AvtoVAZ — an Ongoing Problem

Ovanes Oganisian
Analyst
Renaissance Capital

Built in 1970 under Prime Minister Kosygin, AvtoVAZ played a major part in the collapse of the Soviet Union and is still a problem.

In the mid 1960s, the Soviet Union decided its economy needed a reform. Following a heated discussion in the media, in the party Central Committee and in the academy of sciences, the then-prime minister Alexei Kosygin chose the model offered by Kharkov’s economist Yevsei Liberman as the basis for reform. The idea was to change the criteria by which the efficiency of Soviet enterprises was evaluated and to focus on only three criteria: revenue, profit and productivity. The model also introduced a concept of price into Soviet economics. Prior to this, the efficiency of any Soviet enterprise was judged by 23 economic coefficients, the most important of which was physical output. The reform also allowed Soviet directors of enterprises more freedom in investing profits and made higher salaries and bonuses possible.

That reform resulted in huge growth of the economy from 1965 to 1970. GDP was 7.4 per year, the highest rate of growth during the Soviet period. The concept of price introduced unwanted inflation. Moreover, the Soviet Union was lagging behind in producing enough consumer goods and deficit worsened.

In search of ways to offset the rising purchasing power of households and to offset the pressure on prices, the Soviet leadership decided to build consumer-goods giant AvtoVAZ. The most successful Soviet citizens would then be able to buy a car and spend some of their savings. The huge plant would solve the consumer demand problem, producing 700,000 cars per year and sterilizing some 3.5 billion Soviet rubles or $4.5 billion according to the exchange rate of 1970.

In 1967, Kosygin and KGB head Yury Andropov decided to pay Fiat $500 million, a relatively modest sum, so that a plant could be built on the Volga river. For this sum, Fiat did everything from supplying and assembling equipment to educating the Soviet workforce and even designing the Lada logo. In 1970, the AvtoVAZ plant produced its first Lada.

By 1972 the reform started to stall, the previous high rates of economic growth dropped and the reform was pronounced a failure that had introduced unwanted capitalist ideas into Soviet economics, but AvtoVAZ continued producing.

The persistent and pragmatic desire for car ownership eroded the high morals and ideals of the builders of communism. The whole concept of private property had taken off: Soviet citizens aspiring to car ownership went in search of ways of making more money. With a salary of 200 rubles per month, it would take 30 months to save for a Lada. People who wanted quicker results needed other means of making money, leading to soaring corruption and a surge in the shadow economy in the ’70s and ’80s.

This increased corruption further transformed the structure of the Soviet economy from vertical command into a network of horizontal connections. The most connected people were the most successful. Corruption surrounded the Lada, including service and parts. A car mechanic in the Soviet Union was no less important than a federal minister.

Widespread car ownership highlighted the absence of roads in the Soviet Union. Substantial increases in spending were made, but this emphasis on the roads delayed development of a transport means that would be more effective across vast Russian territories.

By 1980, AvtoVAZ had produced 7 million Ladas and their growing number on the roads gave rise to development of the State Traffic Police (GAI). The GAI further institutionalized corruption in Russia and introduced it into every Soviet household. But AvtoVAZ was still unable to produce enough cars to satisfy demand. The deficit of Ladas was huge and since deficit is the same as inflation, when the economy was liberalized in the beginning of 1990, Lada prices soared sending overall prices into the sky.

In its 40 years of existence, AvtoVAZ has shown no ability to produce new models; therefore investing by AvtoVAZ in new models is a waste of money. The AvtoVAZ business model remains very simple. With enough emphasis on controlling costs and keeping the end prices low ($4000), AvtoVAZ would be able to make money producing the same old Ladas regardless of who owns the plant. The emphasis should instead be on how much tax revenue AvtoVAZ can contribute. In fact, if AvtoVAZ abstained from investing, it could become one of the largest tax revenue contributors to the budget.