Russian Car Maker, Known for Cold War Self-Reliance, Idles Factories

The disruption shows how Russia’s economy is beginning to feel the bite of sanctions the West imposed on Moscow after Russian President Vladimir Putin decided to invade Ukraine. Russia’s exclusion from the Swift interbank payments system has made it hard for Russian companies to transact with suppliers. Supply routes, particularly through Ukraine, are shut and the ruble’s devaluation has made paying for parts from outside Russia much more expensive.

Such a stoppage was once unthinkable. During Soviet times, Lada’s parent company AvtoVAZ erected a giant factory on the banks of the Volga River, capable of nurturing a homegrown supply chain.

Today, however, AvtoVAZ is owned by French car maker Renault SA and the Togliatti plant relies on a Renault factory in Romania for subassembly and components. More than 20% of the Avtovaz’s parts—from connectors to key electronics—come from outside Russia, people familiar with the matter said.

“If trade stops, AvtoVAZ stops,” said one former AvtoVAZ board member. “Putin knows that he can’t do it by himself.” It would take months or even years to get production up and running again without the support of Renault, the former board member added.

An AvtoVAZ spokesman said the company planned to idle its plants until at least March 11 due to the global chip shortage that has affected car makers world-wide. He declined to comment on the sanctions.

Workers unwilling to use their vacation days will be paid part of their monthly income while they are on leave, the spokesman said. Employees working in spare parts production and distribution, as well as customer service, will keep a full working schedule during this period. The spokesman added the company was making every effort to resume production as soon as possible at the Togliatti plant and another factory in Izhevsk, 700 miles east of Moscow.

Russia is facing a new vehicle shortage if car makers like AvtoVAZ remain paralyzed. Lada is Russia’s only homegrown brand with significant market share, accounting for 21% of auto sales in Russia last year, and many foreign car makers have suspended production of vehicles at their factories in Russia. The country has around 46 million passenger cars, which are an average of close to 15 years-old, according to Thomas Besson, an analyst at brokerage firm Kepler Cheuvreux.

“They still need to move, whether the country is at war or not,” Mr. Besson said. “That still requires someone to make the cars. AvtoVAZ is one of the companies with the highest degree of local integration.”

Lada and AvtoVAZ are also part of Russia’s national psyche, much like General Motors Co. in the U.S. “For Russia, Lada is a symbol of the rise of the industry,” said Nikita Novikov, an editor of the automotive publication speedme.ru.

AvtoVAZ was founded in 1966 when the Soviet Union built a mammoth factory on the banks of the Volga and renamed the city that mushroomed around it after Palmiro Togliatti, the then leader of Italy’s Communist Party. The plant sprawled over 1,000 acres, more than New York’s Central Park.

In the early years, it sold all of its output domestically. Russians often had to wait years to get a car. The brand became known world-wide for its durability and enjoyed golden years with the iconic Lada Niva, a boxy vehicle that some consider a precursor to the modern SUV.

Lada cars were often unreliable but their simple designs made them easy to fix.

“I drove my own car, fixed it myself, did not take it to a garage. It was cheap in fixing, cheap in driving, simple in upkeep, and comfortable,” said Vadim Ivanov, 57, a street cleaner who lives in the village of Bolshaya Izhora outside St. Petersburg, and who has owned five older generation Lada models.

By the mid-2000s, however, AvtoVAZ was struggling with issues familiar to many of Russia’s big firms: rampant corruption and a lack of productivity and investment. In 2007, Russia put a stake in AvtoVAZ up for sale, which was acquired by the French car maker Renault.

When Renault executives first visited the huge AvtoVAZ plant in Togliatti, they were surprised by what they saw.

“The machinery was like Detroit in the 1920s,” said a former Renault executive who was on the AvtoVAZ board. “Everything was manual. There were no robots.”

The production lines—rather than being arranged in a serpentine pattern like in European and Asian plants—were straight and long, the former executive recalled. “If you stood at one end of the line, you could see the curvature of the earth,” he said.

Renault executives got to work modernizing the plant. For years, the French car maker chartered a jet to transport its employees from Paris to Samara on the banks of the Volga every Monday morning and return them to the French capital on Thursday evenings. Renault employees helped build a new production line and revamped the brand’s product design. They also worked to stamp out graft and improve the supplier base.

“For Putin, it’s also considered a success, and it’s visible to everyone: when people see the cars in the street they can see the change of quality,” said Patrick Pelata, a former chief operating officer at the French car maker. “You still have a lot of old Lada cars, and when they see the new ones people see the change.”

Today, the Togliatti plant employs some 32,500 people. The plant makes a number of Lada models, including the XRAY, the Largus and the Granta. It also makes vehicles for the Renault brand.

Last year, AvtoVAZ sold some 350,000 vehicles, accounting for 12% of the cars sold by the French car maker and making Russia its second-largest market behind France. Renault’s operations in Russia made a net profit of €166 million, equivalent to around $181 million.

For the past two weeks, investors have fretted that Renault would lose its business in Russia, sending the French car maker’s share price down more than 35% since the middle of February.

Adding to the pressure is the fact that Rostec Corp., a Russian state-owned defense and industrial company, owns the 32% in AvtoVAZ that Renault doesn’t own. Rostec’s CEO is a close friend of Vladimir Putin’s and has been sanctioned by both the U.S. and EU since Russia’s seizure of Crimea in 2014.

“We’re worried, obviously,” said one person close to Renault. Losing the Russian business “would be a total catastrophe,” the person said.

Write to Nick Kostov at [email protected] and Evan Gershkovich at [email protected]