AVTOVAZ: ANATOMY OF A RUSSIAN CORPORATE WRECK (int'l edition) Gangs of thugs and insider networks are choking Avtovaz Armed men in camouflage gear guard thousands of shiny new cars stored in fenced-in lots scattered around the city of Tolyatti in central Russia. The lots belong to private trading companies that do business with Avtovaz, the locally based maker of the country's best-selling auto, the Zhiguli, which retails for about $5,000. Last year, the company posted record sales of $3.8 billion. Yet Avtovaz is a corporate wreck. The trading companies are largely to blame. Aided by some Avtovaz managers as well as criminal gangs, these companies siphon off profits by buying the company's cars at below-market prices and reselling them to retailers at a huge markup, say analysts and government officials. They also supply many of the company's components, often in exchange for vehicles. While the trading companies have prospered, Avtovaz has run up a $1.9 billion tax bill, making it one of Russia's biggest deadbeats. The company officially reported $315 million in net income in 1997, but insiders admit that it is cash poor and actually lost money. BLIND EYE. Avtovaz is a classic tale of mismanagement and corruption in the new Russia. For years, the government of President Boris Yeltsin turned a blind eye to conflicts of interest and even theft by corporate managers to win their support for policies such as privatization and Yeltsin's own reelection. Now, Russia is paying the price. From coal to aluminum, companies are held hostage by networks that rob the government of tax revenues, soak up cash needed for industrial modernization, and fuel organized crime. ''This is one of the maneuvers that totally ruins Russian enterprises,'' says Dmitry Vasiliev, chairman of Russia's Federal Securities Commission, who favors a crackdown on trading companies. Avtovaz will be a crucial test case of the government's resolve. Federal authorities could force Avtovaz into bankruptcy because of its tax debts, but most analysts think the government won't risk closing a company that employs 120,000. ''It would be difficult to liquidate Avtovaz, even if the economic circumstances required it,'' says Thomas Balestrery, an auto-industry specialist and a director at Moscow's First Mercantile Capital Group. The Securities Commission plans to issue new rules on disclosure of trading deals involving corporate managers. But Russian law so far provides no criminal penalties for managers who loot their companies. The saga of Avtovaz' slide begins in 1989, even before the launch of Yeltsin's economic reforms. At that time, Boris A. Berezovsky, a mathematician and management-systems consultant to Avtovaz, began organizing a nationwide car-dealership chain that would later bring him vast wealth. Berezovsky persuaded Avtovaz Chief Executive Vladimir Kadannikov, who was eager for an alternative to the collapsing state-run sales network, to supply him with cars to sell, without up-front payment. That quiet agreement proved disastrous for Avtovaz. As hyperinflation raged in the early 1990s, Berezovsky earned billions of rubles, partly by delaying payments for Avtovaz cars. He has admitted taking advantage of the economic situation but maintains his company did nothing illegal. By the time the government began selling off shares of Avtovaz in 1994, Kadannikov and Berezovsky had become open business partners. They set up a company, called the All-Russian Automobile Alliance, which gradually amassed a stake in Avtovaz now totaling 34%, analysts estimate. Other Avtovaz managers and employees own 35% of the company, and Automotive Finance Corp., an Avtovaz affiliate headed by Kadannikov, holds an estimated 19%. Kadannikov declined to be interviewed for this story. But Berezovsky's dealerships were only the beginning. In the early 1990s, trading companies mushroomed around Avtovaz, taking advantage of its need for parts and its poor distribution network. The companies swapped components for cars--straight from the factory--at prices as much as 30% below market value. Many traders took cars without prepaying, often waiting months before settling. By late 1996, some 300 trading companies were operating with Avtovaz. While they raked in millions of dollars in profits, they owed the carmaker $1.2 billion, about 35% of annual sales, for cars delivered to dealers. Why didn't Avtovaz cut out the traders, or at least require them to pay up front? One reason is that Avtovaz managers profited. Many trading companies were started by managers who teamed up with local businesspeople as partners. Avtovaz' First Vice-President Nikolai Lyachenkov acknowledges that some Avtovaz managers have been involved in trading companies. In 1991, he founded Lada Broker, now one of the biggest such companies. Its billboards dot the highways leading into Tolyatti. Lyachenkov sees nothing wrong with managers pursuing private interests, or with his own role in Lada Broker, although he has sold his stake. ''Many managers are involved in their own businesses,'' he says. Russian law does not prohibit managers from participating in trading companies that do business with their enterprises. Lyachenkov says the Avtovaz board guards against conflicts of interest by requiring managers to get its approval before going into side businesses. As trading companies multiplied, organized crime moved in. Even in Soviet times, local observers say, Tolyatti had been rife with racketeers who demanded ''protection'' money from buyers picking up their cars. After the factory was privatized, criminal gangs began collecting a $100-per-car commission from trading companies--to ensure safe delivery. Thugs muscled their way into the factory, picking cars right off the assembly line. They made sure the trading companies got the colors that retail dealers wanted, and they rounded up spare parts when the factory ran short. ''They were bandits. Nevertheless, they provided a service,'' Moscow independent dealer Yuri Remizov says. STRICTER CONTROLS. Last fall, at Kadannikov's request, federal troops raided the plant to clear the thugs out. Avtovaz managers insist they are trying to rein in trading companies, too. The plan, says Lyachenkov, is to set up an official dealer network owned by the company. Other traders will be allowed to operate as independent dealers only under strict control, Lyachenkov adds. In a normal market economy, Avtovaz would have gone bankrupt or been taken over long ago. Indeed, the government has the right, under a debt-restructuring agreement negotiated last year, to seize 51% of its shares and sell them to an outsider. Although Avtovaz has fallen even further behind on its taxes, the state may be reluctant to do that to Kadannikov, who served as First Deputy Prime Minister in 1996. And it is afraid to stir up workers' outrage. But until Avtovaz cleans up its act, the company is unlikely to get the investment it sorely needs. Its creaky factory, built by Fiat, is nearly 30 years old. Its workers take about 320 hours to build a car, vs. an average of 28 at auto plants in Europe. The company is losing market share to competitors such as Daewoo Corp. and the Czech Republic's Skoda, which are now assembling cars in Russia. Over the years, General Motors Corp. and others have toyed with setting up a joint venture with Avtovaz. But no investor is likely to pour money into Avtovaz until it is shaken up. Unless that happens, the car lots of Tolyatti may one day look look as empty as the government's tax coffers. By Carol Matlack in Tolyatti RELATED ITEMS TABLE: How a Giant Carmaker Stumbled

Updated Aug. 6, 1998 by bwwebmaster
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