoring in Russia, their approach in Europe has been markedly more assertive.
In Europe, Chinese automakers are actively establishing local manufacturing to circumvent tariffs and enhance brand presence. For instance, BYD has announced plans to build its first European EV factory in Hungary, strengthening its foothold in the region. Chery is similarly investing in joint ventures, such as the collaboration with Spain’s EV Motors to produce vehicles at a former Nissan plant in Barcelona.
These initiatives form part of a wider trend reported by Automotive Logistics, where Chinese OEMs are proactively nearshoring in Europe to secure market access, stabilise supply chains and respond to tightening EU regulations.
In contrast, despite Russia’s offering of SPIC incentives and tariff advantages, Chinese firms remain reluctant.
Breaks on the wheel for Russia
The results of the first nearshoring experiments in Russia kicked off by Chinese firms during the last few years were somewhat discouraging.
For example, the re-launch of the former Renault plant in Moscow went sideways. The Russian authorities arranged CKD assembly of the JAC finished vehicles under the revived Soviet-era brand Moskvitch, but during the first year of operation, the plant assembled only 31,000 finished vehicles, falling short of the production target of 50,000 finished vehicles.
Moskvitch suffered a net loss of Rub 8.6 billion ($100 million) in 2023, and the 2024 production plan was downsized from originally 100,000 finished vehicles to only 27,000.
The path of the former St. Petersburg Nissan plant back into business was also thorny. Russian leading automaker Avtovaz in 2023 commenced production of the Lada X-Cross 5 at the facility, which was the exact copy of FAW Bestune T77. However, after the US administration imposed heavy sanctions against Avtovaz in September 2023, the production was swiftly curtailed.
In March 2024, the plant started assembling finished vehicles under the Xcite brand in partnership with Cherry from automotive kits exported from China, but in February 2025, the production was halted again, this time due to low sales.
Quite a few Russian analysts and market players remain sceptical that Chinese OEMs have enough reasons to ramp up automotive production in the country in the coming years.
“Commissioning a finished vehicle plant requires investments of hundreds of millions of dollars and a planning horizon of 10-20 years ahead. In Russia, it is difficult to predict the situation even in 2025, not to mention 2045,” Artem Krasnov, an automotive industry analyst, emphasised.
The list of risks that could hurt the nearshoring plan is long, and includes a decline in the Russian population’s purchasing power, cooling of political relations with China, and above all, the threat of new Western sanctions, Krasnov added.
A possible return of Western automakers, expectations of which have already hindered sales of finished vehicles in Russia at the beginning of 2025, is another factor for Chinese OEMs to think twice before committing to nearshoring plans in Russia.
Paradoxically, tightening and relieving sanctions are equally bad for the prospects of the Chinese brands on the Russian ground.
“Chinese manufacturers have achieved great success in the production of engines and transmissions, but the main technologies still depend on imports,” Milyakin said. “Although Chinese manufacturers are actively working on import substitution, if Western countries impose a ban on exporting products using European technologies to Russia, they will have to obey.”
On the other hand, warming political relations with the West, which have been happening since Trump’s return to the Oval Office, can pave the way for other foreign brands returning to the country and hamper sales of Chinese finished vehicles.
Changing rules
The Russian government plans to convince Chinese OEMs to invest in launching production capacities in the country through a combination of a hike in the utilisation fee tariffs and adjusting SPIC terms.
As a part of the tax reform rolled out last year, the Russian government dramatically raised the utilisation fee rates by 70% to 85% from October 1, 2024, with plans envisaging the levels to further gradually increase by 10% to 20% per year through 2030.
The measure will be a game-changer in the Russian automotive market already in 2025, Alexey Podshekoldine, director of the Russian Association of Automotive Dealers said, forecasts that finished vehicle sales in the country this year will plummet by 15% to 25%, triggering mass bankruptcies along the value chain.
The utilisation fee hike came as a surprise for the Russian automotive industry, as market players see no benefits from the move, aside from a purely fiscal goal of collecting more money into the state treasury.
In theory, it makes imports less competitive, as Russian automotive plants are eligible for the utilisation fee reimbursement from the budget, but Podshekoldine is confident the hike in the utilisation fee tariffs alone has little chance of convincing Chinese automakers to change their attribute towards the Russian market and switch from imports to local production.
“An endless increase in the utilisation fee will not force foreigners to localise production in Russia”, Podshchekoldin said. “In order for the market to become more civilised, conditions must be created at the federal government level under which it would be profitable for Chinese to organise their assembly plants in Russia – both finished vehicles and automotive components.”
Cart before the horse
The Russian finished vehicle industry is also braced for a drop in cargo flows in 2025, revealed a source in the industry who wished to remain anonymous.
“In terms of encouraging localisation, Russia put the cart before the horse. You need to create attractive investment conditions on the local ground first and take steps to limit imports after, and not the other way around,” the source said.
The Russian government expects that due to the hike in the utilisation fee tariffs, the finished vehicle imports to the country will drop to 700,000 in 2025 and 500,000 in 2027. In general, this means less volumes for logistics companies to be handled.
In December 2024, the Russian Industry and Trade Ministry revealed that it drafted new terms for SPICs, envisaging relatively soft localisation requirements through which the Chinese OEMs can fully compensate the utilisation fee.
However, the negotiations on the new terms have been put to a halt due to fierce resistance from the leading Russian automakers Avtovaz and Kamaz.
According to the Russian automotive manufacturers, the proposed terms have put them even in more disadvantage in competitive battle with Chinese brands. Avtovaz and other automakers has been repeatedly calling the authorities to constrain the flow of Chinese finished vehicles to the country.
The Russian automotive industry is in unequal conditions with the Chinese who take advantage of the lower cost of automotive components, a low key interest rate in China and the absence of sanctions, Maxim Sokolov, president of Avtovaz told local state press in July 2024.
In general, the source added, Russian finished vehicle logistics providers are braced for another rough year, though mass bankruptcies in the industry are not expected.
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