Maxim Donde

As you would expect in a growing economy, vehicle production and sales in Russia are healthy and industry analysts expect the country to overtake Germany as the largest car market in Europe by 2016.

This forecast, and the fact that Russia has joined the World Trade Organization, means western vehicle manufacturers have been rushing to invest in local production facilities in order to capture a share of the market.

Russia is currently the fourth largest global lubricant market, with future growth expected to be significant as the vehicle population builds. However, the recent economic turbulence has created some uncertainty about the potential for growth.

We wondered if this uncertainty might lead local lubricant companies to expand their sales outside of Russia and therefore compete with the existing major oil companies.

“When you say ‘local Russian lubricant companies’ you probably mean Russian integrated oil companies, for example Rosneft, Gazprom Neft and Lukoil,” says Donde. “I don’t think you can call these companies ‘local’ because they are pretty big, which makes them regional majors with certain ambition for growth outside Russia.”

It is clear that Lukoil shares these ambitions. “In the commonwealth of independent states of former Soviet countries we have a significant presence and in many cases share common language and culture, so it’s easy for us to grow,” he explains.

“But we also have a desire to expand further. One area is our marine lubricants project, which started in 2008 and now has almost 2% of the market worldwide, which we will continue to expand.”

Today, the Russian lubricant market is oriented towards sales of low quality Russian GOST and low quality API technology lubricants. We asked Donde for his views on the future of lubricant quality.

Not a homogeneous market

“I don’t think you can talk about the Russian lubricants market as one homogeneous market. If you take passenger car motor oil, we already see a huge percentage of high quality lubricants and that’s a reflection of the foreign auto manufacturers getting into the country in a very aggressive fashion.”

“Right now the estimates vary quite a bit, but everyone agrees that the share of imported lubricants is above 50%, so we no longer talk about these so called GOST lubricants as a major driving force in the market.”

“With the emergence of OEM claims they are likely to become a thing of the past. GOST specifications have been out there for decades; right now I don’t think anyone would be investing their time to upgrade them.”

“I think the OEM claims will replace them and the GOST specifications will be something of the past. I expect the share of imported lubricants to grow,” he continues “something we will fight because this specific market segment is very exciting to us because it is where we make the most money.”

“We intend to compete with lubricants of the same high quality – they will just be domestically manufactured.”

For commercial transport the situation is different. Here he estimates the share of imported high quality lubricants to be around 12%, with limited evidence that the imported and high quality lubricants are growing. “Any growth will be because sales of imported vehicles may grow,” he explains.

“We see quite aggressive behaviour from Russian domestic auto manufacturers in this segment and that means that certain lower quality lubricants will prevail. For example, local manufacturer GAZ has a strong position, if you go out on the streets you’ll see their vehicles everywhere, they offer decent quality for decent price and I believe they will hold their market share.”

Fuel economy and oil drain interval

Fuel economy is the main driver for the development of new top tier lubricants in Europe and we were keen to understand Donde’s views of how important fuel economy is in Russia.

“Fuel economy is important to every economy in the world. However it hasn’t been as important in Russia as in the European markets because we have an abundance of energy resources and the price of the energy has been lower and subsidised by the state for quite some time.”

“I think the rate of growth of fuel efficient equipment and behaviour will depend on how forceful the government is and the price of fuel. Right now domestic cars are not fuel efficient and we are not fuel efficient in our behaviour, if the price of fuel goes up that’s going to force people to change their behaviour.”

Oil drain interval is a different matter and Donde feels this is already impacting the Russian lubricant market. “Oil drain interval is integrated with the purchase of foreign made cars which have longer drain intervals – suddenly people don’t have to change their oil every 10,000 km.”

“But the situation is different in the used car market where cars are off-guarantee. We tend to change the lubricant, irrespective of the number of miles driven, during the spring and autumn because the difference in temperature could be as big as 60 degrees.”

“People are used to the idea that summer and winter lubricants should be different, which means I think the tendency for longer drain intervals for lubricants would be less apparent in Russia than in other markets.”

Unexpected challenges

The pace of change in Russia is very fast and adjusting to the changing market conditions has bought unexpected challenges to companies like Lukoil. “We did not expect foreign manufactured vehicles to be prevalent in the Russian market so fast,” he confirms.

“Right now more than 50% of cars in the streets in the cities are foreign – no one would have guessed that just five years ago – yet it is out there. It is a challenge because we suddenly see people who drive really nice cars and they don’t want to buy locally manufactured lubricants.

We have invested a lot of money in upgrading our production equipment, developing new lubricants and obtaining approvals. But now we have to invest money in making sure the consumers trust locally manufactured lubricants because right now people think ‘foreign car equals foreign lubricant’.

Keeping abreast of this challenge is difficult, and Donde is not sure they are winning the race at present.

“It’s easy when you know you must develop a new lubricant, get a new approval or find a new technology provider, but how do you change the perception and understanding that people have had for many years that if you buy a piece of foreign equipment you don’t take a chance on a local lubricant?”

“This is something we fight against constantly and I don’t think we have the answer to it but we’re working on it as we speak.”

Download this article