* Rosneft deal aimed to boost Pirelli's Russia market share
* Russia economic slowdown to weigh on Pirelli's expansion
* Pirelli to report full year results on Thursday
By Agnieszka Flak
MILAN, March 26 The Ukraine crisis and the
possibility of a recession in Russia creates uncertainty for
Pirelli's plans to use a tie-up with oil group Rosneft
to expand in the country, seen as a big growth market for the
Italian tyre company's products.
Rosneft agreed a deal earlier this month to become
Pirelli's single biggest shareholder, thus offering Pirelli the
chance to exploit the Russian company's big gas station network
to sell tyres.
Rosneft's 2,800 gas stations should put Pirelli, the world's
fifth-largest tyre maker, on a par with Finnish rival Nokian
Renkaat in terms of a distribution network in Russia.
The deal could also help boost Pirelli's production base in
Russia, where it already runs two plants, analysts said.
But the timing of the deal could delay the benefits given
the sanctions imposed on Russia over its annexation of Crimea
and the possibility that these could be expanded.
"The timing of (the Rosneft deal) is particularly negative
given the current volatility in Russian politics," Edoardo
Spina, an analyst at Exane BNP Paribas, said in a note.
"After the dust is settled, we believe the market will
re-evaluate this deal and start to see the potential benefits of
a partnership with Rosneft in Russia ... We believe cooperation
with Rosneft can help Pirelli develop its Russian business
faster than expected."
Pirelli has declined to comment on the impact from Russian
The deal follows on from a marketing and commercial
agreement signed between Pirelli and Rosneft in December 2012.
Pirelli, which has weathered a European car sector crisis
thanks to its focus on high-end tyres, makes only about 5
percent of sales in Russia, a high-margin market where Nokian
Renkaat has some 3,000 sales outlets.
Russian car sales fell 5.5 percent in 2013, bringing three
years of double-digit growth to an end, and they are forecast to
drop again this year as a weak economy puts off buyers.
Pirelli will report full-year results on Thursday, where the
focus will also be on the impact of unfavourable currency
movements in Latin America, a region that makes up more than a
third of its sales.
Most analysts expect Pirelli to meet its 2013 operating
profit and revenue targets of around 790 million euros ($1.1
billion) and 6.2 billion euros, respectively. But Pirelli may
lower its 6.6 billion euro sales goal for 2014, they said.
Pirelli cut its 2013 profit guidance in November, also
citing a slowdown in Russia's tyre market, and analysts expect
the volatility in that market to persist through at least 2015.
But Russia's potential cannot be dismissed. The country's
size, its climate and bad roads make it a prime market for
high-margin winter tyres. Pirelli plans to grow revenues there
by around 50 percent to 370 million euros in 2016 from 2012.
"There are clear commercial benefits to the Rosneft deal,
but the situation in Russia adds a major risk to this strategy
bearing fruit in the near term," one Milan-based analyst said.
"Beyond politics, there are wider economic factors in Russia
and its car market, including the end of the car incentive
scheme, that are likely to increase the downside risks."
($1 = 0.7258 Euros)
(Reporting by Agnieszka Flak. Editing by Jane Merriman)