Russia, Kazakh, Chinese, Turkish & Middle Eastern Investors Lining Up M&A To Buy Out VW Russia’s Sanctioned Auto Plant
Pan-Eurasian M&A deals unfold as EU auto manufacturers exit Russia and Eurasian investors capitalize the opportunities
Russia’s auto manufacturer AFK Sistema is looking at buying the exited German automaker Volkswagen’s manufacturing facility in Kaluga, with several other parties also potentially involved in the deal. Kazakhstan’s Allur is said to be interested, produces cars and has Chinese shareholders associated with the release of Volkswagen in China.
According to Russia’s Kommersant newspaper, they plan to restart the site, retaining VW models or vehicles close to them. This can be realized by working with VW suppliers from Turkey or Allur’s Chinese partners and represents a new style of M&A cooperation from countries throughout the Eurasian region.
AFK Sistema is currently negotiating the acquisition of the Kaluga plant from Volkswagen, with Allur also in the project. AllurGroup includes the production sites of Agromashholding and SaryarkaAvtoProm, as well as the AllurAuto dealer and distribution network across Kazakhstan and with links throughout Central Asia.
Volkswagen Group Russia said they are constantly monitoring the situation and considering various scenarios. “One of the possible options is the sale of Volkswagen Group Rus assets to a third party. However, no decision has been made on this matter.”
However, Germany’s Frankfurter Allgemeine Zeitung said in October 2022 that VW expects to find buyers for a factory in Russia or China.
The VW plant in Kaluga was launched in 2007 in the SKD mode, and two years later it started operating in its full cycle, with a capacity of 225,000 vehicles per year. In 2021, the site produced 118,000 vehicles, including the VW Tiguan and Polo models as well as the Skoda Rapid. Since March 2022, the site has been idle.
Volkswagen’s third-quarter 2022 reporting indicated their intention to sell certain companies in Russia. VW also has an engine plant in Kaluga.
Allur meanwhile has Chinese shareholders: the main owner (51%) of the group in 2020 was C&J Ned Auto B.V., which is owned by the Chinese China National Machinery Import & Export Company and Anhui Jiangqi Investment Company. The latter owns a legal entity through which the Chinese automaker JAC operates in Russia. Jiangqi Holdings meanwhile is working with VW in China.
Another 27.48% in Allur belongs to its chairman of the board of directors Andrey Lavrentyev, 16.52% to Yuri Tskhai, and 5% to the state Development Bank of Kazakhstan. Allur Group of Companies did not publish financial statements for 2021.
Kommersant says that the potential interaction between the Kazakh and Russian parties in the deal has not yet been determined, as there are several options. This includes continuing the production of existing models, as Volkswagen takes a softer position in its interaction with Russia. Unlike most European automakers, in its reporting it calls the current crisis not a war, but a Russian-Ukrainian conflict and has attempted to remain on good relations with Russia.
AFK Sistema, in turn, plans to create a machine-building holding through the deal. At present, the company does not possess these types of assets, but in the 2000s, Sistema had a joint venture to assemble Volvo trucks in Zelenograd.
Kommersant also spoke about the possible participation in the deal amid interest of players from the Middle East.
Russian automotive analyst Vladimir Bespalov notes that it will be difficult for AFK to restart the plant without an industrial partner and its competencies. He also believes that VW will not transfer the rights to the models or independently provide components to the site. According to him, this this means working through Volkswagen partners in friendly countries component manufacturers from Turkiye and China to minimize sanctions risks.
Volkswagen had tried to restart the Kaluga plant by supplying components from Turkiye instead of Russia. However, this did not happen, with VW’s lawyers nixing the scheme as they feared this would be interpreted as circumventing EU sanctions – which limit the import of components worth more than €300 into Russia.
The situation itself however is an apt illustration of how what appear to be sanctions imposed upon Russia by the EU have instead caused serious damage to a European manufacturer and investor into Russia, in this case, VW. That damage isn’t just the immediate market loss, it extends to the entire development and capital infrastructure VW made, in addition to future market development opportunities to sell onto markets in Central Asia and beyond.
For Russia’s AFK Sistema, the decision by VW to pull out has presented them with the ability to acquire a fully-operational auto manufacturing plant at very little investment cost – an almost opposite result to that intended by Brussels. It has also opened the door for other interested investors – Chinese, Kazakh, Turkish and elsewhere – to get on board the Russian and Central Asian auto manufacturing sector and to develop that into market areas that VW alone may not have been able to accomplish.
Of specific note is that the new Silk Road merchants of 2023 are proving to be Eurasian based M&A lawyers, while Eurasian investment capital is now flowing into opportunities directly created by Western sanctions.
Source: Olga Nikitina, Dmitry Kozlov; Alexander Konstantinov, Kommersant with additional commentary by Chris Devonshire-Ellis.
Structuring M&A deals with Chinese and Russian manufacturers requires a specific understanding and expertise in Chinese and Russian law. For assistance, please contact Dezan Shira & Associates regional M&A team at firstname.lastname@example.org. The firm has over 30 years’ experience in handling foreign investment into these markets.