The European Bank for Reconstruction and Development is expected to offer roughly $175 million in support for a $500 million-$600 million car-making venture planned in Russia by domestic producer AO AvtoVAZ and US auto giant General Motors Corp - one of the EBRD's largest undertakings in the ex-USSR.

Some details of the bank's involvement remain unfixed, but the EBRD would offer credit and take a 14% stake in the venture. AvtoVAZ and GM each would hold 43%.

The EBRD, which is expected to provide $600 million in financing to Russia this year, is keen to support the project, though the deal still awaits the US automaker's approval. Officials close to the negotiations expect GM to give the green light in October. But GM vice president David Herman, who has been leading the talks with AvtoVAZ, declined to comment on any EBRD role and any schedule for approving the venture.

Vladimir Kadannikov, chair of AvtoVAZ's board of directors, said: "We have met the EBRD, and we spoke about a scheme where the bank would provide credit to the joint venture and take shares in the joint venture."

If approved, the project could launch output as early as fourth-quarter 2002 at AvtoVAZ headquarters in Togliatti, roughly 1,000 kilometers southeast of Moscow. It would aim to achieve an annual production capacity of 75,000 cars with 1,200 people by 2006, Herman said.

AvtoVAZ, which began operations in 1970 by building Fiat-derived models under the brand Lada, is the biggest carmaker in Eastern Europe with capacity to make 750,000 units a year. An AvtoVAZ deal would give GM and its affiliates over one third of the annual production capacity of all light vehicles in the old East bloc (about 4.0 million units), eclipsing empires there of Daewoo and Volkswagen.

The venture would build two types of vehicles, likely under the US automaker's Chevrolet brand: one based on a mid-sized Astra from GM's Adam Opel AG; another derived from a new small sports-utility vehicle from AvtoVAZ, currently made in limited volumes as Lada Niva 2123.

The EBRD also foresees an array of opportunity in supporting investment in Russia by dozens of foreign parts makers to supply AvtoVAZ-GM output. The components producers likely would include major players like Johnson Controls Inc of the USA, GKN Group of the UK and Valeo SA of France.

The bank's enthusiasm for the AvtoVAZ-GM project comes despite past trouble participating in auto ventures in Russia. OAO Gorkovsky Avtomobilny Zavod (GAZ) and AO KamAZ, each car-and-truck makers there, have defaulted on EBRD credits. Meanwhile, ZAO Nizhegorod Motors, a venture between Fiat SpA and GAZ in which the bank took a 20% stake, has postponed plans to launch car output in late 1998 to the first half of 2002.

The EBRD declined to comment on the status of its involvement in Russia's auto industry, as the projects are under review. But observers said the bank is drawn to the innovative strategies of the AvtoVAZ-GM project to extensively use from Russia equipment and technology as well as labor and material, enabling the venture to start selling the Niva at $7,500 and the Astra at $10,000. This is crucial to success, as 98 per cent of demand for new vehicles in Russia is for models costing under $10,000, and many foreign players plan investments there to make vehicles priced at $12,000-$15,000.

The US automaker learned this the hard way. In a project launched in late 1996 in Elabuga in the Tartarstan region of Russia, GM hoped to build 50,000 Chevrolet Blazer off-road vehicles a year, many priced over $25,000. But output was halted in late 1998 due to low demand (3,600 units were made over two years), though prices fell to $15,000 for some models.

Author: Ryan James Tutak in Moscow for just-auto
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