Russia again mulling support for Avtovaz due to growth of debt burden

MOSCOW. Nov 12 (Interfax) - Russian government agencies are again discussing support for Avtovaz , which is facing a steep increase in debt servicing costs due to interest rate hikes, Sergei Chemezov, the head of state corporation Rostec, a co-owner of the Russian automaker, told Interfax.

"Indeed, Avtovaz's debt burden is high. We're continuing to invest in deepening localization, increasing production, updating the model line, because without investment there won't be competitiveness. However, with the growth of the key rate interest payments to banks have risen by a billion rubles per year," Chemezov said, commenting on the growth of the carmaker's debt.

"Of course, it would be better if this money went to finance the investment program. The government also understands this and is not abandoning the plant. As far as I know, relevant agencies are now discussing how to help Avtovaz in this situation," Chemezov said.

He again pointed to the difficulties manufacturers face amid the tightening of the Central Bank of Russia's (CBR) monetary policy, adding that rising interest rates are "hitting the defense industry particularly hard."

"We have serious obligations to the army, other government clients. Furthermore, a large portion of our products are items with a long manufacturing cycle, a year or more. Advance payments from customers are usually not enough to carry out all work, while taking a loan at crazy interest is suicide for a business. This concerns government defense contracts, and export shipments and civilian products. Our margins are already not the highest. Profits are small compared to resource companies and banks. In the current circumstances, we have to hand over everything we earn to pay interest and we'll probably even go into the red. It shouldn't be this way, it's a path to bankruptcy," Chemezov said.

Avtovaz president Maxim Sokolov said earlier that the company's debt exceeds 100 billion rubles. "This is a serious burden, particularly with the current key rate, it's immediately an additional almost 20 billion rubles more that we need to find to service loans annually. But banks believe in us. We now have open long-term credit lines at many banks," Sokolov said in an interview with RBC in September.

The possibility of aid for Avtovaz to reduce the automaker's debt was already discussed earlier this year. Deputy Prime Minister Denis Manturov confirmed this in February, and Sokolov said at the end of April that proposals for restructuring Avtovaz's debt were going through the approval process in the government and the company expected concrete decisions by summer. However, no such decisions were announced.

Avtovaz's government relations director, Alexander Vinogradov said in early August that government discussions on possible steps to ease the company's debt burden were temporarily suspended in light of the growth of the carmaker's sales and improvement in its financial performance.

"This subject was discussed, and a certain instruction was even formulated. But in the end all this has been put on pause for the time being, because our financial results have begun to recover, sales are strong. Furthermore, our finance experts thought that additional obligations will arise there [if the government helps ease the company's debt burden]. So we thought about it and put everything on pause for now, since our finance experts are happy with the current ratio of debt to financial indicators," Vinogradov said.

He said the government's decision to defer payment of the vehicle scrapping fee until the end of the year was an effective measure of support for the auto industry. The Industry and Trade Ministry said at the end of last week that this measure, which in recent years has helped Russian automakers with special investment contracts increase working capital, will remain in effect in 2025.

Sales of Avtovaz's Lada cars in Russia grew by a third to 377,900 in the first ten months of 2024 after surging 90% to 352,600 in 2023. Avtovaz does not publish its financial statements and did not report its 2023 financial results in detail.