Russia Coatings Industry Scrambles to Keep Operations Running

One year ago, when Western sanctions disrupted the supply of Western coatings and raw materials to the Russian market, it seemed that the coating industry was reeling. Now, nearly one year on, it remains solid, though the long-term outlook remains as vague as ever.

In 2022, Russian coatings production dropped by 3.4% compared with the previous year, the Russian state statistical service Rosstat estimated. When the first Western sanctions against the Russian economy were introduced, the industry expressed concerns about how they will impact operations. As expected, the industry was hit badly, but it could have been worse, Olga Andrutskaya, editor-in-chief of the Russian publication Industrial Coating and Their Application, wrote in her blog in February.

“Maybe I’m too optimistic, but, in my opinion, these [statistics] show that the coating manufacturers withstood the blow and managed to cope with the problems. Most factories have replaced Western raw materials, and those who for some reason could not alter the recipes manage to get it somewhere,” Andrutskaya said, adding, however, that the current schemes remain rather unreliable.

“As they say, this [solution] is ‘from the evil one’ – today it worked, but tomorrow it won’t. A long-term policy should be built on reliable suppliers,” she said.

Some Western sanctions have even been said to benefit the Russian coating industry. For example, the prohibition of European companies from exporting coatings to Russia supported sales of local manufacturers. The withdrawal of several subsidiaries of large international coating companies from Russia provided a similar effect: in the context of temporary shortage, Russian manufacturers enjoyed a rise in demand for their products, Andrutskaya disclosed.

The effect winded down before long. Most of the factories shut down at the beginning of the crisis were purchased by Russian companies and put back into operation, she said.

“However, it is too early to relax – for decades, the nurtured opinion that Russian goods are a priori worse than imported ones has not yet been eradicated. Domestic products and services are not always welcomed everywhere,” Andrutskaya admitted.

Import-replacement continues

The Russian coating industry currently works on “a complex set of issues” related to import substitution of coatings for shipbuilding, aviation, mechanical engineering, automotive, and printing industries, Gennady Averyanov, general of the Russian association of coating manufacturers Centrlack, told a local news outlet LKM Portal.

There are still issues to be solved, primarily pertaining to the replacement of raw materials from Western countries with those noted Asia Pacific, Russia and the Eurasia Union, Averyanov admitted. On the other hand, the Russian coatings market felt almost no pain from the mass departure of Western brands.

“By and large, the market did not notice this departure, with the exception of the passenger car industry, which used to rely heavily on imported coatings. In 2022, new Russian owners of foreign assets emerged, and Russian companies saw a rise in output,” Averyanov claimed.

Indeed, the Russian automotive industry seemingly felt the brunt of Western sanctions more than any other segment of the Russian economy. In December, it became known that the leading Russian carmaker Avtovaz started experiencing an acute lack of coatings. As a result, it began offering cars only in three colors: white, black and dark green.

The company promised to overcome the issue in the next several months, but in February, some local news outlets reported that the situation deteriorated further. Some models are now offered only in one color, though the company neither confirmed nor denied that. However, in other segments, things are believed to be much better.

“The [Russian] coating industry has shown stability in difficult external and internal conditions. This fact shows that the industrial, financial and human potential is high enough to compensate for the artificially created obstacles to everyday work,” he added.

Rising Costs, Vague Prospects

However, not all market participants are so optimistic. Ella Vasilyeva, an assistant of the general director of the largest Russian coatings manufacturer, Russian Paints, stated that the difficulties the industry is experiencing are quite severe.
“The main challenge for the industry is raw materials: coating [production], like no other industry, is multi-component,” Vasilyeva told the local press, estimating the share of imported raw materials in the industry at 40%.

“The import substitution program declared by the Industry and Trade Ministry is still stalling. Establishing high-quality raw materials production is quite complicated; it can’t be done quickly,” Vasilyeva said. The Russian government embarked on an import replacement program, but it primarily provides support to manufacturers ready to come up with ready solutions sooner rather than later.

“In terms of coatings, this, unfortunately, does not work that way, because of the low production volumes, on the one hand. On the other hand, bringing a high-tech product to market takes five to 10 years,” she said.

When sanctions disrupted imports from Western countries, the Russian coating industry set its sights on the east, primarily China. “In our company’s experience, not all types of raw materials can be sourced on the eastern markets. China itself buys Western raw materials for the [coatings used in the] automotive industry. Many European companies have opened their production there. When sanctions were introduced, we were well aware that we would not be able to find all the necessary raw materials and components in the east,” Vasilyeva said.

In the past, Russian coatings manufacturers could order any raw materials in Europe and get them within a week. Now, logistics are far more complicated and expensive. On average, she said, raw materials of Chinese origin are cheaper than those from Europe, but due to high logistics costs, the Russian market last year saw a 15% to 25% rise in prices for imported raw materials.  

On average, Russian Coatings experienced a 10% drop in production performance last year, Vasilyeva said, assuming that the picture was similar for all Russian companies. “In some cases, we can’t execute orders quickly, while sometimes we can’t do it at all,” Vasilyeva said.

Despite the turbulence, the average profitability in the Russian coatings industry keeps ranging between 8% and 12%. However, a further rise in raw material prices on the Russian market could put these figures into jeopardy. Vasilyeva disclosed that Russian raw materials suppliers, some of which now hold a monopoly position on the market, could raise prices for their products, justifying this with a lack of export supplies.

Like several other market players during the past year, Vasilyeva pointed to the presence of counterfeit coatings on the Russian market. “And even for me, with vast experience, it is difficult to imagine what quality paint for 20 rubles ($0.3) per can on the shelf can have if the can itself now costs 30 rubles ($0.4). No matter how much we have applied to the higher authorities about this issue, they do not deal with this,” she added.

Fears of Tightening Screws

It is highly unlikely that sanctions will be lifted, but new restrictions could be introduced quite ingeniously, Vasilyeva said.

In a bid to circumvent Western sanctions, in May 2022, the Russian government approved parallel import – a scheme allowing Russian businesses to import goods from countries deemed as unfriendly without permission of the brand’s owner. Last year, several Russian coating companies disclosed plans to try to utilize this tool to source much-needed raw materials.

It must be said that, in general parallel, import proved to be quite effective for different segments of the Russian economy. Russia manages to source Western products and even technologies, importing them through third countries, like Turkey, Kazakhstan, China and UAE.

However, Sergey Kotov, general of the Yaroslavl Powder Coating Plant, said that this solution doesn’t work in the coating industry.

Kotov said, “There will be no parallel import of sanctioned raw materials. European and American raw material suppliers know very well the consumption of their products in different countries and regions. And any excess of previous orders will attract attention and be investigated, and if this order is deemed unreasonable, it will be rejected. We have already tried to introduce sanctioned European raw materials through Turkey. It did not work out.”

However, there are looming fears that sanctions could be gradually expanded and will target third countries that keep working with Russian clients. Under the 10th package of restrictive measures, the European Union largely aimed at companies and businesspeople from other countries, which allegedly helped Russia to dodge sanctions.

During the past few months, European and the U.S. authorities repeatedly claimed their intention to focus on “closing loopholes” in the sanction regime and apply secondary sanctions where necessary. Since the restrictive measures have not got their final shape, the future remains highly uncertain for the Russian coatings industry.