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. Last Updated: 07/27/2016

Bold AvtoVAZ Restructure Frees Controlling Stake

The government has agreed to restructure top automaker AvtoVAZ's tax debts and free a controlling stake in the company that the State Property Fund had held as collateral.

"A somewhat revolutionary step has been taken," Deputy Prime Minister Ilya Klebanov said after a Kremlin meeting with top executives of the auto industry Wednesday.

The controlling stake in AvtoVAZ was … not being used to attract investment," Klebanov said.

AvtoVAZ submitted its development program to the government in March, saying a new model, the VAZ-1118 Kalina, would be ready to roll by 2004. It also detailed plans for a new motor production facility with a capacity of up to 700,000 engines per year by 2010.

In total, both projects were estimated by AvtoVAZ to be worth $2.2 billion. The Kalina will cost $850 million and the engine project $1.35 billion, AvtoVAZ said.

Using its own funds and outside investments, AvtoVAZ plans to invest only $830 million in the two projects, with the remainder expected to come from linked bank credits under state guarantee as well as from a tax investment credit on the cost of restructuring AvtoVAZ's debt to the budget.

AvtoVAZ's debt of 2.85 billion rubles ($97.8 million) was restructured under resolution No. 1316 in 1997, which granted an extension of 10 years with monthly payments. To guarantee payment of the debt, AvtoVAZ transferred 50 percent of its stock plus one share to the State Property Fund.

If AvtoVAZ fails to pay twice in a row, or twice in the course of one year, the State Property Fund has the right to sell these shares at a special auction. The government gains no other rights from the stake as it does not come with voting rights.

Nikolai Khatuntsov, the director of an accounting and auditing company who participated in the development of AvtoVAZ's program, said that after July 1, AvtoVAZ will not have to start paying back its remaining 2.3 billion ruble debt until 2008. By releasing the shares from pledge, AvtoVAZ will be able to acquire new credits under state guarantee for producing the Kalina. Khatuntsov said that with the Kalina on the conveyor belts by 2005, the factory's taxable base will be virtually doubled and the state will get back everything it lost from the new restructuring.

Klebanov did not say whether the delayed-payment scheme would be applied. But even if the debt were to be paid off under the previous scheme, the cancellation of the collateral means that the state's only chance of recouping the debt in a default would be by bankrupting the company.

Albert Yeganyan, senior partner with the Vegas-Leks law firm, said the bankruptcy option is not enough.

"Another form of defense is for the company to issue bearer promissory notes, which the Finance Ministry could present for redemption," he said.

"A scheme must be developed whereby asset stripping would be forbidden. If this is not done, a situation may arise whereby at the moment the promissory notes are presented for redemption AvtoVAZ has nothing to pay them with. If this doesn't happen then AvtoVAZ will know no ill for nine years while the state will be left sitting on a powder keg," he said.