Russian Economy's Potential Impact on Tiremakers

Russian Economy’s Potential Impact on Tiremakers

Rouble-Russia-EconomyPlummeting oil prices have had tremendous effects on Russia’s rouble exchange rate, causing economic tumult in the country. In turn, investors are growing increasingly concerned about a full-blown crisis, which could mean bad news for tire companies in the country such as Nokian Tyres PLC and Pirelli.

Nokian has already felt the strain of an increasingly unstable Russian economy. The Finnish-tiremaker has two production facilities in Russia and, according to Bank of America Merrill Lynch, generates around 35-40% of its earnings before interest and taxes in Russia.

According to a Reuters report, Nokian has nearly a fifth of its shares out on loan to short sellers. Short sellers borrow a stock and sell it, betting they will be able to buy it back at a lower price before returning it to the lender, pocketing the difference.

Short interest in the tiremaker has doubled since August, when the rouble began its slide, reported Reuters.

Pirelli, on the other hand, is positive about the tiremaker’s chances in Russia despite its heavy involvement in the Russian market. Earlier this year Pirelli sold 13% of its stake to Russia’s biggest oil producer Rosneft. In May, Pirelli announced that it will open 200 retail outlets at Rosneft’s filling stations in Russia.

Marco Tronchetti Provera, chairman and CEO of Pirelli, said in a speech on Dec. 10, “The weakness of the rouble will not create problems to Pirelli.” According to Tyres & Accessories, Provera said that Russia is a small portion of Pirelli’s turnover – representing about 4%.

“In Russia we are growing a lot with high-end products. Moreover, it’s a very good hub for export, so I think that, even in this situation, our results this year will improve significantly, in relation to last year, and can continue to improve,” added Provera. “We will find the balance point between export and production for internal market.”

Responding to investor concerns, President Vladimir V. Putin went on  record to address the country’s economic turmoil during a news conference on Dec. 18. Putin said that Russia’s current economic tumult could last at most two years and suggested that revived global demand for oil would eventually solve the problems.

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