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FutureStarrMarkets Are Priced and Chinese Car Brands Can Take Advantage
Market prices provide insight into the worth of a product or service. They demonstrate demand and supply, showing whether buyers are willing to pay more or less for similar goods.
According to an experienced investment chief and former Moscow reporter, markets have already priced in at least 12 months of Russia's conflict in Ukraine. He believes the outcome could shift either way and cause global investors to react.
The conflict in Ukraine could continue into 2024. It appears that Russia's chances of maintaining control over a significant area are declining, as their military is losing ground in some contested oblasts and Moscow is increasingly unwilling to negotiate for peace.
Putin made a risk when he began the conflict in February: He believed Ukraine's citizens would remain loyal to an "all-Russian" nation and that Moscow's attempts to slow its drift toward Europe would succeed where others have failed. Unfortunately, his calculated risks have backfired disastrously.
Ukrainian voters, on the other hand, have demonstrated an increasing sense of national unity. Despite a variety of political parties, voting patterns have shown few sharp divisions between pro-Russian and anti-Russian factions. Instead, voters overwhelmingly favor remaining part of the EU or strengthening existing connections to it while rejecting any move to join Russia's Eurasian Economic Union (EAEU) as a means of deepening cooperation with Moscow.
At the start of Maidan protests in late 2013, Kyiv saw most participants waving Ukrainian and EU flags and rejecting a deal that favored Yanukovych's eastern-based Party of Regions. Their actions symbolized an identity within Ukraine which was not only opposition to Putin's Russia but also Western-oriented--even as Russian government denials denied this connection.
In the months that followed, Russia launched an unprecedented campaign of targeted killings and rapes against civilians in cities like Kherson and Luhansk. Furthermore, they have launched a devastating assault on power, heat and water utilities across the country, potentially leading to a humanitarian crisis.
The Ukrainian government has responded with a fierce counteroffensive that has forced Russia out of the Donbass. It has retaken territory in the east and south, restoring some of its territorial integrity; however, the fight is far from over.
One major factor determining the outcome of this war is whether Ukrainians are willing to fight for their nation. According to a September Gallup poll, 70% said they were determined to fight until victory over Russia is secured.
Russian businesses are fleeing dollars and euros in favor of the Chinese currency as Western sanctions continue to constrain the country's banks, companies, and consumers. Their efforts appear to be paying off; according to Reuters, the yuan's share in Russia's foreign-exchange market has surged from less than 1% this year to as much as 45%.
Wang Min, owner of an LED lights company in China's Fujian province, is delighted to be paying his Russian customers in yuan. This has enabled him to sell products more easily and complete transactions more quickly.
He believes Russia's growing reliance on the yuan will give Beijing an advantage as they attempt to promote greater international usage of Chinese currency. The real effective exchange rate (REER) for the yuan is closer than it has been in years and experts predict Russia may struggle to withdraw funds from its reserves quickly if relations with Beijing deteriorate.
According to Alexander Borodkin, head of savings and investment at Otkritie bank, the Russian banking system has been actively devaluing dollars and euros. Many Russian banks are offering deposit rates on yuan deposits as low as 0.01% to 2.45% for one-year holdings.
Some Russians are investing their money into yuan-denominated accounts as a safeguard against the rouble's declining value. Andrey, a communications specialist from Moscow who moved to Dubai last September in order to avoid fighting in Ukraine, bought both currencies online through his Russian bank as an insurance policy.
Gazprom PJSC, the state-run energy giant, has already begun shifting its contracts to supply gas to China in rubles and yuan from euros. Furthermore, several corporates such as aluminum giant Rusal and oil major Rosneft have either completed or plan to complete yuan-denominated bond sales this year or anticipate doing so.
The yuan's share in Russia's forex market is on the rise, due to conflict in Ukraine and Western sanctions against Moscow. But experts warn that internationalizing the yuan could weaken the dollar over time, creating vulnerabilities for Russia as its ruble loses its status as an alternative reserve currency.
Veteran investment chief and former Moscow reporter believes markets have become overpriced, offering Chinese car brands an opportunity to benefit. Due to Western companies' exodus from Russia and suspension of production at Russian factories due to the conflict in Ukraine, demand for Chinese automakers in Russia is on the rise.
Data from the Russian auto market indicated that every fourth new vehicle purchased in July was a Chinese-branded model, up from one in five in May and roughly even with April's number, though still well behind the share of domestic producers.
"China has an immense potential in the Russian car market," Vladimir Bespalov, director of automotive industry research firm Autostat, told Reuters. He predicted that in five to ten years China could account for 35 percent of all sales in Russia."
Bespalov forecasted despite the slowdown in sales that Chinese brands would continue to expand their market share in Russia due to their lower costs than European or American vehicles. The Chinese aim to take over high-priced vehicle niches currently held by Western brands.
Brands such as Chery, Geely, Changan and Haval have seen their share of the Russian car market increase steadily over time. And in Uzbekistan, where there are no major carmakers yet, Chery is taking over with an aggressive strategy of mass marketing, low prices and advantageous loans.
Due to this development, Chery models are now available in Uzbekistan at a minimum price of $27,000 for the most affordable package - less than half the Russian sticker prices! This development is significant for Uzbekistan's economy which relies heavily on raw material exports.
Kazakhstan has experienced the same phenomenon, with AKAB reporting that Chinese-brand trucks accounted for 3.4% of all new vehicle sales there in 2021.
In other markets, Chinese automakers are taking over the luxury car sector. Nio's electric car, the XPeng, is competing against Tesla and established European manufacturers on range, performance and price.
In Russia, where Western car brands have stopped sales and production, the Chinese have surged to 7.5 per cent of the market - up from 5.3 percent in 2020 and double their Russian competitors' share.
Russian banks are replacing dollars and euros in their accounts with yuan as part of a broad effort to de-dollarize the economy. A veteran investment chief and former Moscow reporter says markets are determined to punish Russia for its aggression in Ukraine, forcing them to seek alternatives to the dollar.
As Western countries impose sanctions against Russia for its war in Ukraine, Moscow has sought to diversify its reserve currencies with Chinese yuan and gold.
Accordingly, a significant portion of Russia's current account surplus is being converted into yuan and other currencies. This has caused an eight-fold surge in funds for Tinkoff Bank's Yuan accounts; MTS Bank saw a four-fold jump; Bank Saint Petersburg experienced a 3.5-fold growth.
Furthermore, many wholesale trading firms are switching to settlements in yuan. This currency is becoming more and more attractive to entrepreneurs and the general public who wish to convert their savings into a secure currency.
Though the yuan may be a viable option for Russia, it also presents new difficulties. Its weakness against the dollar and lack of protection against US and EU sanctions are two issues that Moscow had not expected it to provide.
The European Union is already imposing 150 sanctions against entities and individuals in Russia, and has indicated it may impose more if Putin continues to violate Ukraine's territorial integrity. Furthermore, the decline of the yuan against the dollar has devalued Russia's currency reserves - which are measured in U.S. dollars - which Moscow fears losing if it starts using its yuan for foreign trade.
Soon, a policy plan to de-dollarize the country is expected to be unveiled. It calls for spending $70 billion to purchase currencies of so-called "friendly" countries - mostly yuan.
In June, officials first discussed the possibility of investing in so-called soft currencies. Natalia Lavrova, chief economist at BCS Financial Group in Moscow, predicted this plan would boost the ruble to 75-80 per dollar from its current level around 60.