GAZ, the auto arm of Oleg Deripaska's crumbling industrial empire, received yet another bailout last week as the government continues to prop up the ailing car industry and the beleaguered oligarch.
This latest 5.6 billion-rouble handout is in addition to the government's backing for a deal that would see Sberbank and Magna International take 27.5 per cent of GM's European arm allowing GAZ to produce Opel cars.
"The role of GAZ Group in the project would potentially consist of organising the manufacturing of passenger cars," GAZ spokeswoman Natalia Anisimova said by e-mail.
GAZ's passenger vehicle section is close to collapse after the failure of its Volga Siber to capture the market. Output has fallen to a third of its pre-crisis level as workers have been put on temporary leave and production lines ground to a halt.
The company is dealing with a 55 per cent drop in car sales according to a PricewaterhouseCoopers survey published last week, but domestic producers struggled even in the boom years.
"The Russian car industry is extremely outdated," said Elena Sakhnova, a transport analyst at VTB Capital. "In the last 15 years there has been practically no investment."
The deal hinges on GAZ being able to use Opel's technology, which would allow it to compete domestically with foreign producers.
"It is a transfer of technology, at least that is what Russian officials hope," said Andrei Yakovlev, of the Higher School of Economics. "For GAZ it could also be access to new markets but only after significant improvements in mass production."
The issue of intellectual capital, however, is likely to hold up the deal, with GM wanting to expand Chevrolet into the potentially lucrative Russian market.
AvtoVAZ, Russia's largest domestic producer, has already teamed up with Renault giving it access to foreign technology and if the deal doesn't go through Deripaska's firm could be left behind.
"Without this project they will totally close their passenger car division and will not produce them anymore," said Sakhnova, adding that this was not their main department.
The company has already taken 1,200 people off of production of the unpopular Volga Sedan and plans to cut 5,800 workers as of August 1.
These deals add a timely boost to an ailing company but it remains uncertain how GAZ will survive in the short term with debts reportedly of 45 billion roubles as of March.
"I think this deal is a more mid-term project, while the key issues of GAZ and Deripaska's other companies relate to short-term problems with debt," said Kirill Tachennikov, an analyst at Otkritie, a financial company.
The PwC report warned that the auto industry needed further government intervention to protect it from collapse and that incentives to encourage car buyers had been insufficient.
"In many markets the role of the state has increased," said the PwC analysts. "Therefore the short term dynamics will depend to a large extent on government stimulus."
The 5.6 billion rouble handout will be used to build a new plant to produce 40,000 to 50,000 diesel engines a year. Like the Opel deal this seems more focused on the medium term future of GAZ, though it will also provide a timely injection into the local economy.
In the longer term GAZ will be looking to step up from using its facilities to put together Opel cars to producing its own internationally competitive brands.
"In five years time it can probably be Russian-branded cars based on Opel technologies but before that it'll just be assembly," said Sakhnova.
While the state support might ease the financial pressure on Deripaska, it could be backing him into a corner politically as he becomes reliant on government handouts.
Last month he incurred the wrath of Prime Minister Vladimir Putin over the protests in Pikalyovo where Deripaska, along with other factory owners, was forced to restart production and pay workers.
These deals, however, appear to target long-term success in the auto industry, rather than keeping people in employment.
"The government's interest is more related to capital expansion abroad than to social unrest," said Tachennikov.
GAZ has already received 20 billion roubles in state guarantees for its loans and it appears its vulnerable position has made it the beneficiary of the government's desire to protect the industry.
"The government is trying to bailout the industry somehow, to improve it to allow it to survive," said Sakhnova. "[Deripaska's] company is in the most difficult situation with a debt of $1 billion that they cannot service."
Sberbank and Magna's main competition for GM's Opel division is from Belgian firm RHJ International, who are also having a bid considered by the US firm and German government.
GM's chief negotiator John Smith said that the automaker had "agreed to continued detailed talks with Magna and RHJI to secure Opel's future" in a statement released by the firm.
It was thought that the Beijing Automotive Industry Corporation had also tabled a bid, but they were not mentioned in the text of GM's latest statement.
The Chinese company later announced they had withdrawn.
Sberbank and its partner would both receive 27.5 per cent of Opel, its workers would gain 10 per cent, while GM would retain 35 per cent if the consortium's 500 million euro bid is successful.
Full details of RHJ's bid have not been released but the BBC is reporting that they will pay 275 million euros for a 50.1 per cent stake.
At the moment it appears that Magna is favourite, with German Chancellor Angela Merkel quoted on the Kremlin website saying it offered "very promising ways of improving Opel's markets" and "of building a strategic partnership with Russia."
The Magna bid also has the support of German trade union IG Metall, which believes it will protect more jobs than the Belgian bid.
"IG Metall is still prepared to take part in a future-oriented Opel concept," AP reported union official Berthold Huber saying, adding the group would not support "short-term shareholder interests like RHJ."
The Deripaska connection
Oleg Deripaska, a businessman with diverse interests, has several links to the bid, not least his ownership of GAZ, which would win the right to produce Opel vehicles.
He used to hold a 42 per cent stake in Magna but was forced to sell it as he became over leveraged as the financial crisis escalated and still retains good relations with the firm.
"Given that Deripaska sold his shares due to problems with a margin call, his relationship with Magna wasn't spoiled," said Tachennikov.
The billionaire owner of Basic Element is considered to have a good relationship with Putin, who owns a 1956 GAZ Volga, despite being chastised over unpaid workers in Pikalyovo last month.
The government has lent its support to the deal, with President Medvedev saying that they "are viewing this project with interest and optimism," when speaking about the Opel deal after talks with German Chancellor Angela Merkel.
British Business Secretary Peter Mandelson, a self-proclaimed friend of the oligarch, is also likely to have a say in the decision as the winner will take control of British-based carmaker Vauxhall. The two became embroiled in a scandal last year, after a party on the Russian's yacht led to accusations the politician's impartiality over a bailout for van maker LDV had been compromised.
Mandelson was forced to allow a junior minister to decide whether LDV, which was then owned by Deripaska, would receive government support.
In a recent BBC interview Deripaska insisted the two remained friends but categorically denied that this influenced any business decisions.
Recently Deripaska has been drawn into a series of legal disputes with his creditors as well as one with former business partner Michael Cherney over his stake in metals firm RusAl.
Israel-based Cherney is demanding a 20 per cent share in the aluminium firm based on a claim that he signed an agreement on ownership with Deripaska in 2001. Deripaska is currently challenging a ruling from a London court that the case should be heard in Britain.
Deripaska also lost a recent case against VTB, with the creditor winning $66 million from Deripaska's building arm Glavstroi. A unit of the construction firm, Glavmosstroi, is also facing three bankruptcy suits.
Meanwhile, RusAl is involved in negotiations to restructure $7.3 billion worth of loans from foreign lenders.
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