Two years ago, Russia was one of the fastest-growing auto markets in the world--but few Western carmakers were willing to risk a partnership there. Then, in 2007, Renault purchased a 25 percent stake in AvtoVaz, whose Lada brand was famous for the wrong reasons: its plants were fitted with Soviet-era production equipment and its 100,000 employees produced just 130,000 cars annually. Now, as Russian car sales tank in the wake of the financial crisis, it looks like Renault's gamble hasn't paid off. Prime Minister Vladimir Putin has warned that Renault's stake could be diluted if it doesn't put in more money--but at the same time he wants to minimize redundancies. The Kremlin has promised $1 billion in subsidies, but without a major management overhaul the company risks becoming a walking corpse. So far, Renault remains committed. "We do not regret the deal for a moment," says the company's Oksana Nazarova.
AvtoVaz is a test case of Putin's willingness to play by international market rules. It's one of the few Russian industries where a foreign investor has taken a major stake in trying to turn it around. The Kremlin now has to choose whether to help Renault bring real change, even if it means sacking half the workforce--or whether to continue throwing money at a decrepit industry in order to keep employment numbers up.