According to investment banker Morgan Stanley, Russia is the only game in town at the moment. 'Sales increased by 430,000 year to date (until the end of August), making Russia the fastest growing market in absolute terms. At this pace, Russia will alone account for 100 percent of global car volume growth in 2008 and would fully compensate for a 5 percent drop in the West European market,' said Morgan Stanley analyst Adam Jonas. In 2007, 2.3 million new cars were sold in Russia, an increase of 37.5 percent, says Britain's Automotive Industry Data (AID). 'That compares with less than 1 million as recently as 2002, turning this into the way-ahead biggest and fastest European car sales bonanza,' said AID editor Peter Schmidt. Ugly, datedRussia's Lada brand, produced by AutoVAZ, held the biggest share last year of just under 30 percent, but this maker of ugly, dated cars is fast being supplanted by foreign imports, led by General Motors and its Chevrolet and Opel brands, Hyundai of Korea, Ford, Toyota and Nissan. In 2002, Lada had a 73 percent market share. In 2008, the consensus is that slightly more than 3 million cars will be sold. Next year automotive forecaster J.D.Power and Associates says Russia will be the biggest market in Europe. 'In 2009 we forecast new car sales of 3.36 million in Russia and have recently downgraded our German forecast to 3.18 million in 2009,' said Cambridge, England based J.D.Power analyst Carol Thomas. German auto consultant Roland Berger's Moscow operation thinks German sales might be overtaken by Russia before the end of 2008. Building 1.2 million cars by 2012Most of the foreign car sales are imports, but new factories are being planned to get around the high import tariffs. According to consultancy Ernst & Young, 10 global automotive players plan to build factories in Russia with overall new capacity close to 1.5 million cars a year by 2012. But Russia's incursion into Georgia in August, and worries that similar action might be taken against Ukraine or some Baltic states, have set off alarm bells suggesting that doing business in Russia might have a darker, counterproductive side. Recent action by Russia to bring strategic pressure to bear on oil company BP's joint venture by physically denying entry to the country to the company's leading executives will have echoed around the boardrooms of the big foreign car manufacturers, who have, or plan, huge investments in Russian factories. A couple of years ago, Russia tried similar muscle tactics to gain control of a Shell gas project in Siberia. Alexei Grigoriev and Boris Firsov, analysts with Roland Berger's Moscow office, don't think Russia's August action is cause for much concern. 'Recent developments in Georgia are local and are not connected with the relations with Ukraine and Baltic States at all. Moreover, that action will definitely not impact the economic course of the government. All the fears about a new cold war are emotional and have nothing to do with the reality,' Grigoriev and Firsov said in a joint e-mail, replying to questions. No threat to international manufacturers'The BP case might be explained by the strategic importance of the oil industry for Russia and its state budget. We do not see any similar threats for international manufacturers and suppliers, provided they fulfil all the legal requirements,' Grigoriev and Firsov said. Some commentators say the ramshackle nature of Russia, and its underlying economic problems, might in fact ease the path for foreign companies. 'Much of Russia's resurgent self-confidence is built on a weak foundation. Russia's economic growth is largely based on raw materials. Its infrastructure and industry is in desperate need of modernization. Russia's population is ageing rapidly,' said Andrzej Olechowski, former foreign minister of Poland, in a recent article in the Wall Street Journal. 'To solve its problems, Moscow needs cooperation with the West. It can't afford to be isolated and lose its standing in global political and economic institutions and among investors -- as the withdrawal of foreign funds and the fall of Russia's stock market since the invasion of Georgia illustrates,' Olechowski said. UnpredictableJ.D.Power's Thomas believes there are serious questions about investing in Russia. 'Given recent developments, the Russian authorities approach to foreign investment must now look much more unpredictable. WTO (World Trade Organisation) accession, which is now delayed and may not happen at all, gave companies a higher degree of certainty about future legislative policy etc but the future outlook must now look more risky and volatile,' Thomas said. 'Similar developments to what happened with BP-Shell are always possible but the more strategically important nature of the oil industry, means that the probability is lower. Nevertheless, AvtoVAZ in particular has a significant strategic importance in Russia as a major employer. I don't think we can discount the possibility of government action/protection to make sure that it's successful in the future,' she said. (Late last year Renault of France bought a 25 percent stake in AvtoVAZ, after outbidding Fiat of Italy and General Motors.) Political risk limitedVassil Stavrev, senior market analyst at Global Insight's automotive group, is a little more sanguine. 'We think that the political risk is still limited and political decision makers are aware that the industry will not be able to develop without support from abroad,' said Frankfurt-Germany based Stavrev. Stavrev agrees that Russia will soon overtake Germany as Europe's biggest car market, but points out that the overwhelming share of sales will be for cheap and basic transport, which explains the success of Lada. He believes the Russian market will reach what he calls its 'natural' size of close to 4.5 million a year around 2018. J.D.Power's Thomas expects sales to hit about 5 million in 2020. Roland Berger reckons sales will reach between 4 and 4.5 million new cars by 2020. Premium manufacturers are also doing well, from a low base, while the SUV is much in demand. Last year, Russians bought just under 400,000 SUVs, nearly twice as many as were sold in Germany, Western Europe's biggest SUV market. SUV buyers in Russia are unlikely to find little notes from Greenpeace activists on their windshields pointing out that they are guilty of causing global warming. 'Consumers' undiminished craving for these go-anywhere SUVs is helped no doubt by Russia's comparatively low fuel prices, the country's notoriously cold winters, and above all, Russia's comparatively underdeveloped and largely crude road network,' said AID's Peter Schmidt. Meanwhile, major manufacturers will be hoping Russian politics don't take a turn for the worse any time soon. Can't ignore the potential'Yes, investing in Russia is very dangerous, but the potential rewards mean that manufacturers have been unable to ignore it,' J.D.Power's Thomas said. 'Whilst the outlook must look more uncertain at present, possibly causing some to question investment in new car plants, I would have thought that there is a much greater chance that Russia will decide not to reduce import duties on new imported cars -- they are currently quite high at 25 percent - but WTO accession would have seen them coming down to 15 percent over a 7-year transition period. There is also now talk of Russia increasing duties on used car imports significantly, which will again provide further protection to domestically-produced vehicles,' said Thomas. Roland Berger's Grigoriev and Firsov play down the dangers. Risks in every new country'The risks may arise from overestimation of market opportunities, choice of wrong partner, wrong selection of manufacturing location etc. That is to say, normal commercial risks, which are probably higher since international executives do not know local peculiarities in Russia. But these risks exist in every new country. No particular help from authorities can be expected, but this also differs from region to region. But we not see any special political risks for international investors into automotive industry in Russia. Experience shows they are welcome here,' they said. So expect investment in new factories in Russia to continue, while western car industry chiefs cross their fingers, make regular visits to the Trevi fountain in Rome to throw three coins over their left shoulders with their right hand, adding a few trips to the Blarney Stone for good measure. Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at [email protected]