AvtoVAZ Disdains Foreign Rescue Plan

Threatened with bankruptcy for tax debts totalling $2 billion, management at Russia's biggest car maker AvtoVAZ Wednesday lashed out at the government and dismissed a rescue plan which would transfer control to a foreign investor.

AvtoVAZ chairman Vladimir Kadannikov and chief executive Alexei Nikolayev in a joint statement called the threat "another attempt to halt one of the few companies that are still running" and "a new twist in a redistribution of property that threatens to finally transfer it into the hands of a few existing clans," Itar-Tass quoted the statement as saying.

AvtoVAZ, based in Tolyatti, central Russia, manufactures the Lada, Russia's best selling car, but Russia's First Deputy Prime Minister Vladimir Potanin told a meeting of an emergency tax commission on Tuesday that the government might be forced to initiate bankruptcy proceedings because AvtoVAZ owes an overall 11 trillion rubles ($2 billion), including nearly 3 trillion rubles in back taxes to the state.

AvtoVAZ's debts are not new but the plant has until recently been able to escape punishment, largely by using its close ties to the government. Kadannikov was Potanin's predecessor as first deputy prime minister in charge of the economy, only leaving the job a few months ago. Konstantin Titov, the governor of the Samara region, which is home to AvtoVAZ, also took AvtoVAZ's side Wednesday.

The threat against AvtoVAZ is the latest of a series of bankruptcy procedures initiated by an emergency commission which the government has established to try to raise tax collection. The International Monetary Fund has suspended a $10 billion loan program because the government has failed to meet revenue targets.

Potanin said the government was growing impatient with AvtoVAZ because management had turned down a compromise deal to give up 50 percent of their stock to a strategic investor in return for further debt rescheduling.

Pyotr Mostovoi, head of the Federal Bankruptcy Agency, gave no sign he was pressing ahead with the case but said Wednesday that Italian auto group Fiat could become the strategic investor to take Russia's biggest automaker out of the crisis.

According to Mostovoi, Fiat was one of the "companies seriously engaged in the car business" and was also familiar with AvtoVAZ as it helped Russia build the plant in the 1970s.

Other investors could include a number of aggressive and fast-developing South Korean automotive firms, Mostovoi was quoted by Itar-Tass as saying.

AvtoVAZ officials said they already had a deal under which the government would reschedule its tax arrears to help it launch a new model.

"Of course we hope that prior arrangements will be taken into account," Vladimir Peresypkinsky, head of assembly operations at AvtoVAZ, said in an interview Wednesday.

He said the AvtoVAZ was firing on all cylinders and would produce by the end of this year some 685,000 cars, up from last year's output of about 500,000 cars.

"We've almost reached our projected capacity," he said, adding that next year's output would amount to more than 700,000 cars.

According to Peresypkinsky, Kadannikov will be a strong factor in settling the dispute with the government not only because of his tenure in the White House but also because "he's a problem solver."

However, he said even if the government made good on its threat to start bankruptcy procedures against the plant, it was unlikely that the changes would affect automaker's huge 114,000 person work force.

"There are our employees and there are also our suppliers. You can't leave them without work," he said.

Car industry analysts said foreign investors were unlikely to rush in with the money to save the cash-strapped giant because of significant political and economic risks.

Richard Hanna, a partner at Price Waterhouse, told an automotive conference in Moscow on Wednesday that one of the reasons foreign investors were reluctant to invest in joint production of competitive models at Russian enterprises was lack of "honest" information about their true situation.

"Russian management tends to look at the current situation through rose-colored glasses. And that will not sell to foreign investors. They want to know exactly what the situation is," he said.

Hanna said that most of the troubles faced by Russian car producers stemmed from resistance of their management to "accept the disciplines of the consumer market and capital markets."

"Consumers will actually determine the winners versus the losers in the long term, not political connections," he said.

Hanna also said protective import duties on foreign cars would probably help the domestic industry live through expensive restructuring but "are not a long-term solution."

Hanna warned however that the current complicated tax system handicaps Russian automakers. "The only long-term solution is for the government to drastically revise the taxation system possibly by introducing a flat tax," he said.

?Renault SA is in talks to establish a possible venture to assemble Megane cars at the Moscow-owned Moskvich plant and sell them in Russia, but no agreement has been struck yet, a Renault spokeswoman said Wednesday, Reuters reported from Paris.

"Nothing is decided. Nothing has been signed. We're just in discussions," she said after a visit by Russian Prime Minister Viktor Chernomyrdin to Renault's Paris headquarters.

The talks, first announced in June, grew out of an accord signed in February entailing the delivery of Renault engines to the Moskvich plant. The spokeswoman said that contract was not operational because the financing had not been set. It hinges on an agreement between the French and Russian finance authorities.