Japan Bank for International Cooperation is considering lending roughly $80m for Russian automaker DOAO Izhmash-Avto to expand and modernise its paint shop, sources have told just-auto.com.

The credit would enable Izhmash-Avto, based 1,325km east of Moscow in Izhevsk, to paint over 200,000 cars and light-commercial vehicles a year, according to a top executive at the automaker.

"We are close to finalising this project," said a source at the bank, formerly named Export-Import Bank of Japan. "The contract is ready. We are only waiting for a letter of guarantee from the Russian state."

Izhmash-Avto would install new capacity to paint 100,000 vehicles a year. Plus it would upgrade existing facilities that can handle well over 100,000 units annually, though the equipment is outdated.

The financing of approximately $80m could be available to the automaker before 2001, as the government guarantee is expected within weeks, parties to the deal confirmed.

Red tape has contributed to delays of the guarantee, but observers said the main problem has been the inability of Izhmash-Avto to supply collateral, largely due to questions surrounding the ownership of the company's assets. The government in Izhevsk, however, now is helping the automaker to secure the loan, sources said.

No names of suppliers for the paint facilities have been publicised, and insiders would identify the main contractor only as a Japanese trading house, but much of the machinery and technology would come from Japan. The bank, controlled by the Japanese government, generally limits its support to projects that derive at least 50% of their value from Japan.

The loan could galvanise a turnaround of Izhmash-Avto, the automaker that has fared the worst in post-Soviet Russia. Its production of cars and commercial vehicles collapsed from 180,823 in 1990 to 15,004 in 1999. Output remains modest, but a recovery is stirring: January-to-August volumes rose 78.9% from 8,439 in 1999 to 15,100 in 2000.

The company, the easternmost producer of cars in Europe, expects to accelerate this growth with plans to make 20,000-25,000 in 2000 and 55,000-60,000 in 2001.

The targets may seem unrealistic, against a decade of severe declines. But the enterprise is part of OAO Izhmash, a conglomerate with recognised credentials in engineering and manufacturing.

An armaments supplier since 1807, Izhmash is the main producer of famous assault rifles AK Kalashnikovs. It is the largest manufacturer of motorcycles in the ex-USSR, and it has made bearings, electrical equipment, forgings, industrial machines, steel and tools.

Izhmash began car production only in 1966, re-badging models of AO Moskvich, an automaker in Moscow. But it has innovated vehicles. In 1973, it created the USSR's first hatchback. It also rolled out early Soviet pickups and vans. (Izhmash models are branded Izh for Izh River. The company's name means Izhevsky Mashinostroitel'ny Zavod or Izhevsk Machine Plant.)

The automotive accomplishments are impressive, given Izhmash was disadvantaged during Communism. The company, kept under the Ministry for Defence for its key role in making weapons, was the only producer of motor vehicles in the ex-USSR not under the Ministry for Automobile Industry, so it lost out on state subsidies to develop new models.

Izhmash's strong traditions have attracted Skoda Auto AS, the Czech division of Volkswagen AG. Last year, Skoda agreed to build cars in Izhevsk in a venture named Skoda Auto Udmurtia - owned 75% by Skoda, 25% by Izhmash-Avto. Long-term plans call for $250m in investment to manufacturer 100,000 vehicles a year, but the launch of even basic assembly has been postponed repeatedly. Fallout from the economic crisis in Russia in August 1998 has aggravated delays, and each partner now has reservations about the cooperation. Among other things, Skoda is worried about ownership questions hanging over the Russian company, while Izhmash-Avto now favours assembling cheaper vehicles from Lada-maker AO AvtoVAZ of Russia.

Read a feature on Russia's auto industry here.

Contact Ryan James Tutak, associate editor of just-auto.com for Eastern Europe:
E rjt@pronet.hu
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