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. Last Updated: 07/27/2016

Lubricating The Rust Belt

Oleg Deripaska says he'll turn the creaking and sputtering Gorky Automobile Factory into a modern, profitable carmaker. He and the other young industrialists who hope to revitalize the aging manufacturing sector have their work cut out for them. Sabrina Tavernise of The New York Times reports.

NIZHNY NOVGOROD, Central Russia Ч A new sign hangs at the entrance of the Gorky Automobile Factory, one of Russia's biggest carmakers, located 420 kilometers east of Moscow: "The Buyers of Our Cars Pay Our Salaries."

At this Soviet-era factory, quality had never been a priority. Nor was profit. The plant has been teetering on the brink of insolvency for years. Its trademark Volga sedan, the limousine of Soviet bureaucrats, has not changed much since the early 1970s, when it was designed.

Recently, however, Oleg Deripaska, a 33-year-old aluminum magnate, took control of the factory. He says he intends to sort out its tangled finances and make better cars. To start, he put up the sign Ч a message to the workers to shape up.

Young Industrialists

Deripaska is one of a handful of young businessmen flush with profits from selling oil and other raw materials who have begun a quiet transformation of industries in Russia's heartland. In the last year, they have snapped up companies in previously neglected areas of Russia's economy, including its aging manufacturing sector Ч carmakers, bus makers, engine producers and a television factory.

If they are successful in reviving Russia's languishing industrial base, the change would free the country from its dependence on the fickle world commodity markets and perhaps spread the benefits of market reform to the country's depressed rust belt.

Still, their intentions are far from clear. Past practices of diverting company revenues and bare-knuckled takeovers still leave people here Ч cynical after a decade of robber-baron capitalism Ч wondering whether things will be different this time around.

Analysts say the very fact of these new purchases is a promising sign. Throughout the 1990s Ч the wild and woolly first decade of privatization Ч the standard practice was to hide profits in bank accounts offshore. But investing in Russia has become more attractive for owners here. A currency devaluation three years ago made local manufacturing profitable. A stabler political situation under President Vladimir Putin has also helped keep money home.

"Russian money is going into Russian assets Ч that's new," said Roland Nash, chief economist at Renaissance Capital investment bank in Moscow. "It's different from the stealing and rape we saw during the 1990s."

As with all those who made their fortunes over the last decade in Russia, notably in aluminum, Deripaska is not without his share of controversy. His reputation in the West took a beating when three little known metals-trading companies filed suit in a federal court last December in New York. The suit accuses Deripaska and some associates of, among other things, using extortion and murder to gain control of a Russian aluminum plant. The suit has drawn much attention internationally; as part of the fallout, Deripaska was denied a visa to the United States.

He and the other defendants deny the accusations. Last month, they filed motions to dismiss the suit, arguing that it should be transferred to the Russian courts. The real force behind it, they say, is a business rival, who is wanted in Russia on charges of conspiring to murder a leading politician.

Despite the overseas allegations, in Russia, where garish accusations are routinely traded during business disputes, Deripaska's reputation is relatively clean. And his move to help rescue the car industry is a boon to that public image.

His company, Siberian Aluminum, paid $300 million for a controlling stake in the Gorky Automobile Factory, known by its Russian acronym, GAZ. He has also been buying other automotive companies and has grand plans for a giant industrywide holding company.

'Yesterday's Cars'

In a country where the average income is modest by Western standards and where there are only 14 cars for every 100 people Ч less than one-third the share in the West Ч cheap domestically made cars make a good investment, said Deripaska, sitting at a conference table in his sleek downtown Moscow office building.

But the auto industry is a mess. Even the government, which counts it among the country's economic priorities, says so. At a meeting with auto company owners early this month in the Kremlin, Putin derided them as producing "yesterday's cars."

GAZ, built in 1932 with the help of engineers from Ford Motor Co., has made cars with no eye to market demand. Even after the collapse of the Soviet Union, the government continued to provide a steady diet of state subsidies and debt forgiveness in return for promises of eternal employment for the company's more than 100,000 workers.

"It was a preserved island of socialism here Ч absolute stagnation," said Viktor Panyushkin, one of Deripaska's new managers at the plant.

Then there were the post-Soviet problems. Local car dealers took control of the company's cash flow, paying for more than half of their purchases in goods like headlights and metal. The factory's suppliers, often middlemen linked to management, vastly overcharged on everything from batteries to fuel oil.

Record keeping was, at best, sketchy. The factory, which produced about 220,000 cars, minivans and trucks last year Ч only 2.2 per worker, about one-tenth the number produced by the average Ford worker Ч did not even have a formal list of its assets.

"They didn't even know what they owned," said an exasperated Panyushkin.

The problems added up. The company reported about $190 million in losses last year and was bogged down in about $486 million in old debts Ч to suppliers, the government and even the European Bank for Reconstruction and Development, whose $65 million loan to GAZ went into default in 1999.

Deripaska's team, men in their 40s and 50s, say they have moved quickly to impose order on the company's finances. Viktor Belyayev, the general director, who was poached from elsewhere in the Russian auto industry, said he had demanded that all buyers pay only in cash and had eliminated middlemen. Plans for a new-car model that he said had no market were canceled. The new management cut one of the factory's shifts, tailoring production to meet demand. A few thousand employees have left the payroll, but only those who volunteered to go, plant managers say.

Inside Track

Rich and politically connected business owners like Deripaska may be the only hope for this country's foundering manufacturing sector. As they cherry-pick assets, they are exploiting their ability to dominate markets by Russian rules.

So far, forays by Western investors have met with very limited success, as Russia's tangled business environment has overwhelmed foreign auto companies.

"Foreigners are very bad at understanding how things are really done," said Anders ?slund, a senior associate at the Carnegie Endowment for International Peace in Washington. "With the weak rule of law and in the unclear decision-making environment, Russians have a clear advantage."

BMW is producing a handful of cars for a wealthy clientele. Fiat agreed in 1997 to make passenger cars with GAZ, but the venture has yet to build a single automobile.

Russia's largest car factory, AvtoVAZ, another ailing Soviet giant, which accounts for more three-quarters of the country's passenger car market, spent years persuading General Motors to work together to produce a Russian-style jeep, to which GM finally agreed earlier this year.

Ford has a plant outside St. Petersburg that is scheduled to begin production of less-expensive versions of its American cars this year.

Portfolio investors also have little place in the new era of takeovers. GAZ, a publicly traded company, has lost a lot of allure since Deripaska bought it. Fearing an upset of the status quo, many investors sold their shares, sending the stock price plunging. And those who stayed say they regret doing so.

"In retrospect, we would have rather had cash," said Ian Hague, a partner at Firebird Management LLC, a hedge fund based in New York that has a 1 percent stake in GAZ. "It was a blue chip in the stock market, and now it's a dog."

GAZ, Russia's second-largest automobile producer by revenue, has just 15 percent of the Russian passenger car market. The sell-off has caused the value of the company to fall below $100 million.

Hague said he had received no information about the company's finances from the new owners but that he hoped the investment would pay off over time.

Deripaska, who grows exasperated by questions about transparency, says he is in the business to make money, not to please minority stakeholders. After acquiring control last autumn, in part by buying shares on the stock market, he began to work on what he says is most important: setting a clear, coherent course for the company, something never done before because its ownership was splintered.

"Imagine if some unit of General Motors were buying motors independently, another one was buying paint and still another was selling cars independently Ч total chaos," he said. "That was the situation here."

He said the company had been so poorly run that it would have been worthless if he could not have established full control. "Management wasn't responsible for their actions Ч they generated losses" and began programs that were not realistic, he said. "There were small shareholders, but who asked the general director for the results of the quarter, when we weren't there? Who? There was no one."

As was the case with many of companies sold by the government to private owners in the mid-1990s, ownership at GAZ was divided among many small shareholders. As a result, companies like GAZ often remained under control of their Soviet-era managers, who continued to run companies in part as social welfare agencies.

'A Swamp'

The big question is whether these companies even are salvageable. Some economists say they will never be good investments because they were designed to operate in the Soviet system. One consultant who did some work at GAZ earlier this year referred to the company as "a swamp."

Some Russian tycoons, like Mikhail Fridman, are also skeptical. His Alfa Group, a business conglomerate whose holdings include an oil company, a bank and a chain of grocery stores, is betting instead on Russia's new economy: it plans to invest $300 million to $400 million this year in two start-up telecommunications companies. Russia's ailing carmakers are not worth investing in, said Fridman, chairman of Alfa Group, because they have too many problems.

"That industry is too low tech Ч it would be better to start from zero," he said, adding, "Telecoms, on the basis of cash flow, they're not so profitable, but they have big potential."

Deripaska brushes aside such skepticism. The carmakers' assets are cheap, he said, and all that is needed to turn around the companies are some elementary management skills.

Besides, the group has friends in high places. In an early display of his influence in the Kremlin, Deripaska and other auto industry executives persuaded Putin last week to raise tariffs on imported used cars, a major competitor to GAZ's Volgas. Putin also supports Deripaska's broad purchases in the auto industry as well as the grouping of the industry into large holding companies.

Back at the GAZ plant, the marketing people are viewing an advertisement they ordered from a popular music video director in Moscow.

The television commercial, which features a stylish young woman driving a Volga, rock music blaring, will try to get Russians to forget the car's association with stodgy bureaucrats. The ad ends with the flashing caption: "You surprise me!"

And maybe Ч just maybe Ч GAZ will.