Renault finally mothballs Moscow plant and weighs an expensive exit from Russia after shaming over Ukraine puts it in a corner

March 24, 2022, 12:31 PM UTC

Ukraine’s strategy of naming and shaming corporations that are still doing business in Russia has claimed its latest high-profile victim. 

Hours before Russian President Vladimir Putin’s war on Ukraine officially turned one month old, French carmaker Renault said it was suspending production at its Moscow factory and signaled it would consider withdrawing from its second largest market. 

In a statement published late on Wednesday, the company’s 17-member board of directors, led by Chairman Jean-Dominique Senard, suggested Renault could cut ties to AvtoVaz, its majority-owned subsidiary that builds Lada cars. A potential disposal of its 68% interest would leave Russian state-owned conglomerate Rostec as the sole owner of the company.

“Regarding its stake in AvtoVaz, Renault Group is assessing the available options, taking into account the current environment, while acting responsibly towards its 45,000 employees in Russia,” it said.

A withdrawal would be very costly to the French company, since it has staked a good part of its growth on its dominant position in the market, where nearly one out of every three new cars built sports either a Renault or a Lada badge on the hood.

Russia accounted for 18% of the group’s overall volume last year with over 482,000 vehicles sold, led by the top two most popular cars in the country: the Lada Vesta and Lada Granta.

The move came after Ukraine’s government shifted its sights to the French carmaker from other major multinationals like Nestle, which pledged on Wednesday it would restrict sales to absolute necessities and donate whatever profits it made to humanitarian organizations. 

Foreign Minister Dmytro Kuleba welcomed the sudden change of heart at Renault, calling it a “responsible move against the backdrop of Russia’s ongoing barbaric aggression against Ukraine.” 

Ire had erupted on social media after Renault restarted production at its wholly-owned factory in Moscow on Monday, where it assembles the Kaptur, Duster and Arkana models sold under its own badge. Renault management’s restart reportedly had received the backing of the French government, the company’s largest shareholder with just over 15% of the stock.

The group’s board said on Wednesday it would immediately and indefinitely mothball production at the plant, warning its financial guidance for 2022 would have to be revised lower as a result.  

AvtoVaz did not respond to requests from Fortune for comment. 

Once a promising market

In view of other companies that pulled out of Russia, like petroleum producer BP, analysts have said it would be a tough decision for Renault to take the loss—but feasible nonetheless.  

“It would be perfectly legitimate for Renault to consider an exit from AvtoVAZ,” Jefferies analyst Philippe Houchois told Bloomberg

Russia has long been prized as one of the top emerging markets, alongside India and Brazil, thanks to its population of almost 150 million people, a low level of car ownership that offers considerable upside potential, and rising disposable income fueled by the country’s vast wealth of commodities like oil, gas and key industrial metals, such as nickel. 

In 2012, car sales in Russia hit a peak of close to 3 million vehicles, prompting predictions Russia would eclipse Germany as the largest market in Europe and enticing premium brand Mercedes-Benz to invest €250 million in a new factory in the country. However, subsequent sanctions over Russia’s 2014 invasion of Ukraine’s Crimea peninsula caused a sharp drop from that level, to the range of 1.4-1.8 million sales annually.

Courtesy of the Association of European Businesses

As Russia’s car market grew, Renault seized the chance in 2008 to buy a 25% stake in AvtoVaz, the dominant local carmaker. After injecting further equity into its subsidiary to fund its multi-year restructuring plans, Renault held over 67.7% of the shares by the end of last year.

Sanctions hit

Western sanctions have already dealt a severe blow to AvtoVaz’s operations. Due to a dwindling supply of electronic components, the Lada manufacturer had said it would move forward its three-week summer break to April 4 in order to “accumulate the necessary stock of components to ensure a more stable operation” at its Togliatti and Izhevsk factories.

Renault’s former CEO—the larger-than-life Carlos Ghosn, now a fugitive in Lebanon after fleeing criminal charges in Japan—distanced himself earlier this month from the AvtoVaz deal, which was a key plank in his growth strategy and now has become a fiasco for his successor, Luca de Meo

“When we decided to move into Russia and make this alliance with AvtoVaz everything was fine,” Ghosn told Bloomberg TV, adding “it made a lot of sense.”

The CEO, who has been quick to criticize his former employer’s troubles, also didn’t miss the opportunity to attack Renault’s current management for doing nothing: “I’m stunned by the fact that it’s complete silence.”

Renault’s Senard finally offered his first answer on Wednesday, but he will likely face unhappy shareholders at the company’s annual meeting on May 25. Shares in the carmaker slid 2% amid a flat broader equity market in France on Thursday.

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