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New VW CEO Inherits Russian Alliance Clouded by Trump Sanctions

Bloomberg 2018-04-13 18:24:51

Volkswagen AG’s new chief executive officer has a fresh headache to contend with as he settles in to the job.

The German automaker’s ties to GAZ Group, the vehicle maker owned by billionaire Oleg Deripaska, could expose the world’s biggest auto manufacturer to the U.S. crackdown on Russian oligarchs and companies. Diess, speaking Friday as he took over as CEO, implied that Volkwagen still wasn’t clear how its activities in Russia will be affected by the sanctions announced last week.

“Of course we’re concerned,” Diess told reporters at the company’s headquarters in Wolfsburg. “If sanctions were to be imposed we’d of course have to review our business relationship” with GAZ.

The German automaker’s partnership with Deripaska, one of seven wealthy Russians targeted by new U.S. business prohibitions, is a key part of its expansion into Russia, which has including a 300 million euro ($370 million) investment at GAZ’s Gorky plant in Nizhny Novgorod. The site has been assembling Jettas and Skoda Yeti models since 2011, and VW has agreed to start supplying engines to the Russian company’s commercial-vehicle business. Deripaska’s Russian Machines Corp. declined to comment.

Volkswagen last year extended the partnership through 2025 and signed an initial agreement to consider a deeper trucks collaboration. The company has held talks on taking a stake in the Russian counterpart, the country’s largest producer of commercial vehicles. It’s also discussed supplying truck cabins from VW’s Brazilian unit and working together with Gaz on delivery vans.

The new sanctions come at a time of recovering Russian vehicle demand following a dramatic contraction. Under last year’s agreement, VW is due to start supplying some 200,000 engines over five years from 2019 to GAZ for use in light commercial vehicles.

Growth at Risk

U.S. sanctions threaten to upend Russia's recovering car demand

Source: Bloomberg Intelligence


The U.S. intends to to punish Russia for actions in Crimea, Ukraine and Syria, and for attempting to subvert Western democracies. Eight out of 12 companies listed by the U.S. Treasury Department are connected to Deripaska -- an ally of Vladimir Putin -- including his United Co. Rusal and En+Group Plc. The restrictions are designed to make it almost impossible for Deripaska’s empire to do business in U.S. dollars.

The measures prompted a selloff across Russian equities and a plunge in the ruble, while analysts at Citigroup Inc. warned the move sets a new precedent that could ensnare “any Russian company.” VW’s other operations in the country include a vehicle plant and engine manufacturing, while Daimler AG’s Mercedes-Benz luxury-car unit started building a factory last year. BMW AG has said it’s considering a production facility.

— With assistance by Ilya Khrennikov