The government recently issued a statement of support for a project for joint production of automobiles between the Yelabuzhsky Factory and the U.S. company General Motors. The project will form a joint venture to produce jeeps and pickup trucks.


This decision is an excellent excuse to take a look at AvtoVAZ, Russia's largest producer of automobiles. AvtoVAZ is not mentioned even once in the government statement, which is exactly why the situation is interesting.


Why is it that the most attractive Russian company outside the energy sector has been unable to find a serious partner after no fewer than four years of searching?


The first foreign firm ready to put money into rebuilding and developing AvtoVAZ was the Italian firm, Fiat. In 1991, the Soviet Automotive and Agricultural Machine-Building Ministry attracted Fiat to AvtoVAZ's still state-owned plant in Tolyatti. But long negotiations on the amount of investment and loans led to nothing.


The second and most serious attempt to attract investment was a deal with GM. By this time, AvtoVAZ had already become a joint-stock company and the conditions for forming a joint venture were far more favorable.


Initial discussions took place in the summer of 1993. GM was extremely serious, bringing in a complete investment strategy and preliminary market research. Several special GM teams came to Russia to study all aspects of the project. Nonetheless, in September 1994, the project was quietly dropped.


AvtoVAZ's third major failure involved the South Korean firm, Daewoo. This company appeared on the scene a couple of months before GM left, in June 1994. Daewoo -- unlike GM -- was willing to invest more than 1 billion rubles ($510,000) in an engine factory, as well as to export the venture's production to third countries.


Nonetheless, even though this arrangement would seem to be extremely advantageous for the Russian side, AvtoVAZ's general director, Vladimir Kadannikov, told the Koreans this spring that the deal was off.


One reason often mentioned is the lack of capital on the Russian side. However, there is another, more intriguing version of Kadannikov's refusal going around. AvtoVAZ decided, they say, that Daewoo just was not the "right" partner.


The reasons behind the collapse of the GM deal were somewhat more complex. But, when asked, most analysts name the arrogance of AvtoVAZ's leadership together with various uncertainties about the market. Also, perhaps even more importantly, the firm's upper managers clearly fear for their positions. After all, a major, long-term investor is not going to put up with managers who senselessly throw away the firm's money. So why should the managers risk their present personal well-being for the sake of some unclear, "strategic" future?


Whatever the reason, this major Russian enterprise now has no potential investors, and there are no signs that any will appear in the near future. Unless this situation changes soon, Russia's largest car manufacturer -- with its aging equipment and outdated models -- will find itself unable to cope with the new competition. And if AvtoVAZ collapses, the whole enormous city of Tolyatti will go with it.





Mikhail Berger is economics editor for Izvestia.