A $1 Billion Deal With Putin Traps Renault in Russia Quandary
Russia is Renault’s second-biggest market, and it’s paying a heavy price for a $1 billion deal sealed in 2007.
(Bloomberg) -- Volkswagen AG, BMW AG and Toyota Motor Corp. have idled Russian plants and suspended shipments to the country as part of a broader retreat by global corporate giants. The one automaker with the most to lose, Renault SA, has remained conspicuously quiet.
The French company has lost more than a third of its market value in two weeks, as Russia invaded Ukraine and was hit with unprecedented economic sanctions. Russia is the second-biggest market for Renault, which is paying a heavy price for the $1 billion deal it sealed in 2007 with a top ally of Russian President Vladimir Putin.
Renault’s majority control of AvtoVaz, the Soviet-era maker of Ladas, and reliance on Russia for about 12% of its revenue are now matters of investor concern. Cutting ties with the venture would come at a tremendous cost, and prospects for a broader economic slump across Europe risk derailing the company’s already-tenuous turnaround effort.
“It would be perfectly legitimate for Renault to consider an exit from AvtoVaz,” said Jefferies analyst Philippe Houchois. “Renault could take the loss, but an exit would be a tough decision.”
Russia accounted for about 5 billion euros ($5.5 billion) of Renault’s revenue last year, and roughly 315 million euros of operating profit could be at risk, according to Michael Dean, a Bloomberg Intelligence analyst. Renault shares fell another 4.4% on Friday to close at the lowest since November 2020.
As a flood of companies worldwide pull back from Russia and unload assets, Renault and the French government -- its most powerful shareholder -- have kept mum on AvtoVaz. So has the other partner in the venture, Rostec State Corp., a Russian government-owned defense conglomerate headed by Sergey Chemezov, a close Putin ally.
“Renault has promised to abide by sanctions,” Gabriel Attal, the French government spokesman, said Thursday on France Info radio. A spokesman for AvtoVaz declined to comment beyond operational issues. Renault continues to monitor the situation, according to a spokesman.
Renault’s foray into Russia a decade and a half ago was decided at the highest levels of government, and any exit would be politically fraught. If the company stands pat, it may have a hard time collecting money from a business it’s sunk more than $2 billion into over the years.
“One risk for Renault is that capital controls could prevent it remitting profits or cash from AvtoVaz and its other Russian operations,” said Redburn analyst Charles Coldicott.
Back in 2007, Putin dictated Renault’s initial deal for a 25% stake in AvtoVaz with former leader Carlos Ghosn. The accord was backed by France and spearheaded by Chemezov. The Rostec CEO’s close ties with Putin trace back to when they lived in the same Dresden apartment complex in Germany during the 1980s as the future president worked as a KGB officer.
“When we decided to move into Russia and make this alliance with AvtoVaz, everything was fine,” Ghosn said Thursday in an interview with Bloomberg Television. “It made a lot of sense.”
Ghosn, who resigned from his Renault roles in the wake of his late 2018 arrest in Japan, said he was surprised current management hasn’t communicated on the situation. “I’m stunned by the fact that it’s complete silence,” he said.
The Russian state was highly involved in the subsequent increases in Renault’s AvtoVaz shareholding. The country now accounts for about 18% of Renault’s total vehicle sales. AvtoVaz sold about 385,000 Ladas last year, mostly in Russia.
AvtoVaz’s reliance on the domestic market means a deep economic slump would spell trouble. “Historically, during times of recession in Russia, AvtoVaz has been heavily loss-making,” Redburn’s Coldicott said.
Founded with the help of Fiat SpA in 1966, when Russia was part of the Soviet Union, AvtoVaz’s Lada commanded an almost 80% share of the market during the Communist era, and still has about a fifth of the market now. Renault has refurbished the massive Togliatti plant on the banks of the Volga River and redesigned models with an eye toward erasing consumer perceptions of shoddy workmanship and style.
Turnaround Plan
Brightening prospects in recent years for Lada formed part of Renault Chief Executive Officer Luca de Meo’s revival plan for the group. He’s envisioned an “incredibly profitable” business model for the Lada and Dacia budget-car brands, with shared manufacturing processes and technology.
The war in Ukraine isn’t the first time AvtoVaz has tripped up Renault. Within a year of its initial investment, the financial crisis saw AvtoVaz’s value plummet, and Putin pressed Renault to come to the rescue. Ghosn’s move to take a controlling stake for Renault and Japanese partner Nissan was aimed at gaining a foothold in what were expected to be key growth markets -- the so-called BRICs.
In 2014, Russia was hit with a first round of sanctions after Putin annexed the Ukraine region of Crimea. Renault acquired a controlling 51% stake in 2016 after Ghosn pledged to do “whatever it takes” to back the loss-making venture on the verge of collapse.
The ongoing war in Ukraine is now posing a new and perhaps more serious threat to the carmaker because of the potential to reverberate beyond Russia’s borders.
“Renault’s turnaround plan is predicated on a recovery in the European auto market,” Houchois said. “The longer the crisis continues, the greater the likelihood of a recession in Europe.”
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