Renault Vows to Sustain AvtoVAZ after Record Loss

"We will do whatever it takes to sustain AvtoVAZ and to allow AvtoVAZ to compete when the recovery comes,” Renault CEO Carlos Ghosn said in a Bloomberg Television interview Friday. "We have made the decision to prepare ourselves for the recovery of the Russian market because we believe in its potential."

Russian car sales plunged 36 percent last year as the economy slid into what is now the longest recession since Vladimir Putin came to power in 2000, undermined by sanctions over Ukraine and plunging oil prices that weakened the ruble. Sales of AvtoVAZ's Lada brand plunged 31 percent.

AvtoVAZ’s net loss widened to 74 billion rubles last year from 25 billion rubles in 2014, the carmaker said Friday. Revenue dropped 8 percent to 176 billion rubles, less than its operating costs.

"This is the company's largest loss since it started reporting under international standards," said Vladimir Bespalov, an analyst at VTB Capital in Moscow.

AvtoVAZ said it breached covenants on more than 43 billion rubles of loans as of Dec. 31 and received waivers from lenders including Societe Generale and Turkiye Garanti Bankasi. The company said it may not “continue as a going concern" without shareholder support.

Auditor warning

Auditors EY said AvtoVAZ's liabilities exceeded its assets by 68 billion rubles ($857 million). "These conditions, along with other matters indicate the existence of a material uncertainty which may cast significant doubt on JSC AvtoVAZ and its subsidiaries' ability to continue as a going concern," EY said.

Renault said it is in talks with other shareholders to recapitalize AvtoVAZ, which could lead to it being consolidated in Renault's accounts. Renault has written down the value of its holding in AvtoVAZ by 225 million euros to 91 million euros. It also booked 395 million euros of AvtoVAZ's losses for 2015.

Ghosn said he couldn’t comment on the amount of recapitalization for AvtoVAZ or the timing of support before talking with the fellow shareholders.

Russian state-owned conglomerate Rostec, which has a 33 percent stake in the holding company that controls AvtoVAZ, said it was considering converting part of the debt it is owed by the carmaker into shares to increase the troubled firm's capital.

"AvtoVAZ, when you look at the numbers they look terrible but you don’t see all the work that’s been done on the ground," Ghosn told analysts in Paris. "AvtoVAZ has reduced 20,000 employees in the last two years. The quality levels have improved tremendously, recognized by Renault and Nissan people."

Renault expects the Russian market, which has roughly halved since 2012, to fall another 12 percent this year. "I don't expect good news from Russia in 2016," Ghosn said.

AvtoVAZ may be able to capitalize on ruble weakness to boost exports in the short term, VTB Capital's Bespalov said The ruble has weakened 19 percent against the dollar in the past six months. Still, if the plunge in the Russian car market doesn’t reverse, its only option may be a cash injection, he said.

Renault owns 50 percent in AvtoVAZ's holding company, while Nissan holds 17 percent. Combined sales of the three producers declined 32 percent last year to 518,000 vehicles in Russia, accounting for about a third of the 1.6 million total, according to data from the Association of European Businesses in Moscow.

Putin's praise

AvtoVAZ has long been regarded by the Kremlin as a symbol of Russian corporate pride which cannot be allowed to go under.

President Vladimir Putin, who has in the past visited its sprawling factory in southwest Russia, owns a Lada Niva jeep, whose qualities he has publicly praised.He made sure Avtovaz received a hefty loan to keep it afloatthe last time it got into such serious financial trouble, during the 2008-9 financial crisis.

Despite its financial problems, AvtoVAZ said its share of the Russian market increased to almost 18 percent in 2015, up from 16.4 percent the previous year. It said it was implementing an anti-crisis plan which included "revenue improvements, cost reduction measures and sales of non-core assets."