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. Last Updated: 07/27/2016

AvtoVAZ Says Tax Raid Not Justified

Tax police said Wednesday their countrywide sting on the top carmaker, AvtoVAZ, was connected to "widespread" tax evasion and part of an ongoing investigation.

AvtoVAZ denied any wrongdoing. It played down the raids - conducted Tuesday in 42 of its offices spanning 26 regions - calling them "a regular inspection."

Analysts and newspapers speculated that the raids were at least in part politically motivated. They come when the company is daily expecting news of a decision by U.S. General Motors about whether to participate in a joint venture.

AvtoVAZ builds the popular Lada car, which accounts for around 70 percent of the local market.

In a statement, tax police said they chiefly confiscated financial documents. They added that during a search of 10 Moscow offices, they took about $50,000 from the office of branch deputy director Igor Lyachenkov, in addition to bugging devices and a Justice Ministry identification document in his name.

"It was a large operation because there was a lot of tax evasion," said a tax police spokesman who declined to be identified.

Tax police said that AvtoVAZ, based in Tolyatti in the Volga River region of Samara, came under investigation last year on allegations of "fraud, failure to repatriate profits made abroad and failure to pay taxes."

AvtoVAZ said it did not protest Tuesday's searches because it did not see anything illegal about them. "We hope they [law enforcement organs] were acting within the law," the carmaker said in a statement Wednesday.

"At the same time, we categorically deny reports that AvtoVAZ directors developed schemes to avoid paying taxes," the statement added.

The tax police said AvtoVAZ directors had devised new methods of tax evasion through its regional distributors since the launch of the investigation last year. A fire at Samara police headquarters in February 1999 destroyed files related to the case. A probe into the fire, which killed 67 people, determined that the blaze was caused by a cigarette butt tossed into a plastic trash can full of papers, law enforcement officials announced May 11.

AvtoVAZ said its regional branches are part of the company's overall structure and could not independently commit tax payment violations.

The company has already come under public attack for alleged tax violations this year. Former Tax Minister Alexander Pochinok singled out AvtoVAZ in April, saying an audit had revealed the automaker had huge tax arrears and that its liabilities would be recalculated.

The government had previously put the automaker's tax debts at 1.5 billion rubles ($53 million).

AvtoVAZ said in April it had consistently met its debt repayments. But timely payment may not be enough. In the past, tax authorities have demanded immediate repayment of debt even if it had been restructured and companies had complied with repayment schedules.

Alexander Agibalov, an analyst at Aton brokerage, said tax authorities have cranked up the pressure on AvtoVAZ managers by refusing to reveal precise allegations of wrongdoing. "Documents have been seized and general statements made, but we don't know what the accusations are."

AvtoVAZ's troubles with the tax authorities have been brought to the public's attention precisely when the company is waiting to hear from GM about plans for a desperately needed joint venture that would build Opel Astras and AvtoVAZ's new version of its Niva off-roader in Tolyatti.

AvtoVAZ expected the U.S. automaker to sign an agreement last month after two years of talks, but GM's board has delayed a final decision.

Even though AvtoVAZ is one of the country's most productive enterprises, rolling off 677,000 cars last year, its debt payments have caused serious financial troubles that eat up any profits, which Interfax reported came in at 10 billion rubles ($353 million) before tax last year.

The company paid 16 billion rubles into the federal budget last year, Vedomosti newspaper reported.

Under its debt restructuring arrangement, if AvtoVAZ misses its payments, it is obliged to issue a share emission that would give the government a controlling stake in the company.

Agibalov said the probe into AvtoVAZ might constitute an attempt to make the automaker miss a payment and then be forced to issue new shares. The investigations might also be part of an attempt to force out the company's directors, he added.

Speculation in the media about possible motivations for the raids also included the opinion that the actions smacked of an attempt to oust AvtoVAZ chairman Vladimir Kadannikov and his allies. The fact that tax authorities issued vague statements about seized documents and instead focused on confiscated money and listening devices lent strength to that version of the events, Kommersant newspaper said.

The raids came ahead of a general shareholders meeting scheduled for Saturday. But Vedomosti reported Wednesday that shareholders would be unlikely to vote against company management since AvtoVAZ's controlling stakes belong to companies in turn controlled by AvtoVAZ itself.

At the same time, the negative publicity will most likely not sour GM on its proposed joint venture, Agibalov said. "GM will probably decide in June or July, and the current inspections won't affect that. Moreover, if the government takes over the company, it will be able to write off tax debts. That would reflect well on AvtoVAZ, making it more attractive to GM."

A number of companies have recently been raided by federal agents as part of the government's attempt to curb rampant tax evasion. The raids are often ham-fisted, with camouflaged commandos in balaclavas wielding automatic rifles and breaking down doors.

They also reflect a pledge by President Vladimir Putin to clamp down on corruption and "strengthen the state."

Earlier this month, federal agents staged controversial raids of several corporate offices owned by Media-MOST, a major media holding. The Prosecutor General's Office said the raids were related to a criminal investigation. The action caused an outcry from many journalists and watchdog organizations who saw it as part of an attempt by the government to crack down on free speech.

Analysts could not comment on whether Tuesday's AvtoVAZ raids were connected to the business empire of controversial tycoon Boris Berezovsky, who last decade founded LogoVAZ, which sold Ladas as the country's first private dealership. Companies said to be connected to Berezovsky have recently fallen under renewed scrutiny.

Meanwhile, Lada distribution networks have been the focus of numerous battles for control, and Vedomosti reported Tuesday's raids may have been part of a response to recent killings of dealership managers and local police.

Among other allegations that have surfaced in the media is a 1998 "sand scandal," in which AvtoVAZ was accused of falsely saying it bought sand through daughter companies from Dagestan to sell to third parties, allowing the company to claim tax breaks of almost 1 billion rubles.

But observers can only guess at tax police motivations.

"If the inspections are legitimate, then there are sufficient grounds to perform them," said Renaissance Capital tax manager Pavel Vasilyev. "If it's a way to exert political pressure on AvtoVAZ, it's absolutely crazy."