The logo of Russian car manufacturer AvtoVaz, a member of the Renault-Nissan alliance, on the hood of a Lada in Moscow. (AFP via Getty Images)
Volkswagen AG, BMW car AG and Toyota is one of several automakers that has shut down Russian factories and halted shipments to the country as part of a broader exit plan by global giants. One automaker lost the most, Renault SA, has clearly remained silent.
The French company lost almost 30% of its market value following Russia’s invasion of Ukraine and subsequent economic sanctions. Russia is Renault’s second-biggest market, and it’s paying a heavy price for a dollarfirst The billion-dollar deal was signed in 2007 with a top ally of Russian President Vladimir Putin.
Renault’s majority control of AvtoVaz, the Soviet-era Ladas maker and dependent on Russia for about 12 percent of its revenue, is currently a matter of concern to investors. Cutting ties with the joint venture would come at a huge cost, and the prospect of a broader Europe-wide economic downturn threatens to derail already protracted efforts to turn around. its.
“It would be perfectly legal for Renault to consider pulling out of AvtoVaz,” said Jefferies analyst Philippe Houchois. “Renault may suffer losses, but withdrawing will be a difficult decision.”
Russia accounted for about 5 billion euros ($5.5 billion) of Renault’s revenue last year, and about 315 million euros in operating profit could be at risk, according to Bloomberg estimates. Renault shares continued the downward momentum that began last week, falling 7.5% on Friday, to their lowest level since November 2020.
In the wake of a series of companies around the world pulling back and dismantling assets in Russia, Renault and the French government – its most powerful shareholder – have kept an eye on AvtoVaz. So does the other partner in the joint venture, Rostec State Corp., a defense consortium owned by the Russian government led by Sergey Chemezov, a close ally of Putin.
“Renault has promised to comply with the sanctions,” Gabriel Attal, a spokesman for the French government, said Thursday on France Info radio. A spokesperson for AvtoVaz declined to comment beyond operational issues. Renault continues to monitor the situation, according to a spokesman.
Renault’s entry into Russia a decade and a half ago was decided at the highest political levels, and any exit would be politically difficult. If the company stands, it may have trouble collecting money from a business it has sunk more than $2 billion in recent years.
“One risk for Renault is that capital controls could prevent it from transferring profits or cash from AvtoVaz and its other operations in Russia,” said Redburn analyst Charles Coldicott.
Back in 2007, Putin decided on the original Renault deal for a 25% stake in AvtoVaz under the former leader. Carlos Ghosn. The accord was backed by France and led by Chemezov. The Rostec CEO’s close relationship with Putin dates back to when they lived in the same Dresden apartment complex in Germany during the 1980s when the future president worked as a KGB officer.
“When we decided to move to Russia and do this alliance with AvtoVaz, everything was fine,” Ghosn said Thursday in an interview with Bloomberg TV. “It is very meaningful.”
Ghosn, who was sacked in 2018, said he was surprised that current Renault management was not informed about the situation. “I was stunned by the fact that it was completely silent.”
Following Renault’s initial investment in AvtoVaz, a subsequent increase in ownership was also piloted by the Russian state. Russia now accounts for about 18 percent of the company’s total vehicle sales. AvtoVaz in 2021 sold about 385,000 Ladas, mainly in Russia.
AvtoVaz’s reliance on the domestic market means a deep economic downturn will cause trouble. “Historically, during the recession in Russia, AvtoVaz lost heavily,” says Coldicott.
Established with the help of Fiat SpA in 1966 when Russia was part of the Soviet Union, AvtoVaz’s Ladas accounted for almost 80% of the market during the Communist era and still dominate about a fifth of the Russian market. Renault has refurbished its massive Togliatti factory on the banks of the Volga and redesigned the cars to try to reverse local consumers’ perception of shoddy styling and workmanship.
The bright prospects in recent years for Lada are part of Renault CEO Luca de Meo’s revival plan for the group. He envisions an “extremely profitable” business model for the low-priced Lada and Dacia brands, with shared technology and manufacturing processes.
The war in Ukraine is not the first time AvtoVaz has tripped Renault. Within a year of the initial investment, the financial crisis saw AvtoVaz’s value plummet, and Putin pressed Renault to come to the rescue. Ghosn transfers controlling stakes to Renault and Japanese partners Nissan aiming to gain a foothold in one of the largest emerging growth markets after virtually missing out on others.
Then, in 2014, a first round of sanctions occurred after Putin annexed Ukraine’s Crimea region. Renault bought back a 51% controlling stake in 2016 after Ghosn pledged to do “whatever it takes” to support the loss-making venture on the brink of collapse.
The ongoing war in Ukraine now poses a new and perhaps more serious threat to the automaker because of its ability to resonate well beyond Russia’s borders.
“Renault’s turnaround plan is anticipated based on the recovery of the European auto market,” said Houchois. “The longer the crisis drags on, the greater the possibility of a recession in Europe.”
