"Russia is potentially the largest market in Europe," said Bob Shanks, Ford's CFO, as the company announced its quarterly earnings last week.
Last year, Volkswagen CEO Martin Winterkorn described Russia as its "No. 1 strategic growth market in Europe," and there is nothing to suggest that might change over the long term. But automakers have begun to slash their estimates for 2014 volumes radically following a terrible June.
Prospects have darkened considerably now that geopolitical tensions in the region add to sluggish economic growth, a poor network of roads and highways, neo-mercantilist trade policies and an overreliance on revenue from oil and gas exports.
Juergen Reers of consultancy firm Roland Berger, which authored a sobering study on the health of Russia's auto industry, said automakers have no choice but to remain strategically committed to Russia because of its potential to eclipse Germany one day as Europe's largest car market.
But investing further is also dangerous given the risks.
"Growth has come to a dead end, the market is in a recession now that consumers and businesses are reluctant to invest, and that will influence both sales and production in Russia," Reers said. The Ukraine crisis "will only strengthen existing negative trends."
Experts say Russia possesses the best potential for profitable growth outside China because of its low level of vehicle penetration and greater share of large, higher-margin cars than India or Brazil. But they also point out that deep-seated problems were depressing demand in the country before Russia's land grab in March.
Sales were already on the decline last year, hurt partly by cuts in infrastructure spending but mainly by a fee placed on imported cars for their recycling that together with a depreciation in the ruble kept a lid on demand. It was effectively a nontariff barrier, and Russia was forced to extend the poorly conceived measure to locally built cars at the start of this year to settle a trade spat, further hampering sales.
As a result, AEB, Russia's industry body, had already revised its estimate for a market contraction days before the Malaysian Airlines catastrophe, forecasting that volumes would shrink this year 12 percent to just 2.45 million vehicles vs. a previously seen fall of just less than 2 percent.
"The market weakness has not reached its bottom yet," Joerg Schreiber, chairman of the AEB Automobile Manufacturers Committee, warned at the time, after the slump accelerated to a 17 percent drop for June.
The poor outlook prompted Ford Motor Co. last week to book a $329 million charge to impair the value of its Russian joint venture with local partner Sollers, where 17 percent of its work force was let go in June and production in its St. Petersburg plant was reduced to just one shift.
While Ford said it would not sound the retreat from Russia given the country's size and importance, it announced further impending changes to its operations there, explaining that it was "working with its partner in Ford Sollers to develop actions to improve its business outlook."
Russia's car market problems couldn't have come at a more inopportune time. Ford Sollers is scheduled to bring a third manufacturing site onstream in Naberezhnye Chelny in Tatarstan in September, even as 950 jobs in its other two plants were cut.
Ford's Shanks said that regardless of the problems, "we're continuing our participation in that market. We've got a number of launches planned there."