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. Last Updated: 07/27/2016

GAZ Deal Puts Fiat In Russian Race Again

Italian carmaker Fiat trumpeted its plans to return to Russia after 30 years Monday, signing an $850 million accord with Russian automobile manufacturer GAZ to produce its Palio model near GAZ's Nizhny Novgorod plant.

The deal, whose signing was witnessed by Italian Prime Minister Romano Prodi and Prime Minister Viktor Chernomyrdin in Moscow, envisages the assembly of 150,000 cars annually starting December 1998. It represents the second largest foreign investment in Russia's car industry.

"Today, we signed an agreement of intent, which has been preceded by much hard work," Prodi said at a news conference after the signing.

GAZ, short for Gorkovsky Avtomobilny Zavod, is situated in the hometown of First Deputy Prime Minister Boris Nemtsov, who had earlier expressed hopes that an agreement would be signed during Prodi's visit.

"If the agreement is signed, Russia will manufacture modern, comfortable cars, and the question of someone's dissatisfaction with Russian cars will no longer arise," Reuters quoted Nemtsov as saying Sunday.

The final agreement will be signed Feb. 10 in Rome, Prodi said, adding that construction of the Fiat plant in Russia would commence soon thereafter. Fiat will contribute $610 million to the project, with the European Bank for Reconstruction and Development chipping in with the remaining $240 million to become a partner in the venture.

The cars are expected to cost between $10,000 and $11,000 each, the same price as Czech Skodas assembled in Smolensk.

The Palio's price tag appears suitable for Russia's car-hungry upper middle class, which is so far unable to move from low-quality Russian cars to the more expensive foreign models.

The Russian-made Palio will also provide added competition for Russia's biggest carmaker, AvtoVAZ, which has seen sales of it newest $11,000 ***desyatka*** model sag under the onslaught of low-end foreign cars.

The agreement marks Fiat's return to Russia 30 years after it was commissioned to build the gigantic AvtoVAZ car plant at Tolyatti. AvtoVAZ's Zhiguli model is based on a Fiat design of the time.

Analysts said both sides would benefit from the venture, which will give Fiat a firm foothold in the potentially profitable Russian auto market. The Italian company, which in recent years has seen its sales in Italy decrease, has been pondering a move to a fresh market.

"GAZ has needed new technologies as well as a new model of light car," said Maxim Matveyev, an auto analyst at the Rinaco Plus brokerage house. "This joint venture will give them both."

GAZ is an attractive partner for any foreign automaker. Unlike most of its competitors, which are teetering on the verge of insolvency, GAZ posted $111 million in net profits last year, largely on the basis of its big-selling light truck, the GAZelle, and an improved model of the Volga sedan. So far it has produced 144,000 vehicles this year.

"GAZ is doing substantially well even by itself, not like say, Moskvich, for which a proposal to assemble Western cars would be a present from God," said Patricia Isayeva, a United City Bank auto analyst. "For them Fiat assembly will be an addition to their main production lines."

More importantly the venture could act as a catalyst for other similar deals in the auto sector.

"This may push [General Motors' German division Adam] Opel to take a more strong interest in putting together its joint venture with AvtoVAZ," Isayeva said. "Western carmakers have been very slow until now to move into Russian markets."

Plans for a joint venture between AvtoVAZ and Opel have been progressing slowly for the past months.

Russia, where the percentage of people who own cars is far lower than in most Western countries, was initially seen as a gold mine by overseas carmakers. Apart from a $250 million General Motors assembly project in Tatarstan and a $1 billion venture to assemble Kia cars in Kaliningrad, however, most carmakers have proceeded cautiously, investing in small-scale assembly units in Russia.

GAZ stocks climbed 2.23 percent to close at $145 on Monday.