March 31, 2009 - Russia Government Aid, Togliatti Russia

Russia Promises Auto Aid

Kremlin Pledges Over $1 Billion in Bid to Avoid Layoffs

Russia Promises Auto Aid

Kremlin Pledges Over $1 Billion in Bid to Avoid Layoffs

The Russian government pledged more than $1 billion in state support to its ailing car industry in a bid to avoid heavy job losses and potential social unrest, as the once-booming car market may contract 60% this year.

"Unlike some other companies, Avtovaz has not fired workers en masse. And that is an expensive feat," Prime Minister Vladimir Putin told a group of executives and factory workers of Russia's top car marker, OAO Avtovaz. "General Motors has fired 34,000 people," he said.

Prime Minister Vladimir Putin visited Avtovaz in Togliatti, Russia, on Monday.

In combating the economic turmoil, the Kremlin has made it a priority to save jobs. It has pledged billions of dollars to help employers through the crisis; more than a million Russians have lost jobs since December.

The bailout package announced by Mr. Putin helped Avtovaz buck the trend in the global automotive sector, where the shares of bailed-out international auto makers plummeted in the U.S. and Europe.

Shares in Avtovaz, in which France's Renault SA owns a 25% stake, were up 28% in Moscow on Monday, while truck maker OAO Kamaz gained 14%. Investment bank Russian Technologies -- a sprawling state-controlled conglomerate set up by the Kremlin to streamline the country's aging manufacturing base -- and Troika Dialog also own 25% stakes in Avtovaz. The remaining quarter is floated on the market.

The Soviet-era car maker, whose workingman, no-frills sedan is nearly ubiquitous on Russian roads, has suffered from a steep dropoff in sales as Russian consumers pull back on major purchases amid the global financial crisis.

Industry Minister Viktor Khristenko said in separate comments in Moscow that the industry as a whole faced one of the worst years in its history, with vehicle sales set to fall by more than 60%. This forecast was far more dismal than the 40% decline predicted by the government in December, and deeper than the 50% plunge analysts have named as their worst-case scenario for the sector in 2009.

On a visit to Togliatti in Russia's industrial heartland, where Avtovaz is based, Mr. Putin ordered the disbursement of 25 billion rubles ($740.8 million) in state funds to Avtovaz and asked state banks to give a bridge loan for an additional 8 billion rubles.

He said Avtovaz should attract a further 90 billion rubles on its own, and the company's president, Boris Alyoshin, said he hoped to sign an investment memorandum for that amount within two weeks with Russia's largest state-run banks, including OAO Sberbank, OAO VTB and OAO Gazprombank.

Original story - Wall Street Journal

Additional Story - April 6, 2009

Russian Auto Bailout Protects Jobs, Not Efficiency

If there is a country that truly needs a car czar, it is Russia, home of the czars — and Lada.

The factory here has been stamping out the same version of the Lada, the typical boxy people’s car of the former Eastern Bloc, for four decades.

Known as Avtovaz for short, it is one of the least efficient automobile factories anywhere in the world — each worker produces, on average, eight cars a year, compared with 36 cars a year at General Motors’ assembly line in Bowling Green, Ky., for example.

Yet the government is giving Avtovaz (pronounced aft-OV-az) billions of dollars in aid, no strings attached. No chief executive firings. No renegotiation of workers’ contracts. No demands to turn out better-quality cars, much less fuel-efficient hybrid cars. (The first car with an airbag was introduced here in 2005.)

But the auto bailout, Russian style, is intended more to ensure peace in the streets than restructure a business, much to the lament of some critics who think tough love might be better.

“The key issue is too much government protection,” Yegor T. Gaidar, a former prime minister, said. “The factory will create as many problems for the Russian economy as General Motors for the States.”

Moscow’s concerns extend far beyond automobiles. As mounting economic anxiety prompts worker protests from China to Ukraine to the Czech Republic, politicians and economists say the Kremlin is calculating that it can keep the peace by bailing out Russian workers.

The country’s manufacturing base, wobbly in the best of times, is contracting quickly in the global downturn. Layoffs are spreading. Manufacturing declined by 13 percent in February alone. And industrial discontent is stirring in the most hardscrabble Russian factory towns.

On March 11, 16 Russian steelworkers announced a hunger strike to protest wage cuts at a Ural Mountain mill. (The same week Severstal, one of Russia’s largest steel makers, announced it would lay off 9,000 to 9,500 workers.)

Here in Tolyatti, when a G.M. joint venture laid off 400 people in December, riot officers were called in to disperse an angry crowd that had gathered in the plant parking lot.

It is a trend with a history here; a shrinking manufacturing base in the late Soviet period contributed to social unrest. To keep that from happening now, government officials promised at a meeting here last week to give additional aid to the factory: $730 million in an interest-free loan for one year, $230 million in loans from state banks at a favorable rate, and a commitment by state-owned banks to help Avtovaz raise an additional $2.6 billion from banks.

“Avtovaz, along with producing cars, is fulfilling a social role. It is employing the population. Either fortunately or unfortunately, the state must support Avtovaz,” Vladimir R. Yagutyan, a former deputy mayor of Tolyatti, said in an interview. “The stability of the town depends on it.”

Apart from the company’s role as an employer, economists see little point in propping up such an aging giant.

The factory, a monument to Soviet gigantism in industrial design, is a panoramic sprawl of pipes and smokestacks on a bank of the Volga River, 460 miles southeast of Moscow. It employs 104,000 assembly line workers, many of whom still toil with hand-held wrenches.

All told, the Avtovaz factory and its suppliers support two million jobs, according to a statement by the factory’s management, out of a total Russian work force of about 75 million. Many of those jobs are in small and medium-size towns not far from Moscow.

The collapse of the car market came later in Russia than in the United States, but it could be more severe. Russia had been the fastest growing major car market in the world, with 35 percent growth in 2007. The country was projected to surpass Germany as Europe’s largest automotive market in 2009; that is no longer the case.

Now car sales are projected to fall 25 to 50 percent, or 1.6 million to 2.3 million vehicles, according to a report by the Moscow office of PricewaterhouseCoopers.

Last fall, the Russian government deftly shifted the economic hardship away from this politically fragile car industry belt in central Russia. It imposed a tariff on imported cars. The move set off protests and a police crackdown — but in Vladivostok, a major center for importing and servicing secondhand Japanese cars, more than 5,000 miles from Moscow.

Now, the government is backing a no-layoff policy at Avtovaz, in spite of tumbling demand for its products. The government is also subsidizing auto loans to stimulate demand. The factory has requested state loan guarantees, which were approved last week.

Even employees forced to take furloughs seemed unconcerned about being laid off. “The factory is our wet nurse,” Denis N. Makarov, a clerk in the factory office, said. “We have nothing else. If it stops, the whole town will be out on the streets. We all understand this.”

Still, Timofey G. Bushuyev, 59, a sheet metal worker, said he understood the factory’s troubles last year when he bought a new Lada only to discover the horn and heater did not work and the belts squeaked.

In a possible silver lining for Avtovaz, more expensive foreign brands have fared worse. G.M., Hyundai and Toyota, all companies with assembly lines in Russia, were among the biggest losers.

Avtovaz’s management, in a written response to questions, hailed the company’s “indisputable advantages” in a downturn owing to its inexpensive product line. The car now marketed as the Klassika — a design for the squared-off Fiat 124 that the company bought in 1974 — sells for $4,160.

“In crises Avtovaz always had a product people wanted to buy,” the company said. “From the onset of the crisis Avtovaz has not laid anybody off, and does not plan to do so.” Instead, the factory has gone to a four-day week, with two six-hour shifts. Workers are offered voluntary furloughs at two-thirds pay.

But even the unions, used to believing the worst of management, say layoffs are inconceivable here.

“It would become a political issue for this city and this country,” Andrei A. Lyapin, regional coordinator of the Interregional Trade Union of Automotive Workers, said in an interview. “They will print enough money to pay these people.”

Additional Story - New York Times