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Political uncertainty to weigh on Pirelli's Russia expansion plans
March 26, 2014 / 5:00 PM / 4 years ago

Political uncertainty to weigh on Pirelli's Russia expansion plans

* 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 (Reuters) - 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 volatility.

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)

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