Renault sells Russia business to state-backed entity for one ruble

Renault said Monday that it was handing over its stake in Russian car maker AvtoVAZ to NAMI, a state-backed automotive research and development center. Renault said it was also transferring ownership of a factory in the center of Moscow, which makes vehicles under the Renault and Nissan brands, to the city’s government.

Renault didn’t disclose the financial terms of the deal, but people familiar with the deal said the company was selling both assets for the symbolic sum of one ruble each.

“Today, we have taken a difficult but necessary decision; and we are making a responsible choice towards our 45,000 employees in Russia," said Renault Chief Executive Luca de Meo.

Renault can exercise its option to buy back its stake in AvtoVaz at predetermined intervals over the next six years, people familiar with the deal said. The buyback option doesn’t apply to the Renault factory in Moscow, which Renault executives believe will be merged with the rest of the AvtoVaz operations anyway, these people said. The price of any buyback will take into account any investments made in AvtoVaz while it is under NAMI’s stewardship, the people said.

Renault’s arrangement shows how costly it has become to cut ties with Russia. Over the past 15 years, the French car maker has invested billions of euros in the country, making it the company’s second-largest market behind France. Last year, AvtoVAZ sold about 350,000 vehicles, accounting for 12% of the cars sold by the Renault group.

“It’s not good news, but it’s a good solution," said Cyril Meziere, a representative for one of Renault’s unions.

Renault and others have been under pressure to divest from Russia since its full-scale invasion of Ukraine began in late February, triggering waves of Western sanctions aimed at cutting off Moscow from the global financial system. These sanctions have crippled supply chains, making it hard for foreign firms to operate in Russia while also depriving them of buyers for their assets.

Russia’s lower house of parliament, the State Duma, is considering legislation that would allow Russia to nationalize the assets of foreign companies that have exited from the country in response to its invasion of Ukraine.

Shell PLC has agreed to sell its Russian retail-station and lubricants business to oil giant Lukoil PJSC as part of a broader push to exit its Russian hydrocarbons business in phases. Shell said it took a $3.9 billion posttax charge related to its decision to leave Russia. French banking giant Société Générale SA said last month that it would exit Russia, selling its operations to one of Russia’s richest people, and taking a more than $3 billion hit to its income.

Moscow mayor Sergei Sobyanin said the city planned to use Renault’s plant to produce passenger cars under the Moskvich brand, reviving a Soviet-era classic that had ended production two decades ago. A boxy offering akin to the Lada, the Moskvich—or Muscovite in Russian—was produced until 2001. Mr. Sobyanin said he aimed to produce electric cars at the plant after initially making cars with combustion engines.

“We cannot allow thousands of workers to be left without work," he wrote on his blog on Monday. “In 2022, we will open a new page in the history of Moskvich."

At the start of the war, Renault tried to maintain its activities in Russia while also exploring ways to leave the country, according to people familiar with the matter.

As the war continued, however, Renault’s operations in Russia began to burn through its cash reserves. The auto maker had to continue paying salaries and suppliers as sales and production shriveled.

“We didn’t have much room to maneuver," said one person close to Renault. “You have to look at the money we save—each month that goes by, you spend money and you take in zero."

People close to Renault said that ceding its Russia operations had become an imperative in recent weeks. As well as burning cash, Renault felt that tightening rounds of sanctions were making a deal more difficult by limiting the number of entities that it could transfer its assets to.

These people said the auto maker also became convinced the Russian car market could take years to recover.

“The more we waited, the more complex doing a deal became," one of the people said.

Renault said Monday that closing the deals for the Moscow factory and the AvtoVaz stake weren’t subject to any conditions, and all required approvals had been obtained. The car maker confirmed that it expects to book an accounting charge in the first half of the year related to the value of its Russian assets, which the company valued at 2.20 billion euros, equivalent to $2.29 billion, at the end of last year.

AvtoVAZ was founded in 1966 when the Soviet Union built a mammoth factory on the banks of the Volga and renamed the city that mushroomed around it after Palmiro Togliatti, the then leader of Italy’s Communist Party. The plant sprawled over 1,000 acres, more than New York’s Central Park.

In the early years, it sold all of its output domestically. Russians often had to wait years to get a car. The brand became known world-wide for its durability and enjoyed golden years with the iconic Lada Niva, a boxy vehicle that some consider a precursor to the modern SUV.

By the mid-2000s, however, AvtoVAZ was struggling with issues familiar to many of Russia’s big firms: rampant corruption and a lack of productivity and investment. In 2007, Russia put a stake in AvtoVAZ up for sale, which was acquired by Renault.

Renault executives got to work modernizing the plant. For years, the French car maker chartered a jet to transport its employees from Paris to Samara on the banks of the Volga every Monday morning and return them to the French capital on Thursday evenings. Renault employees helped build a new production line and revamped the brand’s product design. They also worked to stamp out graft and improve the supplier base.

Renault eventually acquired a majority-stake in the Russian company. Although a turnaround took longer than expected to materialize, Renault’s Russia operations have been profitable of late. Last year, the car maker made a net profit of €166 million in the country.