Oct. 14 (Bloomberg) -- Renault SA Chief Executive Officer Carlos Ghosn is preparing to commit more time and technology to rescue his $1 billion investment in OAO AvtoVAZ. Analysts say what he may need is more control and a bigger investment.

In almost two years since Ghosn beat rivals to a 25 percent stake in AvtoVAZ, his appointees like Chief Operating Officer Yann Vincent were left out of decisions before their removal, according to people familiar with AvtoVAZ’s strategy. With the collapse in car sales, the investment has lost more than half its value and Prime Minister Vladimir Putin wants Renault to put in more money or see its stake diluted.

“I don’t see how Renault can get assurances that they’re not going to be marginalized again,” said Philippe Houchois, a UBS AG analyst in London who has a “neutral” rating on Renault shares. “They can’t afford to walk away because it would show weakness and send a horrible signal to other potential partners. But it’s hard to go to the board for more cash when they’ve already been squeezed out.”

Now Ghosn is about to let AvtoVAZ, the maker of Lada sedans, produce vehicles based on Renault designs, company and Russian officials said last week. Japanese affiliate Nissan Motor Co.’s models may be next to roll out of AvtoVAZ plants, the Russian company said. Both automakers are looking for a stronger foothold in Russia, which may rival Germany again as Europe’s biggest car market when a recovery takes hold, according to Deutsche Bank AG.

Putin’s Pressure

AvtoVAZ, whose factories dominate the Volga river town of Togliatti, accepted $800 million in emergency loans from the Russian government, slashed salaries and announced plans to eliminate at least 5,000 jobs. Sales of new cars and commercial vehicles in Russia fell 52 percent last month, with Lada reporting a 43 percent decline, according to the Association of European Businesses.

Renault will have to contribute to a capital increase for AvtoVAZ or see its stake diluted as other investors inject fresh funds, Putin said Oct. 2. AvtoVAZ may need to raise at least 70 billion rubles ($2.4 billion), Kommersant reported Oct. 6, citing a management presentation to government officials. AvtoVAZ wouldn’t confirm or deny the report.

Renault and AvtoVAZ will begin joint production of vehicles based on the Boulogne-Billancourt, France-based carmaker’s no- frills Logan sedan in 2012, with Nissan models to follow, AvtoVAZ President Igor Komarov told reporters Oct. 9. Renault- Nissan will provide 75 percent of the investment, he said.

‘More Active Role’

In a statement e-mailed to Bloomberg, an AvtoVAZ spokesman said Komarov and Ghosn agreed Oct. 8 to “expand their collaboration” and give Renault “a more active role” in improving AvtoVAZ’s production lines.

The agreement included the timeframe, production volumes as well as the share of funding for the venture, Komarov said in the statement.

Renault spokeswoman Olga Sergueeva confirmed the plan to produce Logan vehicles for all three carmakers “on the same assembly line.” Nissan spokeswoman Haruko Wada said she’s unaware of any plan to build small cars at AvtoVAZ factories.

Ghosn, who heads both Renault and Nissan, has blamed Russia’s collapsing car sales for the difficulties at AvtoVAZ.

“Nobody foresaw that the Russian market would plunge 55 percent this year,” he said last month when questioned by reporters on Renault’s investment -- whose book value had been slashed to 295 million euros ($438 million) as of March 31, according to the most recent data available.

Market Slump

AvtoVAZ had fallen 64 percent since the partnership agreement with Renault in December 2007. The shares rose 0.4 percent to 15.79 rubles in Moscow.

Renault added 1.07 euros, or 3 percent, to 36.29 euros on the Paris exchange. The stock has gained 96 percent this year.

Ghosn declined to be interviewed for this story, according to his spokeswoman.

While the auto-market slump has cut sales, Ghosn’s difficulties at AvtoVAZ began much earlier.

Renault signed the partnership Dec. 8, 2007, beating out rival suitors General Motors Co. and Fiat SpA by promising the Russian company a degree of autonomy -- with operational decisions overseen by a joint strategic committee. The use of Renault technologies was “at the heart of the project,” Thierry Moulonguet, the French carmaker’s chief financial officer, said at the time.

The strategy soon backfired. Four senior Renault managers sent to run AvtoVAZ met with resistance and were ultimately overruled on plans including a key model design, according to two people with knowledge of that decision.

‘Right Direction’

A year ago, AvtoVAZ chose to develop its own subcompact car for 2012, rejecting Renault’s proposal to reduce risk and costs by basing the vehicle on its own proven Megane model, said the people, who asked not to be identified because the decision was kept confidential and frozen in July.

The Megane’s rejection persuaded Renault’s top management that they needed firmer guarantees on operational cooperation than were afforded by the agreement with AvtoVAZ, one of the people said.

Renault COO Patrick Pelata confirmed the setback last month. Asked about the development decision, Pelata said it was symptomatic of the problems Renault ran into prior to an August management shakeup at AvtoVAZ.

“It’s precisely because they weren’t going in the right direction that there was a management change,” Pelata said in an interview in Frankfurt.

Boris Alyoshin, the AvtoVAZ CEO who had originally opposed a deal with Renault, lost his job in the reshuffle, after the carmaker received bailout loans from Moscow and began cutting jobs and wages.

Board Representation

His exit came weeks after the departure of COO Vincent and that of cost-control chief Alain Carrere, both Renault appointees. Three Renault executives remain in second-tier management jobs at AvtoVAZ.

“The first thing they’d need to do is put senior people back on the ground so at least they know what’s going on,” UBS’s Houchois said.

Renault has three AvtoVAZ board seats, occupied by Ghosn, Pelata and Senior Vice President Christian Esteve. Esteve is heading negotiations on the recovery plan and capital increase with the other two main shareholders, Moscow-based brokerage Troika Dialog and state-owned Russian Technologies Corp. Each of the three holds a 25 percent stake, the minimum needed to block decisions under Russian law.

AvtoVAZ is holding talks on 165 million euros in outstanding license fees it had originally agreed to pay in 2007 for the use of Renault’s Logan car design, production chief Igor Dubrovin said Oct. 9. A waiver is one of the options being considered, he said.

‘Cash Risk’

Renault is seeking to reduce debt to about 4 billion euros from about 7.3 billion euros. As of June 30, the company had 3.4 billion euros in cash and a further 4.2 billion euros in available credit lines.

“We see AvtoVAZ as a material near-term cash risk to Renault,” London-based Credit Suisse analyst David Arnold wrote in an Oct. 7 report, reiterating the bank’s “underweight” rating on the French carmaker’s shares.

To contact the reporters on this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Anastasia Ustinova in Togliatti, Russia at Or austinova@bloomberg.net

Last Updated: October 14, 2009 13:14 EDT