Mercedes-Benz could lose $3bn in assets to Russian Government

UPDATE, Tuesday March 14: As Russia begins steps to nationalise assets abandoned by foreign-owned companies, Mercedes-Benz has admitted it has around €2 billion (AU$3 billion) at risk of being seized by the state.

In its annual report released on Friday, Mercedes-Benz outlined scenarios born from international financial sanctions which could lead to the forfeiture of assets to Russian banks, but warned ​​"these risks could be exacerbated by the potential expropriation of assets of Russian subsidiaries [by the government]”.

The German luxury carmaker recently spent €250 million (AU$375 million) on a new factory, with Russian President Vladimir Putin attending the ribbon-cutting ceremony in 2019 (pictured above with Dieter Zetsche, then Head of Mercedes-Benz Cars, and Peter Altmaier, German Federal Minister for Economic Affairs and Energy).

Renault Group is doing all it can to avoid losing its assets, being the only global carmaker to not announce an intentional production halt in Russia in response to the country’s actions in Ukraine.

While the company “continues to monitor the situation,” Russia is Renault Group’s second largest market, accounting for 12 per cent of its annual revenue.

Renault Group could end up losing out regardless, with Russia’s ruling party introducing regulations that would seize assets that have a foreign ownership greater than 25 per cent from those originating from “unfriendly states”.

The French company owns around 67 per cent of Avtovaz as of December 2021, with the state-owned Rostec defence company – headed by Sergey Chemezov, a close ally of President Putin – owning the minority share.

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The story to here

March 10: A high-ranking member of Russia’s ruling party has likened the mass exodus of carmakers from the country as a “war” against its citizens, while echoing comments from the First Deputy Prime Minister in proposing the nationalisation of factories abandoned by auto companies.

"United Russia proposes nationalising production plants of the companies that announce their exit and the closure of production in Russia during the special operation in Ukraine," United Russia Secretary Andrey Turchak said in a statement posted to the party’s website this week.

"This is an extreme measure, but we will not tolerate being stabbed in the back, and we will protect our people. This is a real war, not against Russia as a whole, but against our citizens," he said.

"We will take tough retaliatory measures, acting in accordance with the laws of war.”

It’s likely the proposed nationalisation of the manufacturing facilities is being used to financially punish companies who have suspended operations in Russia, given global parts supply issues are forcing production stoppages right across Europe.

Renault Group has yet to make an announcement on the subject, but subsidiary Avtovaz was forced to suspend production at its factory in Russia this week, The Wall Street Journal reports.

Despite sourcing the majority of the components needed to build Lada models from within the country, 20 per cent of the parts required are imported.

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March 9: The Russian Government has outlined a plan in which it would take control of car manufacturing facilities abandoned by foreign companies in recent weeks.

The First Deputy Prime Minister Andrey Belousov told a group of business leaders there were possibilities in which the country could seize assets from organisations which had departed Russia, under the guise of keeping its citizens employed.

“We analysed the statements of the authorities of foreign states and specific companies that, having made huge investments in the localization [sic] of production, do not want to leave the Russian market, but today they are facing unprecedented politically-motivated pressure from their own regulators,” Belousov said during a meeting with the Russian Union of Industrialists and Entrepreneurs and Business Russia.

Belousov, who is considered a potential successor to President Vladimir Putin, appeared to be giving carmakers an ultimatum, with the first option being to continue operations in spite of publicly making a decision to leave the Russian market.

“In the second option,” he said, “foreign shareholders transfer their share under the control of Russian partners and subsequently be able to return to our market. This option was discussed with the Russian business community – it is ready for this. Some investors have already taken advantage of this option.”

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Above: Andrey Belousov (center) at the 'Transport of Russia' forum in November, 2021.

Car companies that decide to pull out from the country entirely, with no possibility of returning, would be regarded as entering a “deliberate bankruptcy”.

“In this option, we will intervene through the accelerated bankruptcy procedure, since the absolute priority for us is the preservation of employment and the social well-being of our citizens, so that conscientious entrepreneurs can ensure the effective functioning of the business.”

If the thinly-veiled punishment was enacted, it could be a significant financial loss for many companies with local operations – particularly Mercedes-Benz, which spent €250 million (AU$375 million) on a new factory in Russia which only opened its doors in 2019.

Toyota, Volkswagen, Nissan, Hyundai, and a handful of other companies with production facilities in Russia could also be facing large financial losses.

If Renault Group was forced by the French Government to suspend its Russian plant, it could effectively hand control of Avtovaz back to minority shareholders in Russia, eliminating 12 per cent of its annual revenue and destroying a US$1 billion (AU$1.36 billion) deal.

The looming threat of losing Avtovaz – makers of the iconic Lada brand – could be the reason for the conspicuous silence from Renault Group management as it attempts to negotiate a quagmire of economic sanctions designed to cut Russia off from the world.

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AvtoVaz plant in Togliatti, Russia.

“Andrey Belousov also noted that the Russian Government has always proceeded from the need for a constructive dialogue with foreign business and mutual fulfilment of the obligations undertaken by the parties,” a statement from the Russian Government read.

“For many years, foreign enterprises and joint ventures have been provided with state support measures based on the fulfilment of obligations to deepen localisation and create new jobs in our country.

“All measures prepared by the Government are aimed at supporting industrial and business activity in the Russian Federation, maintaining employment, as well as the speedy restoration of the activities of all enterprises.”