VW Group’s Russian Assets Frozen in Contract Controversy

Volkswagen Group’s efforts to follow other foreign automakers out of Russia hit a snag after a court froze the German automaker’s assets in the country due to a pending lawsuit filed against it by its former partner, GAZ Group.

The Group’s Russian assets include a plant in Kaluga and a smaller plant in Nizhny Novgorod, where GAZ assembled VW and Skoda vehicles under contract. Production at both factories ended in March 2022, shortly after Russia’s invasion of Ukraine.

VW then began seeking buyers for both plants. In the case of the Nizhny Novgorod plant, union officials told the Reuters news agency VW decided to shed the factory because of a “lack of EU-produced parts, critically important components from Ukraine and lack of domestically made equivalents, disruption of logistics chains and inability to predict the terms and conditions of resumption of work.”

GAZ sued VW on March 16, seeking RR15.6 billion ($220 million) in damages and asking that VW’s early termination of the agreement to assemble cars at Nizhny Novgorod be quashed. A court in that city froze VW’s Russian assets the next day.

Volkswagen Russia_1

VW for months had made no secret of its intention to liquidate its Russian assets and said it was waiting for government permission to sell off its shares in Volkswagen Group Rus, which operates the Kaluga plant and signed the contract-assembly agreement with GAZ.

Russian media reports have indicated GAZ was unhappy with the lack of an option to repurchase Volkswagen Group Rus shares. The reports also have said GAZ may have wanted to acquire the two Russian plants for itself, considering other foreign automakers such as Mercedes-Benz have left the country after selling their assets to local partners for far below their market value.

GAZ is controlled by Oleg Deripaska, a billionaire industrialist targeted by U.S. sanctions before and since the invasion. The sanctions were extended to GAZ in May 2022 and prevented VW from assembling vehicles in Nizhny Novgorod, the Interfax news agency reported.

A spokesman for VW, the biggest German company in Russia and arguably the country’s biggest foreign automaker in the past, told the Russian Vedomosti business paper the automaker was surprised by the GAZ lawsuit and claimed the two sides had ended the partnership on mutually agreed terms in mid-2022.

The VW-GAZ venture was formed in 2012. Production capacity at Nizhny Novgorod (pictured, below) was 132,000 units per year. Annual capacity at VW’s 16-year-old, 4,000-employee Kaluga plant was 225,000 vehicles and 150,000 1.6L engines. Both factories most recently produced VW Polo and Skoda Rapid subcompacts and VW Tiguan CUVs.

As VW told the German Frankfurter Allgemeine Zeitung newspaper, “with each stage of the (Ukrainian) escalation, the possibility of resuming production in Russia in the foreseeable future is decreasing.” The automaker has not indicated whether it will pay the damages sought by GAZ.

VW Nizhny Novgorod-Russia