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Russia threatens to seize car-makers’ assets

Precarious position for global car-makers in Russia, especially Renault-run AvtoVAZ

15 Mar 2022

ECONOMIC sanctions and supply-chain disruptions triggered by the invasion of the Ukraine have left many car manufacturers with no choice but to suspend production at their Russian factories, emboldening the country’s ruling party to propose the nationalisation of those foreign-owned plants. 


Several car-makers, including Volkswagen, Ford, Hyundai, Stellantis and Toyota have already announced temporary shutdowns of their factories in Russia, while several other brands variously suspended imports of vehicles to Russia or stopped doing business in the country altogether.


A Russian backlash seemed inevitable and came via the secretary of Russia’s ruling party's general council Andrei Turchak, who proposed nationalising foreign-owned factories to take control of “departing companies” where foreign ownership exceeded 25 per cent.


If adopted, Russian courts could freeze assets, giving the companies the option of restoring operations – or selling their stake.


“United Russia proposes nationalising production plants of the companies that announce their exit and the closure of production in Russia during the special operation in Ukraine,” Mr Turchak said in a statement published on the United Russia website.


“This is an extreme measure, but we will not tolerate being stabbed in the back, and we will protect our people. This is a real war, not against Russia as a whole, but against our citizens. We will take tough retaliatory measures, acting in accordance with the laws of war,” he added.


Car manufacturers have billions of assets that are now considered to be at risk, of which Mercedes-Benz is one. According to Automotive News Europe (ANE), the three-pointed star has about €2 billion (A$3 billion) tied up in a factory that opened outside Moscow two years ago.


The still-new facility, which can produce 20,000 vehicles per year, is seen as key for access to lucrative government contracts. It employs more than 1,000 people and produces E-Class and SUV models. 


Mercedes said in its annual report that the prospect of expropriation presented a risk to the company. According to ANE, Mercedes-Benz’s Russian subsidiaries also have liabilities to banks of about €1 billion, and the company said it has issued guarantees for the debt.


Renault is considered the only major global car-maker that has not suspended trade with Russia or stopped production at its factories, although supply chain issues have hampered assembly at its plant near Moscow and AvtoVaz facilities at Togliatti and Izhevsk, which stood idle for days last week. 


It is understood that Renault has kept longstanding ties with Russia intact because it is worried about the high cost of pulling out from a venture with Lada-producing AvtoVAZ, of which it owns 68 per cent. The French firm has a 30 per cent share of the Russian car market and relies on the country for about 10 per cent of its revenue, “which makes the automaker the most exposed among peers,” according to ANE.


Citing anonymous sources, ANE reports that AvtoVAZ plays a key role in Renault’s turnaround, hence its efforts to avoid nationalisation of the car-maker in which it holds a majority stake, and this position is backed by the French government that owns a large stake in Renault..


Seeming to avoid any direct mentions of Renault in context of the Ukraine crisis, French finance minister Bruno Le Maire has said private companies are free to make their own decisions on whether to keep doing business with Russia as long as they “strictly and rigorously adhere to sanctions”.


ANE quoted research firm Alphavalue as saying it saw a “low likelihood” of Renault exiting its stake in the AvtoVAZ venture.


However, the value of the venture had fallen to zero “to account for the geopolitical risk regarding Russia's invasion of Ukraine and the long-lasting implications that Western sanctions could have on the Russian economy,” Alphavalue analyst Jorge Velandia said.


While several car companies have pledged millions of Euros in humanitarian relief efforts for Ukraine, major German brands’ production has ground to halt in Europe due to interruptions in the supply of components from the embattled country; they are now scrambling to find alternative sources.


Audi said the VW Group was working to get their major suppliers to relocate their Ukrainian wire harness production to other plants – or find alternative suppliers.


That search included eastern Europe, North Africa, Mexico and "possibly China”, the Ingolstadt-based firm said.


BMW also said it is in "intensive talks" with suppliers to find alternative sources for parts, while Stellantis said it has already shifted its sourcing from Ukraine to elsewhere in Europe.


ANE quoted Nick Klein, a vice president at global logistics firm OEC Group, as saying that car manufacturers “would need to order way ahead of time, because you will face delays, and carmakers will (effectively) be competing against each other for the same sources”. 


Moving production to plants in other low-cost markets, such as Romania, Serbia or Tunisia would involve buying new equipment to boost capacity and this could take several months to install.


There is still a trickle of supply out of Ukraine. Some trucking companies are transporting wire harnesses south into Romania because fighting has not reached that region, but that could change.


“The number of truckers who are willing to drive those routes as this continues will be less and less,” said Mr Klein.


“There is going to be a point where you cannot get anything out of there safely.”


Under the circumstances, European car companies need as many sources of parts as possible, Mr Klein said.


“Right now, you cannot have enough suppliers and you cannot have enough shipping partners.”

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