In 2014, confronted with economic sanctions imposed by Western nations, Russias government adopted a policy that encouraged Russian companies to replace imports with products made domestically. Four years later, analysts say the policy has helped domestic lubricant producers gain market share at the expense of importers.
Moreover, they predict that the shift will continue as long as relations between Russia and the West remain stormy.
Large domestic lube marketers, as well as many independent producers, have gained significant market share over their foreign competitors as the quality and [volume] of their products intended for the industry have dramatically increased, Tamara Kandelaki, head of InfoTek, a Moscow-based consultancy focused on Russias energy sector, told Lube Report.
Russian officials originally conceived the import substitution policy as a strategy that could be tapped to help protect the countrys economy from shocks such as the Great Recession of 2008. It was not actually employed until Western nations sanctioned the country for its role in the breakaway of Eastern Ukraine. The idea was simple and not a mandate; the government appealed to Russian companies to buy domestic as a way of propping up the economy.
Russian oil majors Lukoil, Gazprom Neft and Rosneft - whose leaders are all close to President Vladimir Putin - supported the policy by having their lubricant divisions develop higher-quality products for the local market.
Two prominent consultancies in Moscow confirmed that the effect of this product localization is mostly visible in general industry sectors - petrochemical, metalworking and mining - and the automotive industry, particularly in the commercial and heavy-duty vehicles segments.
Analysts say many Russian consumers and companies switched to domestic suppliers for various types of products at least partly out of patriotism. Such changes in purchasing decisions were more palatable, though, because domestically produced goods gained significant cost advantage due to the steep devaluation of the ruble. The value of Russias currency against the U.S. dollar has fallen by half since July 2014, due to sanctions and lower prices of crude oil, a pillar of Russias economy.
According to InfoTek and RPI, another Moscow-based consultancy, the import substitution policy significantly impacted the market shares of several segments in Russias lubricants market, which is the largest in Europe. For example, Lukoil held 17 percent of the commercial market in 2014, which includes lubes for heavy-duty trucks, RPI said. Rosneft and Gazprom had 16 percent and 13 percent, respectively, followed by foreign companies Shell and ExxonMobil with 7 percent each, as well as BP and Total with 6 percent and 4 percent respectively. Russia's Bashneft held 4 percent.
By 2016, RPI found, Lukoil had increased its share to 19 percent, while Gazprom Neft and Rosneft each achieved a 17 percent share. Shell retained its 7 percent share in the combined commercial and heavy-duty segment, but ExxonMobils decreased to 5 percent, BP's to 4 percent and Total's to 3 percent. Bashneft still held 4 percent of the market.
RPI and InfoTek said there were similar shifts in market shares for metalworking fluids and lubricants consumed by industries such as petrochemicals, mining and steel.
The shifts for passenger car engine oils were smaller, according to Nikita Medvedev, a senior researcher at RPI.
For a number of reasons, the passenger car segment has seen less change, and domestic lube marketers gained just 1 or 2 percent market share over their foreign competitors since 2014, Medvedev said during an interview, citing data by RPIs latest study, Russian Motor Oil Market: Current State, Outlook Until 2030. Passenger car motor oil sales in Russia depend less on prices and more on brand appeal, he said. Those who have used imported PCMOs before 2014 are still using them today, he said, while low income consumers migrated to domestic PCMOs or those made by Shell in Russia.
Medvedev added that domestic lubricant companies also benefited from improved marketing practices and retail development. A good example is Gazprom Nefts aggressive marketing approach and development of an extensive fast lube service station network, he said.
The import substitution policy does not distinguish between products made by Russian companies and those made by foreign-owned facilities located within the country. All products produced domestically are considered Russian-made. It encourages a preference for all domestically manufactured products over imports. Medvedev said this helps explain why Shell, which operates a 180,000-metric-ton-per-year plant in Torzhok, was able to maintain its market share. It is thanks to the fact that they operate high-quality, large capacity lubricant production in the country and are able to achieve a competitive pricing, he said.
Shell declined to comment for this article.
German company Fuchs Petrolub is the only other foreign business operating a lubricant plant in Russia - a 40,000 t/y facility in Kaluga. French energy major Total is preparing to open another in Vorsino, Kaluga Oblast.
Our understanding of this measure is [that it is] not to favor Russian suppliers but companies who actually produce in the country, whether they are Russians or foreigners, said Fabien Voisen, managing director of Total Vostok, Totals subsidiary in Russia.
He added that Total entered the Russian market over ten years ago and expects to be recognized as a Russian company. Since 2014, our growth has exceeded double-digit figures annually, resulting in a significant increase of market share that doubled since 2012. We already have a significant part of our sales that are Russian made, and the start of our blending plant located in Vorsino will definitely boost our localization rate.
The new 40,000 t/y plant is scheduled to start production in May. Within a few years, the company expects to hold a 5 percent share of Russias lubricant market. It would be an increase from an estimated 3.5 percent, and this figure is very much in line with our already announced plant capacity: 40,000 t/y of initial capacity in one shift or 75,000 t/y of full capacity in two shifts, Voisen said.