GAZ has secured several high-level overseas contracts

GAZ has secured several high-level overseas contracts

GAZ Group - part of Russian Machines - the machinery and engineering holding of Basic Element - recently started Chevrolet Aveo production at its Nizhny Novgorod facility 250 miles east of Moscow and also produces vehicles for Volkswagen and Skoda.

General Motors and GAZ Group inked the deal in 2011 to produce the Aveo in Russia, with the companies investing US$29m to ramp up the existing Nizhny Novgorod passenger car production facility.

In a conference call with other international media while I was in Nizhny Novgorod for the Chevrolet launch, I talked to Basic Element chairman, Oleg Deripaska, down the line from Moscow about the challenges facing the Russian economy and the opportunities for GAZ Group and the tycoon did not, as is his wont, pull any punches. 

"[The] Russian economy is in general, in good shape [but] as our President  mentioned last week...he demanded  the government develop a new plan," says Deripaska.
 
"Public debt is very low, the lowest in the world, a lot of reserves, above US$720bn, a budget surplus. [There is a] stabilised demographic. We hope for a better economic environment in the US and Asia and a stable outlook for the next three years in Europe.

"The problem is our government has no industrial policy - it is scary to deal with any unemployment which may happen if production would optimise. They have no instrument to deal with it."
 
Part of the solution to addressing those industrial policies is Russia's accession to the World Trade Organisation as its 156th member, a tortuous process whose agreement Deripaska likens to: "Thirty-four or even 40 thick volumes, the size of War and Peace by Leo Tolstoy," but it is closer to home where he feels the real challenges lie, a situation echoed by GAZ Group parent, Russian Machines, also controlled by Basic Element, which fired off a warning surrounding Russia's interest rates, that can be as stratospherically high as 11%.
 
Russian Machines chairman and former Magna CEO, Siegfried Wolf, notes: "Nine per cent, 10%, 11%, interest rates, we can not be competitive. On an international basis, it is 4% and I am going to compete with this? This is my biggest issue.
 
"We have positive signals, but I hope it goes a bit faster. We have to be competitive and competitive means we have to have competitive interest rates. I am very nervous about high interest rates here in Russia."

Wolf's boss echoes his concerns, citing the triple effect of high interest rates, low productivity and punitive cost of capital as obstacles to be overcome by Russian companies, including the development of a component industry.

"We will not be able to develop automotive product without good components," says Deripaska. "[The problem is] high cost of capital. [There has been] a lack of investment in the last 30 years and we need to bridge this gap as soon as possible."
 
Deripaska also revealed the gripping statistic, that despite the seemingly headlong rush to embrace capitalism begun in the Gorbachev and Yeltsin eras, Russia is still very much wedded to the concept of the State being the overwhelming arbiter of economic life.
 
"Still, more than two thirds of Russia depends on the State," he says. "We have major companies that are State-owned and we are still State-dominated. The only chance is to promote a market economy. We need to take a more painful ride [but] we have to be patient for another 25-30 years. America grew up in 200 years.
 
"We are still in transition - 22 years ago Russia was part of the Soviet Union - we did not think in these days about democracy. For us growth is also political stability, it is a distribution of opportunity that Russia created for all citizens.
 
"We started without a tax system, without a legal system, without anything. China demonstrates if you want to develop something, just try on a small scale and understand what is the problem. This is what we try to do with developing new technology."
 
Addressing the automobile business directly - and cars are just one of myriad business activities in which Deripaska is involved - he also runs several airports in Russia including Sochi - home to next year's sensationally costly Winter Olympic Games - the Basic Element chairman highlighted the importance of contract relationships as a fast route to market - and with brand kudos to boot.
 
GM has clearly put its money where its mouth is with GAZ in Russia - it's not a company to take unnecessary risks and views Deripaska's operation - under the eagle eye stewardship of its former procurement man Bo Andersson - as a sound investment to grow its Chevrolet brand in the country.
 
It's a relationship that Deripaska readily concedes has been useful to GAZ since its own exit from passenger vehicles and which VW and Skoda have also emulated.
 
"We have been very opportunistic to develop a short cut to passenger cars," says Deripaska.
 
"The issue is, it is not enough to have a product, you need to reach customers. If you look at successful OEMs, they develop a complicated network in Russia and support fleet cars. The company we inherited, we have very experienced employees who provide quality and efficiency."
 
Russia has been much in the headlines of late in the auto sector, with Russian Railways recently acquiring 75% of PSA Peugeot Citroen logistics division, Gefco, but despite his enthusiasm for co-operation with overseas firms on his own territory Deripaska is less keen to put his cash into European ventures.
 
"I would not advise GAZ to buy at the moment in European automotive," Deripaska told me. "There [are] of course, critical components Russia needs, but with the high Euro, we need to be practical.

"High Euro and issues with the labour market in Europe - I would not believe we go near to buy something in Europe at this moment. I could not say for our products and our customers we can add anything significant by buying operations in Europe. We would rather add Asia with available capital and finding cheap inner cost."

 "Europe is missing a lot of opportunity. What I just can't understand, why [is] the Euro almost 70% higher than it was before? There is no clear action plan. Russia could benefit more from Europe and Europe could benefit more from deeper co-operation."
 
Oleg Deripaska is chairman of Basic Element, an umbrella organisation for the Russian tycoon's many interests that include mining, metals, aviation and construction, collectively employing more than 250,000 people, many of whom work for the company's GAZ Group auto division.
 
A physicist by education, Deripaska has been a key figure in modernising Russian industry and is a member of the Competitiveness and Entrepreneurship Council, an advisory body to the Russian government.