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Will Nissan-Renault rule the Russian auto market by buying majority stake in Avtovaz?

The Renault-Nissan Alliance and state corporation Russian Technologies have announced some interesting news today. Each company has agreed to create a joint venture and give Renault-Nissan an indirect majority stake in AVTOVAZ, the Russian automaker.

The Renault-Nissan Alliance, AVTOVAZ, Russian Technologies and Troika Dialog, a Russian investment firm, signed the non-binding agreement today in Paris, France. According to rules set in the memorandum, Renault-Nissan and Russian Technologies will contribute their respective stakes in AVTOVAZ. The joint venture will control AVTOVAZ, which is Russia’s largest car company and maker of the iconic Lada brand.

Renault-Nissan plans to invest a hefty amount of money, around $750 million dollars into AVTOVAZ. Renault plans to invest about $300 million in the joint venture. Nissan, which does not currently own a stake in AVTOVAZ, will invest about $450 million, sharing the cost. Each company will make recurring payments through 2014.

This should will give the French-Japanese car group 67.13% of the joint venture by mid-2014. The joint venture along with Russian Technologies will hold 74.5% of AVTOVAZ.

“Today’s memorandum is the latest step in an expanding collaboration that helps modernize the leader of Russia’s auto industry,” said Renault-Nissan Alliance Chairman and CEO Carlos Ghosn. “Just as Renault and Nissan will continue their technology transfer to AVTOVAZ plants, our AVTOVAZ colleagues will contribute more and more to the Alliance’s multicultural management bench.”

Renault purchased 25% of AVTOVAZ in 2008 and then helped the Russian automaker with an aggressive turnaround. It seems though that Carlos Ghosn feels he can do even better. It is important to note Ghosn is credited with bringing back Nissan from the brink of financial destruction and making the Japanese automaker profitable.

“We are very pleased to allow AVTOVAZ to further strengthen its ties with the Renault-Nissan Alliance and to welcome Nissan as a new strategic partner in AVTOVAZ,” said Sergey Chemezov, Russian Technologies General Director and Chairman of the Board of AVTOVAZ.

Renault-Nissan will perform financial, legal and environmental due diligence over the coming months to evaluate the deal. This basically means they just want to see if they are getting a good deal.

The parties expect to sign definitive agreements and close the transaction by the end of 2012. This is subject to regulatory approvals though.

The joint venture will acquire Russian investment company Troika Dialog’s entire stake in AVTOVAZ by 2014.

This tentative memorandum comes a month after Russian Prime Minister Vladimir Putin inaugurated a $525 million assembly facility in AVTOVAZ’s Togliatti factory. The Togliatti facility is one of the world's largest auto manufacturing sites in the world. This adds capacity for Togliatti to build an additional 350,000 cars per year. The factory will have the capacity to build almost 1 million cars per year.

Renault, Nissan and Lada are launching a product offensive that will update all core Lada models and will launch new cars across all three brands. This includes five models from the newly inaugurated facility. The three brands operate additional plants in, Moscow, St. Petersburg and Izhevsk.

“The company believes the Renault-Nissan Alliance and Russian Technologies shared vision for AVTOVAZ is a key enabler of our future success,” said AVTOVAZ CEO Igor Komarov.

Russia is the fastest growing economy in Europe and should remain in the forefront for several decades. This is mainly due to the surge in upper- and middle-class consumers. More than 10 million Russian households are earning more than $50,000 a year.

Total industry volume in Russia last year was 2.65 million vehicles, including light commercial vehicles. Volume in 2012 is expected to grow to a respective 2.9 million units.

The Renault-Nissan Alliance sold 878,990 cars in Russia last year, including 578,387 Ladas. With a market share of nearly 33 percent, Russia is the third largest market for Renault-Nissan after China and the United States.

Getting into the Russian automotive market is vitally important for any automaker to stay competitive. This move will only strengthen Renault-Nissan's efforts to expand globally.