Dream Shattered: China Sends Cars, No Production to Russia
China supplies vehicles to Russia, but is holding back on factory construction. Moscow's hopes for local production are dashed by Beijing's reluctance.
Chinese car manufacturers have taken the Russian market by storm, but are reluctant to set up their own production facilities. Following the withdrawal of Western groups such as Renault and Volkswagen in 2022, brands such as Chery, Haval and Geely filled the gap with exports and simple assembly. Russia is now demanding local manufacturing, while China is keeping its technology and jobs at home. What began as a pragmatic partnership is developing into a "frenemy" relationship in which geopolitical interests and economic goals clash
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Chinese brands dominate Russia's roads
Following the exit of Western manufacturers in 2022, Chinese brands stepped in. In 2023, exports of Chinese vehicles to Russia rose to 735,000 units between January and October, accounting for 19 percent of China's total passenger car exports. Chinese brands dominated about 61 percent of the Russian market in 2023, an increase from 9 percent in 2021. Meanwhile, nine of the top ten best-selling models come from China.
Russian companies such as the state institute NAMI took over abandoned factories of Western manufacturers, often for a symbolic ruble. Chinese brands use these facilities to assemble partially knocked-down cars (semi-knocked-down kits, SKDs) or completely knocked-down cars (CKDs), a method that hardly creates any local added value. Great Wall Motors has been operating its own factory in Russia since 2019, but only produces SKDs, and Geely produces through a joint venture in neighboring Belarus. Most manufacturers rely on exports to remain flexible and minimize risks. This approach was initially successful, but Russia is changing the rules.
Russia demands localization from China
Initially, Russia welcomed the Chinese cars because they supplied consumers and relieved the domestic industry, which is focusing on military equipment for the war in Ukraine. However, Moscow has had enough of serving as a dumping ground for China's surplus internal combustion vehicles, which are crowding out domestic brands. In May last year, President Vladimir Putin called for more cooperation in car production. Avtovaz boss Maxim Sokolov even called Chinese imports a threat to Russian industry.
To put pressure on China, the Ministry of Trade and Industry raised recycling fees in July last year, a measure that acts as a hidden tariff. Since October, the fees have risen by 70 to 85 percent, depending on engine size, with further increases of 10 to 20 percent annually until 2030. For a car with an engine capacity of 1 to 2 liters, additional costs of over 7,000 US dollars (6,580 euros) have been incurred since January 2025, and up to 20,000 US dollars (18,800 euros) for larger vehicles. For Chery's Tiggo 7 Pro, which sells for 27,780 US dollars (26,113 euros), the fee accounts for over a quarter of the price, more expensive than EU tariffs on Chinese electric cars.
SKD assembly does not bring any relief, as refunds are excluded. Russia is thus making it clear that exports are not enough and that China should produce in Russia.
China does not want to take any risks in Russia
China, on the other hand, is cautious when it comes to relocating production. Beijing is urging manufacturers to keep technology and added value in the country in order to utilize production capacities for combustion vehicles.
As part of the mobility transition in China, demand for petrol vehicles is falling, but the government wants to prevent workers in these factories from losing their jobs. At the same time, Western sanctions are making investment in Russia more difficult. The state-owned manufacturer FAW broke off cooperation with Avtovaz in 2023 after US sanctions were imposed on the Russian company.
Russia's opaque bureaucracy and political interests make investments even riskier. Western sanctions against the Russian banking system also make it difficult for Chinese manufacturers to repatriate profits. Large Russian banks such as Sberbank are excluded from the SWIFT international payment system, and transactions via alternative channels are expensive and often require intermediaries in third countries. The falling rouble is cutting into profits as income in renminbi is worth less. High inflation and a key interest rate of 21 percent in Russia are dampening demand for cars, as loans are becoming more expensive for consumers.
Problems specific to Russia are exacerbating the situation. The poor quality of the Russian workforce and the lack of a network of domestic suppliers that can deliver components in the required quantities and to an acceptable standard are hindering the establishment of efficient production. These factors make Russia a risky location for Chinese manufacturers, despite Moscow's pressure for localization.
Chinese projects fail in Russia
The results of Russian-Chinese cooperation so far have been sobering. The reopening of the former Renault plant in Moscow did not go as planned. Russian authorities organized the CKD assembly of JAC vehicles under the revived Soviet brand Moskvitch, but only 31,000 vehicles were assembled in the first year of operation, far below the production target of 50,000 vehicles. Moskvitch suffered a net loss of 8.6 billion rubles (94 million euros) in 2023, and the production plan for 2024 was reduced from the original 100,000 vehicles to just 27,000. The former Nissan factory in St. Petersburg was hit even harder. Production of Chery SKDs has since been discontinued there.
Exports instead of factories: China's strategy remains defensive
Russia dreams of having its own car industry and plans to increase production from 760,000 vehicles in 2024 to 1.4 million by 2030. This ambition relies on Chinese investment, but manufacturers remain cautious.
Exports and SKD assembly are safer than factories, which entail uncertainties and costs. Nevertheless, Rostec CEO Sergei Chemezov spoke in November of plans by a Chinese manufacturer for a factory in Moscow or Siberia. Such announcements are rare and remain vague.
Chinese manufacturers are reacting differently to Moscow's dreams. GWM is doubling its Russian production to 200,000 units and is building an engine plant where older versions of Chinese combustion vehicles can be produced. Chery, the leading brand in Russia, assembles SKD kits in former Western factories. Geely remains cautious, relying on exports and its Belarus joint venture to escape sanctions.
State-owned manufacturers such as FAW, Dongfeng and JAC are restricted by Beijing's regulations, while manufacturers of alternative drive systems (NEVs) such as BYD are avoiding Russia's weak e-car market.
Secondary sanctions hold China back
Europe is keeping a critical eye on the close economic ties between China and Russia, particularly because of technology exports that could be used in Ukraine. Chinese manufacturers such as Chery, which cooperate with sanctioned Russian companies, risk punitive measures. This risk reinforces Beijing's reluctance to invest in Russia and forces manufacturers to carefully consider their global strategy.
China earns money - Russia remains a dream
The "unbreakable friendship" between Russia and China is a political phrase and a fantasy that is mainly spread in Western Russophile circles and has little to do with reality.
China is cautious about its engagement with Russia for many reasons. Not least, this caution is based on a certain aversion to Russia that stems from a long, difficult shared history, from the "unequal treaties" to the rivalry of the Soviet era. China is also scrupulous not to expose itself to the risk of secondary sanctions.
Trade with the US, Europe and Australia is far more important for the Middle Kingdom than the relatively small exchange of goods with Russia, which has also declined slightly since October. The risks of greater involvement in Russia far outweigh the benefits, and China remains a pragmatic market participant that primarily seeks its own advantage, while Russia is the weaker partner in this relationship.