Renault had been planning for months to export a newfangled version of the Lada to the rest of the world.

While the realization of that ambition was still a long way off, it would have hindered the revival of a brand arguably more synonymous with the Soviet Union than any other brand and which Renault first entered into in 2007, after chief executive Carlos Ghosn identified Russia as a promising market.

Encouraged by Russian President Vladimir Putin, in 2012 Renault increased its stake in Avtovaz, the manufacturer of the Lada since it first rolled off the production line in 1970, to a controlling stake.

Ten years later, Renault’s success in leading Lada through setbacks and market slumps has led to a bigger company in Russia than many other foreign companies, just as Putin’s invasion of Ukraine threatens to turn the country into a pariah state.

Unlike some multinationals for whom the Russian market is little more than a rounding error in their accounts, Renault employs 40,000 local workers and generates 10 percent of its revenue there.

The carmaker has not commented on its intentions, saying only that it is monitoring the situation in Russia. The scale of Renault’s activities, in addition to a lack of political pressure in France to withdraw, has prompted the group to try to stay, according to people familiar with the matter.

But as the business rush out of Russia deepens, commercial and reputational risks for the company, which the French government and Japan’s Nissan consider its two largest shareholders, are mounting.

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“People underestimate the potential economic collapse [in Russia]this could be a complete meltdown,” said Mark McNamee, Europe director at FrontierView, a consultancy that advises companies on macroeconomics.

“There is pressure for companies not to be seen as doing business with Russia,” McNamee added, pointing to a particularly strong move among US consumer brands to “self-sanctify” and back out.

Renault has already been informed of the increasing economic tensions in Russia. The three plants, including one in Moscow that produces models under the Renault brand, have faced downtime and struggled to source components as some suppliers cut ties with the country.

Avtovaz resumed production of some Lada models on Wednesday after a week-long break at the massive factory in Togliatti, which is located 1000km east of Moscow on the Volga River. But all Avtovaz plants will be shut down for another 20 days from April 4, as Renault puts forward a company vacation normally scheduled for the summer as they race to stock electronic parts.

Semiconductors, in particular, would be hard to find in Russia, industry consultants said, even if Togliatti had his own extensive metalworking business to make some other components.

Inside Russia, there was “a lot of pressure on them never to stop,” said a person familiar with Renault’s operations. The risk of a Russian counter-movement to seize assets was also an issue, she added.

Some other car plant operators in the country have received unannounced visits from local authorities to check they are still paying workers even when closed, according to people familiar with the visits.

Since Renault first invested in Avtovaz in 2007, its workforce has shrunk from more than 100,000 as the French group aims to modernize its assembly lines. Almost all of the workers are local, except for 10 foreigners in top jobs or key positions, such as Nicolas Maure, head of Avtovaz, and the group is reluctant to simply abandon its staff, people at Renault said.

Visits by international employees who normally carry out quality checks have been cancelled, according to Renault unions.

Though smaller than it was, the size of Renault’s workforce means there’s a lot at stake – both for the company and the Russian government. The factory at Togliatti, one of the world’s largest car factories, is so large that it used to have its own hospital and remains a major source of employment for the surrounding province of Samara.

Prolonged downtime threatens to become very expensive. “The question is production and how long do you pay the workers until you can’t afford it anymore?” said Philippe Houchois, an analyst at Jefferies.

The Lada, a car brand that resonates far beyond Russia, has long been the best-selling brand within, and its lower price has kept it market share at around 20 percent, even as foreign rivals have invaded the country in recent years. two decades.

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Even in the Soviet era, the no-nonsense Ladas were one of Russia’s most successful exports. EU sales fell more than two years ago when vehicle emissions standards were tightened, although the brand still sold new cars outside of Russia, including in Kazakhstan and Belarus.

However, under CEO Luca de Meo, Renault was considering bringing a hybrid version of its Lada Niva back to Western Europe by 2025, building on the revival of its beefy off-road car first launched in 1977.

While Renault’s factories have suffered production disruptions since the invasion, there are signs that demand is proving more resilient, even as the Russian ruble has fallen in value.

“They’re buying everything up,” said a car dealer in Moscow, pointing out that this was far from normal.

“In my opinion, they mainly want to invest money, buy everything except invest earlier [the rouble] devalues ​​completely,” he said. “Those with more money buy apartments, those with less money buy cars.”

Fears that spare parts for foreign cars would eventually run out added to the Lada’s appeal, the dealer added. Some people have said that they keep cars in underground parking garages or garages rather than on the street for fear of being stolen for parts.

“These are Russian products made for Russia by Russians,” a French government official told the Financial Times, adding that it was too early to consider a radical production stop or a departure. Japan’s Nissan, Renault’s alliance partner, declined to comment.

It’s a position the French government maintains despite Renault owning a 68 percent stake in Avtovaz alongside Rostec, a defense and industrial group led by longtime Putin ally Sergei Chemezov, which has been under US-imposed sanctions since 2014 stands.

French President Emmanuel Macron, who has spoken regularly with Putin since the invasion and urged him to negotiate a ceasefire, has also emphasized that the west is not at war with the Russian people.

His government has not pressured companies to leave, even in private exchanges, several people familiar with the matter have said. So is TotalEnergies, the French company that is gaining most control over its continued Russian presence after oil and gas rivals BP and Shell announced plans to leave.

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French companies are among the largest foreign employers in Russia, according to French officials, with a total of 160,000 local employees. Food producer Danone, supermarket group Auchan, DIY chain Leroy Merlin and lender Société Générale also have major operations.

“The question of whether these companies should leave [Russia] is definitely there,” says Tatiana Kastouéva-Jean, head of the Russia Center at the French think tank Ifri. “Some French companies have resisted more than others, but many are more local and have more to lose.”

Germany’s three major automakers, VW, Mercedes and BMW, ceased sales or operations within days of the invasion. The trio sold fewer than 300,000 vehicles in the country last year, a fraction of the 13 million cars they shipped worldwide.

That is less than the total of Ladas delivered by the Renault group alone, while the company sold more than 482,000 cars in Russia in 2021, including under other brands, a chunk of 17 percent of its total production.

Avtovaz has €3.1 billion in assets, according to Renault accounts. Jefferies analyst Houchois said Avtovaz’s operations were largely foreclosed, limiting the impact on the wider Renault group. “You could wipe the value in your accounts to zero and deal with that,” he added.

Nevertheless, Renault shares have underperformed other French blue-chip companies since the invasion, falling more than 20 percent.

The Russian dilemma threatens to weigh on De Meo’s wider ambitions at Renault after the company, stricken by corporate scandals and then disruption from the coronavirus pandemic, only returned to profit last year after two years of losses.

“I am concerned for the group,” said a senior executive at Renault, adding that he thought the company should stay after years of investment and energy spent in Russia.

Additional reporting by Domitille Alain in Paris, Joe Miller in Frankfurt and Eri Sugiura in Tokyo


This post Renault’s Russia dilemma | Financial times was original published at “https://www.ft.com/content/72fecc70-10a7-4ddb-9c20-b19c774e1f3b”

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