JSC AVTOVAZ annual report 2001

© JSC AVTOVAZ, Directorate of Corporate GovernanceIn charge of production: Dmitri Bourgomistrenko

"Studio KIT Design"

Printed in the Printing House, Information Systems Directorate, JSC AVTOVAZLicence to carry out printing activity: ПЛР № 040266 dated 29 December 1994

… r e v i v a lJSC AVTOVAZ ANNUAL REPORT 2001

…increasing production

of more modern and attractive

vehicles is one of the key

elements of our strategy

to retain and strengthen

the position of JSC AVTOVAZ

in the Russian automobile market

Indicators 2001 2000 Change

Vehicle unit sales 000’s units 000’s units %

Domestic market 689 600 14.8Export market 85 106 (20.3)Total 774 706 9.6

RR million RR million %

Net sales 112,843 98,841 14.2Operating income 7,166 164 4,369.5

JSC AVTOVAZ Operating Highlights for 2001

Year ended 31 December

At 31 December

Consolidated Statement of Operations RR million RR million %

Net sales 112,843 98,841 14.2Cost of sales (91,549) (82,695) 10.7Gross profit 21,294 16,146 31.9Interest expenses (3,158) (3,776) (16.4)Other expense, net (4,309) (9,101) (52.7)Net income for the year 13,827 3,269 423.0

Consolidated Balance Sheet RR million RR million %

Cash and cash equivalents 3,969 3,294 20.5Other current assets 26,593 26,784 (0.7)Non�current assets 85,743 88,144 (2.7)Total liabilities 50,145 72,080 (30.4)Minority interest 10,671 7,672 39.1Total shareholders’ equity 55,489 38,470 44.2

Financial information extracted from JSC AVTOVAZ’s Consolidated IAS Financial Statements

From the speech of V.V. Kadannikov, Chairman of the Board of Directors of JSC AVTOVAZ,

at the Annual General Meeting

Address of the Chairman of the Board of Directors

Page 10Message of the President –

General Director

Page 16Mission and

strategic tasks

Financial report

Page 18AVTOVAZ – a leading

Russian machine �building company

Page 20Five�year

financial review of JSC AVTOVAZ

2Finance raising

strategy

Page 34Management's discussion

and analysis of financial condition and results

of operations

Businessreview of 2001

Page 46Main events of the year

Page 48AVTOVAZ's position

in the automobile market

Page 54Research and technology

Page 64Production and dispatch

of finished goods

Page 70Sourcing of supplies

Page 74Quality control

Page 78Social and personnel policy

The Company'smanagement

Page 85Share capital

Page 86Transactions with shares

Shareholdings

Page 87Management

system reform

Page 88Board of Directors

Page 90Board of Management

Page 92Management structure

Page 94Corporate philosophy

Consolidated financial statements

Page 96Auditors' report

on IAS consolidated financial statements

of JSC AVTOVAZ

Page 97IAS consolidated financial

statements of JSC AVTOVAZ

1966

… a road

of 35

years

2001

Financial reportPage 18 Page 20 Page 32 Page 34

Page 6

Address of theChairman of the

Board of Directors

AVTOVAZ �a leading Russianmachine�building

company

Five�year financialreview

of JSC AVTOVAZ

Finance raising

strategy

Management's discussion

and analysis offinancial condition and

results of operations

Page 10

Message of thePresident �

General Director

Page 16

Mission and strategic tasks


7 JSC AVTOVAZ ANNUAL REPORT 2001

Cumulative change in GDP per capita

Increase in sales price vs GDP, %

1997

Cumulative change in sales price

1998 1999 2000 2001

400

300

200

100

0

It is well known that the automotive industry contributes significantly tothe economic development of major industrialised countries. A strongautomotive industry can be a driving force for technological and scien�tific advancement.

The automotive industry is one of the key industries in Russia. Theindustry’s output in 2001 was approximately RR 200 billion, represent�ing 8.7% of Russian production output. The sector’s contribution tothe federal budget was approximately 4.5% of its overall revenues.

An overview of the industry suggests that despite lagging technology,Russian vehicle producers are equipped to be successful in this mar�ket. To date, the main competitive advantage of Russian vehicle pro�ducers has been their ability to produce vehicles at relatively lowprices.

The average price of Russian�made passenger vehicles is approxi�mately US$ 5,000 – US$ 6,000, significantly less than their competi�tors.

However, this "price / quality" ratio allows Russian vehicles to be com�petitive only in Russia, CIS and a number of developing countries.Approximately 10% of Russian�made vehicles are exported, of which90% are represented by AVTOVAZ production.

V.V. KadannikovChairman of the Board of Directors of JSC AVTOVAZ

ADDRESS OF THE CHAIRMAN OF THE BOARD OF DIRECTORS

A nation�wide task has been set – create a modern

automotive industry in Russia. AVTOVAZ will do whatever

is required to achieve this task. I am confident that the

development of this industry will contribute significantly

to the revival of the economy in general.

… steady progress

In recognition of the above issues, the Government decided toincrease its cooperation with all Russian manufacturers, and withAVTOVAZ in particular.

In 2001 the Government made a number of important decisions thatwe believe will influence significantly the Russian automotive industry,including:

The Government of the Russian Federation adopted a plan for the development of the Russian automotive industry until the year 2017. AVTOVAZ contributed to this plan by developing its own strategy for the period to 2007;

In the past year, positive new tax legislation came into effect. The major changes were:

1. The reduction in the profits tax rate from 35% to 24%, effective from 1 January 2002;

2. The reduction in the personal income tax rate to 13%, effective from 1 January 2001;

3. The abolition of some turnover taxes.

The Government has emphasised its support to small businessesthrough simplified taxation, simplified registration procedures andreduction of various inspections by state authorities; and

Decision to enter the World Trade Organisation (WTO) in the nearfuture.

In addition, we have seen the steady growth of GDP and correspond�ingly the disposable incomes of the population. Industry experts pre�dict that demand in the Russian market for new vehicles will reach twomillion vehicles by 2010.

As their purchasing power increases, consumers will look to buy vehicles that are of higher quality, that are safer and that are more comfortable.

We have to move quickly to grasp the opportunities that open up to usas a result of these changes.

The strategy of JSC AVTOVAZ should continue to be focused on retain�ing and consolidating its position primarily in the domestic market.This should be achieved by pursuing the following goals:

Accelerating the rate of improvement in the quality of our own manufactured products – beginning with the Kalina family;

Creating joint ventures with strategic partners, building on the experience of cooperation with our partner General Motors Corporation (GM);

Continually improving the quality of bought�in components;


8


JSC AVTOVAZ ANNUAL REPORT 2001

There is much to be done. We have to find new sources of finance todevelop newer, higher quality vehicles. We have to continue to reducethe production of outdated models at our main production facilities.We are looking at a number of possible investment raising scenarios:loan finance, strategic partnerships and equity finance.

We need to secure our reputation not just as a manufacturer of reliablevehicles, but also as a financially sound business partner.

Our aim is to demonstrate that we are financially reliable by managingour business profitably, by paying our suppliers on time, paying inter�est and principal on our loans when they fall due, paying dividends reg�ularly to our shareholders, and providing transparent financial informa�tion about our company to all those that are entitled to receive it.

Given the economic and other difficulties AVTOVAZ have faced in therecent past, this task is a challenging one, and cannot be achievedovernight. However, we are clear that our long�term success as acompany depends upon our achieving financial reliability as much asengineering reliability.

I said in last year’s annual report that 2001 could be the beginning of anew period of prosperity for AVTOVAZ.

Increasing the quality and accessibility of the service network; and

Modernising our management structure in line with world best practice.

Part of Russia’s declared strategy to integrate into the global economyis its planned accession to the World Trade Organisation (WTO). It is inthe long�term interest of Russia to play an equal role in internationalcommerce and international commerce is, to a large extent, governedby the rules of this organisation.

As a result, AVTOVAZ is likely to be required to:

Produce vehicles that comply with Euro�2 in 2003�2004,Euro�3 in 2005�2007 and Euro�4 in 2008�2010;

Reduce fuel consumption of these vehicles during this period; and

Improve safety features of vehicles by prioritising these at the design stage.

To achieve these goals we need to continue to improve our financialperformance.



V. V. Kadannikov

2000 2001

100,000

105,000

Net sales, RR million

115,000

110,000

95,000

90,000

2000 2001

Net income, RR million

14,000

12,000

10,000

8,000

0

2,000

4,000

6,000

I am pleased to say that this is indeed

what we have seen. We have achieved

all our targets. In 2001 we produced

the highest number of vehicles ever

and generated our highest profit for the

past five years.

10 11 JSC AVTOVAZ ANNUAL REPORT 2001

A.V. NikolaevPresident � General Director

M E S S A G E O F T H E P R E S I D E N T � G E N E R A L D I R E C T O R

AVTOVAZ has a steep hill toclimb, but we now have themomentum. Our future is firmly in our hands and it is up to us whether we succeed.

… our futurestarts today


The past year was successful for AVTOVAZ both in terms of volume ofproduction and financial performance. This is a consequence of thedevotion with which the whole AVTOVAZ team worked towards improv�ing AVTOVAZ’s financial condition and overall efficiency of operations.I am proud of our people and their efforts to ensure that our businessimproves year on year.

In the past year we produced 768 thousand vehicles, about 116 thou�sand automotive kits and 105 thousand engines. Gross profit on salesof goods and services was 19%, a 3% increase on 2000.

These results were achieved thanks to active implementation of ourstrategy.

A great deal has been done over the past few years:

We have succeeded in restructuring significant liabilities to thestate and major lenders; as a consequence a controlling block of shares of JSC AVTOVAZ was released from mortgage in December 2001;

JSC AVTOVAZ has made all tax and other mandatory payments on time and in full;

We have completed the first stage in modernising the way wemanage our business. Business units, which do not have a statusof a separate legal entity, have been established. This has led to the adoption of a two�tier management system of a corporatecentre and business units;

As a result of improvements in the distribution system, JSC AVTOVAZ has accelerated collections from customers bylocating its products closer to them. Production to order has reached 90% of production volume. To accelerate our cashflow, we will soon move to requiring prepayments for all vehicles shipped to domestic consumers. In addition, to comply with strict foreign currency regulations, AVTOVAZ has significantly reduced the time taken to repatriate hard currency earnings;

Our product range continues to evolve towards higher�margin and more attractive vehicles. In 2001 we reached full production capacity of the VAZ�2110 range and produced over 45 thousand vehicles of the VAZ�2115 model;

Our co�ordinated work with suppliers in 2001 successfully reversed a long trend � where the increase in prices and tariffs of production inputs exceeded the increase in vehicle sales prices. By supporting the development of the Russian automotive components industry we have managed to reduce the cost of imported components to US$ 120 per vehicle. Yet at the same time we have increased the output of modern models;

Bad debts have been written off; and

Barter transactions have been largely eliminated.

As a result, JSC AVTOVAZ’s net income is RR 13,827 million (2000: RR3,269 million). In addition, the statutory financial results of the parentcompany made it possible this year to declare a preference dividend of RR 47.58 per share.

However, in a customer�driven business such as the automotive busi�ness there is nothing more dangerous than to concentrate on internalprocesses and lose touch with your customers.

Five years from now Russia, our key market, will most likely enter theWorld Trade Organisation. Many barriers to our competitors will beremoved.

The resulting shock to the manufacturing sector in particular, if we arenot well prepared by then, could well be comparable to that whichaccompanied the fall of the iron curtain.

Our future therefore starts today.

There are challenges and opportunities in this.

B - 19% SUV - 11%C - 39% MPV - 2%D - 12 % A - 7%E - 10%

Forecast of the composition of the Russian automobile market until 2015 by class of vehicle, %

Message of the President – General Director

JSC AVTOVAZ ANNUAL REPORT 2001 13 JSC AVTOVAZ ANNUAL REPORT 2001

The challenge is that we will have to measure up to an increased levelof competition. We are likely to have the benefit of five years of partialprotection behind relatively higher import tariffs to ensure we do.

We, therefore, have to think hard about the fundamentals of our business:

Quality;

Our customers;

Our people; and

Products and capacity.

Our share of the domestic market in five years time and beyond willdepend upon how much progress we make with production quality.

When Russia enters the WTO our market will inevitably see a substantial increase in imported vehicles, both second hand and new.

In addition, the global producers are well aware that this market is oneof the few remaining where private ownership of vehicles is still low.They will aim to establish their own automotive production and assembly operations in Russia to be closer to their customers. For us,aggressive pricing will not be enough. This must be matched by highquality.

Personal incomes will grow as Russia’s economic recovery continues.As a result, we will be faced with wealthier Russian customers who lookfor vehicles that live up to expectations of better quality and safety,with a competitive price and low maintenance. As Russians grow torealise that "Time is money" they will have less and less appetite formaintaining their vehicles in their spare time.

We need to find ways to achieve quality improvements both within ourfactory and at our suppliers’ premises.

During 2001 the majority of the parent company’s production divisionswere certified for compliance with ISO 9002.

In addition, UTAC have satisfactorily completed their review of JSCAVTOVAZ.

2000 2001

Warranty costs for one defective vehicle (domestic sales), RR

2,800

2,700

2,600

2,500

2,400

2,300

12

We have continued to assess the quality of our suppliers. In last year’sannual report we said that the number of high�quality suppliers hadincreased compared to 1999. During 2001, this category hasincreased by another 12%. This year also saw an increase in the num�ber of suppliers whose production was certified for compliance withISO 9002.

Increasing the efficiency of the supply network will help us reduce stor�age costs and eliminate bottlenecks in production.

We understand the problems that our suppliers face. Their lack ofmodern technology and weak financial position impede improvementsin quality.

We forecast that the components supply business will continue on itspath of grouping into industrial associations, resulting in a joint bodythat represents the interests of the industry. This should help to over�come many administrative issues and cultural differences whenRussian component manufacturers enter serious negotiations withpotential western strategic partners in the future.

We believe the industry has good prospects for establishing mutuallyprofitable joint ventures with foreign component producers.

Message of the President – General DirectorMessage of the President – General Director





We also see opportunities to increase our revenues by providing betterafter�sale services. These opportunities should not be wasted.

We are already studying options for consumer finance. When foreigncompetitors do come in force to the Russian market, they will bring notonly their design skills and manufacturing expertise but also theirfinancial know how and strength, and offer their customers opportunities to finance the purchase of their vehicles. If we cannotmatch these financial services, we stand to lose a sizeable part of ourcustomer base.

Our people are, as ever, indispensable to the success of this business,contributing their talents and also their perseverance. The young people who came here in the 1960s and 1970s built the factory fromscratch. They have built the city we all live in.

My words will never be enough to praise these people adequately for this achievement, both at the parent companyand subsidiaries.

In return JSC AVTOVAZ continues to pay great attention to the socialneeds of our people. We have continued and will continue to providefinancial support to the social infrastructure (kindergartens, schools,polytechnics, colleges and universities).

We understand that AVTOVAZ has an inescapable responsibility for thewelfare of our people and their families.

Finally a few words about our products, and the new vehicles we haveto offer to our customers. One of them, the new Niva, will be launchedby the joint venture with GM in September 2002.

Our next promising product is the Kalina range. We are already makingsignificant equipment acquisitions and preparing for production launchin late 2004.

A. V. Nikolaev

2000 2001

Production of LADA vehicles by destination market, thousands of units

0

100

200

300

400

500

600

700

800

900Domestic market

Export market

This project requires significant investments that AVTOVAZ on its owncannot shoulder. We are actively encouraging proposals from potentialstrategic partners for this project and are also discussing variousoptions for raising debt finance.

Almost uniquely in the modern automotive world, AVTOVAZ is con�strained by a lack of production capacity. Demand is set to increasefar beyond what we can currently produce and we are currently manufacturing in excess of our planned capacity.

One solution that we are actively pursuing is to outsource the produc�tion of older models to production sites in Russia, Ukraine and a number of foreign countries.

Customer relations are key tomaintaining our market position.Customers want quality not onlyin our products but also in ouroverall approach to dealing withthem,particularly, in after�sales services,warranty and post�warranty services.

We plan to increase our production

capacity, particularly of more modern

vehicles, thereby enriching our model mix

and securing our strong competitive position

in the Russian automobile market.

2000 2001

4,000

5,000

Vehicles sold on credit by official dealers, units

7,000

6,000

3,000

2,000

1,000

0

2000 2001

1,000

1,500

Social expenditure, RR million

2,500

2,000

500

0

2000 2001

Production capacity utilisation, %

0

10

20

30

40

50

60

70

80

90

100

110

Strategic tasks

Establish within JSC AVTOVAZ a Corporate Centre that will develop a uniform strategy and provide strategic management.

Establish an efficient system for the management of JSC AVTOVAZ'sproperty by establishing business units.

Ensure that changing consumer preferences are addressed in a timelymanner in the development of new models, and reduce the time requiredto replace and modernise the model range.

Actively seek opportunities to form strategic alliances with largeinvestors in a variety of areas of our activity.

Rigorously pursue improvements in the quality of our products toimprove our competitive position.

Ensure that our products comply with the latest requirements of environ�mental safety.

Improve the financial condition of JSC AVTOVAZ and reduce costs whilemaintaining full employment.

Restructure our dealership network to be able to fully meet expectationsof our customers.

Revive our export market.

Our mission is

to consolidate AVTOVAZ’s

position as market leader

in the Russian automotive

industry for the long term,

providing quality vehicles to

Russian people at prices

they can afford

... our target isrevival

Financial report


JSC AVTOVAZ is the largest automotive producer in Russia and CentralEurope.

In 2001 the Company’s output of vehicles increased by 8.1% on 2000.Net sales in value terms were up 14.2%. This increase in sales valuesis partially due to an increase in the percentage of the higher marginVAZ�2110 range in total sales.

JSC AVTOVAZ owns shares in 243 entities where the Company exercises corporate management and control.

In 2001 JSC AVTOVAZ paid a total of RR 30.4 billion to various Russiangovernment budgets and funds, an increase of 25% compared with2000. This increase was the result of an 8.1 % increase in productionvolumes, an increase in production of more modern, higher marginmodels, and also due to general price inflation.

In 2001 AVTOVAZ paid RR 7.9 billion in current taxes to the federalbudget. Of this amount RR 433.2 million was paid in accordance withrestructuring agreements.

Payments to the region’s budget totalled RR 2.3 billion of which RR220.1 million was related to the restructured liability. In 2001 JSCAVTOVAZ paid to the city’s budget RR 1.4 billion in current taxes.

Personal income tax paid last year was equal to RR 1.1 billion.

In the past year AVTOVAZ transferred to non�budget funds RR 3.2billion. The largest recipient of these funds is the State pension fund to which JSC AVTOVAZ paid RR 2.4 billion, of which RR 107.2 millionwas paid as part of restructuring.

The remaining amount of taxes of approximately RR 14.5 billion relatesto purchases and expenses.

In 2001 AVTOVAZ completely and in a timely manner fulfilled its currentobligations to other regional budgets and customs authorities.

JSC AVTOVAZ is the major enterprise for Togliatti and its 750,000 population. About 650 suppliers provide JSC AVTOVAZ with compo�nents and materials. Many of these suppliers are also major employers in their communities.

As a result of JSC AVTOVAZ’s focus on the development of industry inthe region the number of AVTOVAZ’s suppliers in the Samara Regionincreased from 140 in 2000 to 200 in year 2001, and purchases fromthese suppliers amounted to RR 20 billion. Companies from theSamara Region currently supply over 40% of components and materials to the AVTOVAZ assembly lines.

.…rev iva l

AVTOVAZ –a leading Russian machine�

building company

JSC AVTOVAZ’s turnover

was equal to 1.08%

of Russia’s gross domestic

product in 2001,

while its tax and other

budget payments comprised

1.9% of the total

Russian budget

…rev iva l… re v i va l

…rev iva l

Financial report


This financial review is intended to give an insight into AVTOVAZ’sfinancial performance over the last five years.

During the past five years the Russian economy has experienced highrates of inflation. Cumulative inflation since 1 January 1997 hasreached nearly 400%, although the rate has reduced steadily over thisperiod.

Russian accounting standards require JSC AVTOVAZ to prepare annualfinancial statements in historical roubles with no adjustment for inflation.

Consequently, the statutory financial statements prepared annually byJSC AVTOVAZ in accordance with Russian legislation do not lend themselves to comparison from year to year in any meaningful way, or allow the reader to form any clear idea of trends in the business.

Recognising this fact, AVTOVAZ has in the recent past, including thelast five years, prepared additionally consolidated financial statementsin accordance with International Accounting Standards (IAS).

These IAS consolidated financial statements have been adjusted forthe effects of inflation, and therefore enable the results of operationsfrom year to year to be presented on a comparable basis, and revealmore clearly the underlying trends in the business.

The following analysis has been drawn from the consolidated IASfinancial statements.

All figures are expressed in terms of the measuring unit current at 31December 2001.

The IAS financial statements for the past five years have been restatedusing conversion factors derived from the Russian FederationConsumer Price Index published by the Russian State Committee onStatistics as follows:

Five�yearfinancial review of

JSC AVTOVAZ

Over the last five years

AVTOVAZ has continued to be

the leading vehicle producer

in the Russian Federation.

AVTOVAZ has demonstrated

improved growth in revenues

and profitability


1996 1997 1998 1999 2000 2001

4.9 3.6 2.0 1.4 1.2 1.0

Over the past five years,

AVTOVAZ has recorded healthy gross

profit margins � 16% on average.

Financial report


Financial report


Consolidated IAS Balance Sheets at 31 December (In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001)

2001 2000 1999 1998 1997 1996

ASSETSCurrent assets:Cash and cash equivalents 3,969 3,294 3,820 4,348 2,697 3,798Trade receivables, net 7,919 8,156 9,017 13,484 14,882 16,249Prepaid expenses, advances and otherreceivables 5,939 6,069 5,612 5,817 9,084 12,524Inventories 12,735 12,559 12,568 14,173 17,338 16,708

Total current assets 30,562 30,078 31,017 37,822 44,001 49,279

Property, plant and equipment 84,655 86,488 88,041 88,532 98,642 102,850Investments available for sale 308 1,336 1,655 1,395 503 413Investments in associates 372 � � � � �Deferred tax assets 44 � � � 3,461 �Other assets 364 320 428 161 377 282

Total long�term assets 85,743 88,144 90,124 90,088 102,983 103,545

Total assets 116,305 118,222 121,141 127,910 146,984 152,824

LIABILITIES & SHAREHOLDERS' EQUITYCurrent liabilities:Trade payables current 14,444 16,148 13,592 12,544 18,340 13,269Other payables and accrued expenses 6,995 6,302 9,615 9,646 9,656 28,886Taxes payable�current 5,368 9,493 9,666 18,087 44,048 44,009Warranties and other provisions 1,002 898 1,511 3,043 3,074 3,745Short�term debt 4,297 4,864 5,481 6,051 2,565 14,864Advances from customers 3,674 4,176 2,144 3,474 256 926

Total current liabilities 35,780 41,881 42,009 52,845 77,939 105,699

Long�term debt 2,860 7,134 16,182 20,294 13,432 2,554Long�term taxes payable 4,763 10,553 14,180 10,171 6,112 �Deferred tax liability 6,742 12,512 6,334 3,619 � 1,367

Total long�term liabilities 14,365 30,199 36,696 34,084 19,544 3,921

Total liabilities 50,145 72,080 78,705 86,929 97,483 109,620

Minority interest 10,671 7,672 7,376 7,200 6,703 7,193

Shareholders' equity:Share capital 26,227 26,243 26,306 25,958 14,285 14,306Currency translation adjustment 835 714 965 1,001 343 348Retained earnings 28,427 11,513 7,789 6,822 28,170 21,357

Total shareholders' equity 55,489 38,470 35,060 33,781 42,798 36,011

Total liabilities and shareholders' equity 116,305 118,222 121,141 127,910 146,984 152,824

Consolidated IAS Statements of Operations for the years ended 31 December(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001)

Consolidated IAS Statements of Changes in Shareholders' Equity for the five year period ended 31 December 2001(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001)

Share Treasury Currency Retained Total capital shares translation earnings shareholders’

adjustment equity

Balances as of 1 January 1997 30,717 (16,411) 348 21,357 36,011Effect of adopting IAS 39, net of income tax (Note 25A) � � � 2,804 2,804Sale of treasury shares (ordinary) � 809 � (66) 743Purchase of treasury shares (preference) � (576) � 573 (3)Currency translation adjustment � � 487 � 487Profit for the period � � � 15,447 15,447Capitalisation of reserves** 25,095 (13,407) � (11,688) �

Balances as of 31 December 2001 55,812 (29,585) 835 28,427 55,489

** During 1998 JSC AVTOVAZ increased the par value of its shares from RR 1 to RR 500. This was transacted through a transfer from the statutory revaluation reserve.

1997�2001* 2001 2000 1999 1998 1997

Net sales 500,454 112,843 98,841 90,027 89,840 108,903Cost of sales (420,605) (91,549) (82,695) (74,761) (82,633) (88,967)

Gross profit 79,849 21,294 16,146 15,266 7,207 19,936

Selling, general and administrative expenses (60,497) (8,790) (12,633) (8,943) (13,555) (16,576)Provision for impairment of property, plant andequipment to estimated recoverable value (9,323) � � � (4,600) (4,723)Research and development expenses (8,840) (2,496) (1,375) (1,500) (1,657) (1,812)Other operating expenses (16,559) (2,842) (1,974) (4,789) (4,028) (2,926)

Operating income (loss) (15,370) 7,166 164 34 (16,633) (6,101)

Interest expense (43,651) (3,158) (3,776) (10,355) (8,459) (17,903)Foreign exchange (loss) gain (24,299) (72) (358) (6,246) (18,037) 414Monetary gain 72,873 5,578 7,455 15,202 37,295 7,343Gains on extinguishment and forgivenessof tax debts and other borrowings 56,422 8,501 11,335 7,324 7,453 21,809Financial instruments recognition effect, net 200 200 � � � �

Profit (loss) before taxation 46,175 18,215 14,820 5,959 1,619 5,562

Current income tax expense (19,398) (5,998) (4,686) (1,772) (3,734) (3,208)Deferred income tax (expense) benefit (6,798) 4,336 (6,177) (2,713) (7,080) 4,836

Net profit (loss) 19,979 16,553 3,957 1,474 (9,195) 7,190

Minority interest (4,532) (2,726) (688) (263) (496) (359)

Net income (loss) attributable to shareholders of JSC AVTOVAZ 15,447 13,827 3,269 1,211 (9,691) 6,831

* � here and below this column represents cumulative numbers for the period from 1997 to 2001 inclusive.

Change in production mix, units

1997

SAMARA

NIVA

2110 family

Old models

1998 1999 2000 2001

800,000

600,000

700,000

500,000

300,000

200,000

400,000

100,000

Financial report


Financial report


Production mix

AVTOVAZ recognises the need to improve quality of its vehicles inanticipation of the Russian Federation’s entering into the WorldTrade Organisation and the consequent increase in competitionfrom western automotive companies. AVTOVAZ is continuouslyworking on quality and consumer features of its products.

During the period under review AVTOVAZ has changed its product mix.Specifically, it has removed the majority of its older rear�wheel drivemodels from the main production lines. AVTOVAZ launched the 2110family in 1997 and reached full production capacity for this range in2001. Additionally, as part of the SAMARA�2 (2115) project, AVTOVAZhas upgraded its 2109 family.

Further, in order to meet the strict requirements of European qualityand toxic emissions standards (ISO 9000 and Euro 3), AVTOVAZ hasbeen both upgrading its own production equipment and ensuring thatpurchased components are produced in compliance with these stan�dards.

121,849 vehicles were fitted with catalytic converters in 2001. AVTO�VAZ is planning to equip 75% of vehicles with catalytic converters in2003 and 100 % in 2004.

Capacity utilisation

The Company has managed to maintain consistently high levels ofcapacity utilisation over the past five years despite numerous macro�economic shocks, most notably the devaluation of the rouble in 1998.

Maintaining high utilisation enables the Company to maximiseeconomies of scale, and keep its vehicles affordable.

In line with overall economic growth in Russia, in 2001 a record level of production was achieved when some 768 thousand vehicles wereassembled. This is in excess of the theoretical capacity of AVTOVAZ of 730 thousand vehicles.

Consolidated IAS Statements of Cash Flows for the years ended 31 December (In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001)

Capacity utilisation,%

1997 1998 1999 2000 2001

0

10

20

30

40

50

60

70

80

90

100

110

1997�2001* 2001 2000 1999 1998 1997

Cash flows from operating activities:

Operating cash flows before working capital changes 76,028 15,503 9,749 10,669 27,241 12,866

Cash provided from operations 58,666 12,832 8,041 9,993 18,313 9,487

Income taxes paid (19,054) (3,771) (618) (1,229) (10,401) (3,035)Interest paid (8,100) (1,358) (1 629) (2,857) (939) (1,317)

Net cash provided from operating activities 31,512 7,703 5,794 5,907 6,973 5,135

Cash flows from investing activities:

Net cash used in investing activities: (25,243) (5,815) (5,474) (5,673) (3,498) (4,783)

Cash flows from financing activities:

Net cash (used in) provided from financing activities (2,784) (1,040) (600) (359) 462 (1,247)

Effect of inflation on cash (6,810) (267) (358) (1,282) (4,611) (292)Effect of exchange rate changes 3,496 94 112 879 2,325 86

Net (decrease) increase in cash and cash equivalents 171 675 (526) (528) 1,651 (1,101)

Cash and cash equivalents at the beginning of the period 3,798 3,294 3,820 4,348 2,697 3,798

Cash and cash equivalents at the end of the period (Note 6) 3,969 3,969 3,294 3,820 4,348 2,697

During the past five years AVTOVAZ has generated substantial operating net cash flow from operations of RR 31,512 million. AVTOVAZhas also reduced its obligations to the tax authorities and to suppliers by a total of RR 37,466 million. This, together with restructuring oftax and debt obligations, has enabled AVTOVAZ to reduce its net current liability position. As at 31 December 2001 AVTOVAZ’s net current liabilities were RR 5,218 million.

Due to its inability to raise significant external finance AVTOVAZ had to utilise the majority of these net operating cash flows to invest intoproperty, plant and equipment. During this five year period AVTOVAZ had net investment of RR 25,243 million.

Analysis of performance, RR billions

1997

Gross profit

Operating income (loss)

1998 1999 2000 2001

25

20

10

15

5

0

(10)

(5)

(15)

(20)

Increase in sales price vs inflation and GDP, %

1997

Cumulative change in sales price

Cumulative inflation

Cumulative change in GDP per capita

1998 1999 2000 2001

400

300

200

100

0

Financial report


Financial report


Sales price

In the past five years AVTOVAZ has managed to keep the rise in itsvehicle prices pegged in line with inflation despite the constantincrease in modern front wheel drive models in AVTOVAZ’s sales mix.

In summary AVTOVAZ now produces better value�added vehicles thanit has ever done.

From 1997 to 2000, AVTOVAZ absorbed some of the impact ofinflation as its vehicle prices lagged behind the rate of inflation.

This was good for our customers but reduced the amount of cashwe were able to reinvest into growing the business.

During 2001 AVTOVAZ benefited from the general increase in people’spurchasing power and for the first time in recent years sales price out�paced inflation.

Operating performance

Over the past five years, AVTOVAZ has recorded healthy gross profitmargins � 16% on average. As can be seen from the chart opposite,gross margins were adversely affected by the 1998 crisis, when vehicleprices were not increased despite inflationary pressures (as discussedabove).

Not until 2001 was AVTOVAZ able to restore the gross profit margin topre�crisis levels.

The devaluation of the Russian rouble in 1998, however, greatly bene�fited export sales.

AVTOVAZ was not able to take full advantage of this recovery in 1999as AVTOVAZ had deliberately reduced export sales during the years leading up to 1998. This was a consequence of the rouble being overvalued on foreign exchange markets as a result of the "roublecorridor", which had made export sales unprofitable.

It took AVTOVAZ one year to build up sales in new markets, primarilyCIS countries. During the last two years AVTOVAZ exported over 191thousand vehicles.

The Company’s management have focused their efforts suc�cessfully over the past five years on ensuring a high gross profitfrom vehicle production.

During 1997�1998 a significant gross profit from main activity of RR27,143 million was entirely consumed and turned into significant operating losses as a result of events that were not fully under thecontrol of management.

The major factors leading to the operating losses of these two years are summarized as below:

Significant social costs reflect AVTOVAZ’s responsibility to the town and the region where AVTOVAZ’sproduction facilities are located. Even during the crisis AVTOVAZ did not lay off staff. Financial support to the social infrastructure will be continued in the future – management consider their duty to the families of their workers, their town and their region as one of their prime responsibilities;

Significant research and development costs. Much of this expenditure was devoted to bringing the new 2110 range to production. A further portion was devoted to developing the new Niva. This has laid the foundation for the creation of ZAO GM�AVTOVAZ;

During the period AVTOVAZ wrote off RR 3,738 million relating to bad debts, the majority of which related to goods that were despatched prior to this five�year period. In the past five years AVTOVAZ has established stricter controls over collections and has reduced the incidence of new bad debts to a negligible level;

The major portion of claims and similar charges is represented by claims for late repatriation of foreign currency earnings. However, AVTOVAZ is actively defending its position in court in relation to this matter; and

The 1998 impairment provision arose as a result of the August crisis after which the estimated discounted cash flows from future operations were lower than the related assets’ carrying value.However, no additional provision was considered necessary in subsequent years due to improved cashflows.

Management recognises the constant need to reduce costs to be competitive on the market and, apart from the measures discussed above, has taken the following steps:

In 1999 AVTOVAZ took the decision to eliminate barter transactions completely – suppliers had inflated prices under barter arrangements to compensate for the delay in receiving cash settlement;

During 1999 and 2000 AVTOVAZ replaced the majority of foreign suppliers with Russian ones. The share of cost of imported components at AVTOVAZ has decreased from 20�25% to 3�5%;

The purchasing system was re�organised. AVTOVAZ monitored purchase costs more closely and negotiated better quality and prices for materials and components;

AVTOVAZ transferred production of some components to third�party suppliers. This was done primarily to free up premises for installation of new equipment and production of components for new models. This policy has also resulted in a decrease in storage costs and an improvement in inventory turnover;

Non-operating income / (expenses), RR million

1997

Financial instruments recognition effectGain on tax and debt forgivenessMonetary gainFX gain/(loss)Interest

1998 1999 2000 2001

50,000

40,000

20,000

30,000

10,000

0

(20,000)

(10,000)

(30,000)

(40,000)

Financial report


Financial report


The level of production overheads has steadily decreased to approximately RR 10,000 in 2001 as a result of optimisation of production processes and better allocation of resources.

However, this significant decrease in production overheads has been offset by an increase in variable costs (components and materials) that have been growing often in excess of the rate of inflation. As a result overall gross profit has not changed significantly; and

Since the 1998 crisis AVTOVAZ has continuously increased its output, resulting in a reducing allocation of fixed costs per vehicle.

As a result of the above management actions AVTOVAZ was at breakeven at an operational level in 1999�2000 and achieved substantialoperating income of RR 7,166 million in 2001.

Non�operating performance

During 1995�1998 due to high inflation, the strict "rouble exchangecorridor", excessive tax burden and the necessity to launch the 2110family, AVTOVAZ was not able to stay current with its tax andborrowings obligations.

As a result significant tax penalties, fines and punitive loan interestwere accrued.

However, starting from the end of 1997 AVTOVAZ management wassuccessful in applying favourable changes in tax legislation and obtain�ing forgiveness and restructuring of tax liabilities from the Russian gov�ernment.

Furthermore, during 1998�2001 over US$ 504 million of debt liabilitieswere repaid or restructured over a period of 18�30 years.

These deferrals of tax and debt payments resulted in realeconomic benefits to AVTOVAZ as reflected in the graph opposite.

This reduction of currency denominated debt liability had some addi�tional positive effects, such as a significant reduction in interestexpense and foreign exchange losses.

The effect of the decline in the purchasing power of the rouble createsa monetary gain or loss. By holding net monetary liabilities (mainlyamounts owed to suppliers and the government) AVTOVAZ gains purchasing power. Due to continuous reduction in AVTOVAZ’s net monetary liability position and the reduction in the rate of inflation, the monetary gain also fell steadily over the period under review.

60,000

80,000

Tax burden vs sales, RR million

120,000

100,000

40,000

0

20,000

1997 1998 1999 2000 2001

Sales

Tax burden (excluding tax forgiveness)

Working capital, RR million

1997 1998 1999 2000 2001

0

(5,000)

(15,000)

(10,000)

(20,000)

(25,000)

(35,000)

(30,000)

(40,000)

Taxation

Taxation represents a major expense for AVTOVAZ.

Large tax payments are a significant use of AVTOVAZ’s funds andan obstacle to AVTOVAZ accumulating sufficient funds neededfor investment in the development and launch of new models.Moreover, no deductions are available in relation to a significantportion of expenses on new models that were already incurredby AVTOVAZ.

The chart shows a decrease in the effective tax burden over the past fiveyears: from 26% in 1997 to 11% in 2001. This is in large part due tofavourable changes in tax legislation starting from 1999.

However, the tax burden is still significant, and consists of road user tax,social taxes, property tax, income tax, and fines and interest.

AVTOVAZ submitted to the Government of the Russian Federation aprogramme of long�term development and improvement in investmentattractiveness. This proposed programme included the abolition of therequirement to register with the Russian Federal Property Fund (RFPF) theissuance of 50% plus one share as collateral under the Agreement onrestructuring of the Company’s debts to the Federal Budget.

In accordance with Resolution of the Government No. 927 of 29 December2001, the terms of restructuring of AVTOVAZ’s liability to the FederalBudget were revised.

In future, the restructuring agreement will not require AVTOVAZto issue additional shares.

AVTOVAZ is in full compliance with the terms of restructuring of thefederal, regional and local tax debts at 31 December 2001.

Liquidity

Over the past five years AVTOVAZ has experienced chronic difficultieswith liquidity. The graph opposite shows that AVTOVAZ's working capital is not yet sufficient to maintain operations of AVTOVAZ let alone provide the necessary finance for the development of new models.

By reorganising our sales network we have significantly improved collections from customers. This was achieved by locating sales units closer to our markets.

31 JSC AVTOVAZ ANNUAL REPORT 200130 JSC AVTOVAZ ANNUAL REPORT 2001

AVTOVAZ has improved its net current liability position over theperiod by:

Continued strong gross margins on vehicle sales;

Reduction in operating costs;

Restructuring of certain current (and long�term) obligations;

Improvements in cash collections through the restructuring of the sales and distribution system; and

Reduction in the required collection of foreign receivables, partly due to the strict requirements of hard currency legislation.

As the graph opposite demonstrates, this has resulted in a reduction ofdebtors’ days from 50 in 1997 to 26 in 2001. The majority of domesticsales in 2001 were made on a prepayment basis. However, thesemeasures were not sufficient to finance current operations of AVTO�VAZ. As a result, AVTOVAZ had to delay payment to suppliers in orderto obtain additional financing. The gap between supplier terms anddebtors’ terms shown above has been the primary source of financefor AVTOVAZ over the past five years. However, this was only to theshort�term benefit of AVTOVAZ. Suppliers in response have increasedtheir prices to compensate for late payment.

Management have recognised these problems and, in addition tothose already discussed, developed a number of initiatives to addressthem:

AVTOVAZ is improving relations with suppliers by reducing delays in settlements;

In the past years, AVTOVAZ has been actively negotiating the restructuring of its tax debts and loans. This enabled us to postpone settlement of these liabilities to future periods. This in turn reduced the fair value of these debts and the outflow of cash to service these debts;

AVTOVAZ has vigorously defended itself in courts against tax claims, and has a high rate of cases won (currently in excess of 70%); and

The Joint Venture Agreement with GM and the EBRD and animproved reputation have enabled AVTOVAZ to discuss potential long�term financing with lenders.

Net Book Value, RR millions Buildings Plant and Other Assets under Totalequipment construction

Balance at 31 December 1996 38,930 21,620 4,260 38,040 102,850

Additions / Transfers in 12,564 39,366 1,921 28,997 82,848Disposals / Transfers out (6,948) (3,492) (2,138) (53,949) (66,527)Depreciation expense (7,905) (16,152) (1,133) � (25,190)Provision for impairment of fixed assets (2,965) � (981) (5,380) (9,326)


Investing in the future

Management understand the fundamental need to make investments to remain competitive.

Even in light of the deficit of working capital discussed above, significant investments in R&D of RR8,840 million and new equipment of RR 28,899 million (as shown in the table below) were madeover the past five years.

The bulk of investments were targeted at launching the VAZ�2110 range in 1997. Since the launch AVTOVAZhave produced over 579 thousand vehicles of this range, which includes a sedan, a station wagon and ahatchback.

The next investment project was a new four�wheel drive sports utility vehicle, Chevrolet�Niva (Project VAZ�2123 in JSC AVTOVAZ). This model will be produced by ZAO GM�AVTOVAZ with the participation of GM andthe European Bank for Reconstruction and Development. The creation of ZAO GM�AVTOVAZ represents thebiggest inward investment project to date in the Russian manufacturing industry.

The project will involve the construction of new production capacity in Togliatti to assemble a five�door version of the VAZ off�road vehicle starting in late 2002. The new plant is expected to reach full capacitywithin two or three years after the start of production in 2002 and will produce 75 thousand vehicles a year.

A significant portion of the new four�wheel drive sports utility vehicles will be exported to Europe and LatinAmerica.

At present AVTOVAZ has a medium�term goal of the mass�production of the VAZ�1119 Kalina range, to bestarted at the end of 2004. A new conveyor with a high level of automation will be built.

Significant investments have been already made in this model. However, the above project requires furthersubstantial investment.

While the majority of the above finance will be generated internally, AVTOVAZ’s management are currentlyconsidering options to raise the additional finance required.

Management are confident these measures will assist JSC AVTOVAZ to meet the anticipatedincreasing demand for vehicles on the Russian market and thereby retain its leadership role inthe national automotive industry.

Creditors days vs debtors days

1997

Creditors days at 31.12.

Debtors days at 31.12.

1998 1999 2000 2001

100

90

70

80

60

50

30

20

10

40

0

Financial reportFinancial report


…rev iva l…rev iva l… re v i va l

F inancera i s i n g s t ra t e g y

We have developed an investment

programme that will be the foundation

of stable growth of financial

performance of JSC AVTOVAZ

and strengthening our position

in the Russian automotive market

Investment programme

We have developed an investment programme for the period between 2001 and 2015 based on the need toachieve the following objectives:

Launch competitive models of vehicles that meet international and Russian environmental and safety requirements as well as market expectations of diversity, quality, price and cost of maintenance;

Improve profitability of production of vehicles and components;

Create a favourable environment to attract Russian and foreign investors;

Upgrade the efficiency of production facilities;

Establish production of modern components and materials; and

Improve the environmental safety of production equipment.

Overall requirement of investment capital

Our Investment Programme envisages annual capital investment of approximately RR 7 billion until 2015.

This level of investment is based on a range of specific investment projects to be implemented by the Company.

Sources of finance

The required finance will be cash generated by the Company, approximately 80%, and the remaining 20% will beexternal financing including municipal and regional investment tax credit.

In order to generate the funds necessary to support this ambitious investment programme AVTOVAZ is pursuing arange of initiatives, including:

Reduce manufacturing costs and reduce non�sale, commercial and management expenses;

Introduce improved budgeting at the level of business units in order to strengthen control over financial performance;

Reduce inventory levels and tighten standard rates of utilisation of materials;

Optimise the management of working capital;

Improve control over the financial performance of subsidiaries and associates;

Increase production and sales volumes;

Make the best of tax concessions available; and

Utilise debt market instruments and derivatives.

Financial report


Financial report


The following management’s discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the IAS consolidatedfinancial statements presented on pages 97 to 120of this annual report.

Overview

During 2001 management has made significant improvements toAVTOVAZ’s financial position through the following initiatives:

The majority of tax and debt obligations have been restructured;

A new family of higher margin automobiles has been introduced;

The sales and distribution system has been reorganised resulting in the reduction of the incidence of bad debts;

Cash flows have been accelerated by the introduction of full prepayment for all domestic sales;

The creation of a strategic partnership with GM and the European Bank for Reconstruction and Development («EBRD») for the development of the Niva 2123 model; production to commence in September 2002;

Successful negotiation with the government, resulting in the abolition of a restrictive mortgage on JSC AVTOVAZ’s share capital, thus enabling JSC AVTOVAZ to consider raising finance; and

Continued focus on cost reduction, leading to improvements in gross margin.

Total revenue from vehicle sales in 2001 was RR 93,232 million.

Management ’sdiscussion and analysisof financial condition and

results of operations

Thanks to steady operations

of the main production plant and implementation

of the management’s strategy aimed at development

and strengthening the financial position,

the year 2001 was the most

successful year for AVTOVAZ

in recent times

Financial report


Financial report


Results of operations and effect on the financial position of JSC AVTOVAZ

For 2001, AVTOVAZ’s consolidated net income amounted to RR 13,827 million (RR 3,269 million in 2000).

The main factors that contributed to the growth of net income were:

A 10% increase of sales volume over that of 2000;

Reaching maximum output of higher margin vehicles of the VAZ 2110 family;

Realisation of significant gains on further restructuring and forgiveness of tax liabilities and the restructuring of other long�term debt, as discussed further in "Gains on extinguishment and forgiveness of tax debts and other liabilities";

A substantial monetary gain through inflation accounting; and

A reduced income tax expense as a result of the application of deferred tax.

Strong cash flow from operating activities have improved the financial position of AVTOVAZ

The strong operating performance in 2001 generated operating cash flow before working capital changes of RR 15,503 million (2000: RR 9,749 million). This increase in operating cash flow before working capitalchanges was used to repay a major portion of current obligations. This together with the success of restructuring and forgiveness of obligations AVTOVAZ reduced its working capital deficit by RR 6,585 million during 2001.

Net cash provided from operations of RR 7,703 million (2000: RR 5,794 million) was invested primarily intothe renewal of property, plant and equipment.

Furthermore, the continued restructuring of debt and tax obligations has resulted in the reduction in the IAScarrying value of tax and debt obligations. Additionally, the term structure of the repayment of the nominalliabilities has been changed in favour of AVTOVAZ.

Management is currently discussing the raising of new finance to allow AVTOVAZ to introduce its new generation of models on a timely basis.

The Government of the Russian Federation agreed to abolish the restrictive mortgage on the JSC AVTOVAZ’s shares. This factor potentially assists AVTOVAZ in any future financing.

2001 2000

Vehicles sold domestically, thousand units 689 600Vehicles sold to foreign markets, thousand units 85 106

Total vehicles sold, thousand units (manufactured by JSC AVTOVAZ) 774 706

Revenue from domestic vehicle sales, RR million 75,061 62,388Revenue from foreign vehicle sales, RR million 7,334 11,095Revenue from sales of other manufacturers’ vehicles by subsidiaries of JSC AVTOVAZ, RR million 10,837 9,743

Total revenue from vehicle sales, RR million 93,232 83,226

Revenue from sales of spare parts and assembly kits, RR million 15,971 11,998

Other revenue, RR million 3,640 3,617

Increase in sales volume

The demand of vehicles within the Russian Federation remains strong.AVTOVAZ has in terms of units 48.6% of this market.

The major competitor to AVTOVAZ in the Russian market continues tobe second hand imports. In response to this, one of the strategies thatmanagement is employing to maintain and enhance its position withinthe Russian market is to increase production of newer, more attractivemodels. The success of this strategy can be measured by the increasein sales volumes of 10%.

As a continuing element of its strategy to produce new and higher�margin vehicles, AVTOVAZ has continued to remove production of oldermodels from the main assembly lines, as a result of which a greaternumber of automotive assembly kits were sold.

The continued stability of the Russian rouble has enabled AVTOVAZ toexport competitively. However, the continued strong demand for vehi�cles in the Russian Federation resulted in a decline in 2001 of exportsas a percentage of total sales (2001: 11%, 2000: 15%).

Foreign markets are an important source of hard currency and it isnecessary to understand developments in the international automotive markets.

Financial report


Financial report


Other operating expenses

The major change in operating expenses in 2001 as compared to 2000was a charge of RR 876 million, related to adjusting the investment inthe associate ZAO GM�AVTOVAZ to fair value, as measured throughdiscounted cash flows based on existing business plans. This adjustment is required by IAS 39.

AVTOVAZ continues to upgrade its production facilities resulting incharges for the disposal of fixed assets.

Other operating expenses in 2001 include an expense of RR 144 mil�lion for customs claims in respect of the non�timely repatriation ofexport revenues. Russian currency regulations stipulated that pro�ceeds from the export of goods must be repatriated to the RussianFederation within 90 days of the despatch of goods.

AVTOVAZ’s licence allowing an extension of this requirement expired in1999. Funds from export sales were often received after more than 90days. AVTOVAZ have made compliance with this legislation a top priority and have strengthened procedures to ensure that funds arerepatriated on a timely basis and are in compliance with this legislation.Furthermore this 90�day limit was relaxed in August 2001 to threeyears.

Operating income

The increase in gross profit and reduction in the tax burden haveresulted in a healthy operating income of RR 7,166 million (2000: RR164 million).

Interest expenses

Interest expenses in 2001 have decreased by 16% from 2000, a reduc�tion of RR 618 million. This has primarily been due to the reduction inUS dollar denominated debt following AVTOVAZ’s further restructuringagreements in 2001. The restructuring of US dollar denominated debtis further discussed in the "Gains on extinguishment and forgivenessof tax debts and other liabilities" section below.

Additionally, tax interest charged by the tax authorities has decreasedalso as a result of AVTOVAZ’s improvement in the timely payment oftaxes.

Gross profit

For 2001, AVTOVAZ’s gross profit amounted to RR 21,294 million. Margins increased from 16% to 19% as aresult of AVTOVAZ’s increased production on a fixed cost basis and the ability of AVTOVAZ to raise its salesprices higher than the prices of input components and materials.

Sales of the higher margin 2110 family have increased to 230 thousand (2000: 162 thousand), representing30% of the volume of total vehicle sales (2000: 23%).

Selling, general and administrative expenses

Selling, general and administrative expenses of AVTOVAZ have decreased during 2001, a reduction of 30% ascompared to 2000. The following major factors contributed to the decrease in these expenses:

Road user tax rate has decreased from 2.5% of sales to 1%, resulting in a reduction in expenses of RR 1,353 million;

Housing tax was eliminated in 2001, saving RR 1,021 million; and

Previously written off or provided for bad debts have been recovered in the amount of RR 183 million, as compared to a charge of RR 567 million in 2000. This represents a net change of RR 750 million.

Research and development expenses

Continued development of the Kalina project caused a significant increase in research and develop�ment expenses during 2001. In accordance with IAS these expenses were charged to the consolidatedstatement of operations.

41 JSC AVTOVAZ ANNUAL REPORT 200140 JSC AVTOVAZ ANNUAL REPORT 2001

Foreign exchange differences

The restructuring of US dollar denominated debt for Russian roubledebt has reduced AVTOVAZ’s exposure to devaluations of the Russianrouble against the US dollar. Additionally, the relative stability of theRussian rouble against the US dollar has reduced this expense.

Inflation and Monetary gain

In an inflationary environment the general purchasing power of moneydeclines as the general level of prices of goods and services rises.

The effect of the decline in the purchasing power will create a mone�tary gain or loss. In a period of inflation, an enterprise holding netmonetary assets loses purchasing power, and an enterprise holdingnet monetary liabilities gains purchasing power.

International Accounting Standards require that the financial statements of an enterprise that reports in the currency of a hyperinfla�tionary economy be stated in terms of the measuring unit current atthe balance sheet date.

AVTOVAZ’s monetary gain as reported in the IAS consolidatedaccounts decreased from RR 7,455 million in 2000 to RR 5,578 millionin 2001 due to the steady reduction of AVTOVAZ’s net monetary liabilityposition.

The Russian economy continues to strengthen. The inflation rate in theRussian Federation has started to decrease gradually over the past twoyears (2001: 18.82%, 2000: 20.13%) and is anticipated to continue todecrease during 2002. The Russian Federation still exhibits a numberof characteristics of an inflationary environment.

It is expected that inflation accounting will continue to be applied dur�ing 2002. However, it is envisaged that inflation accounting is likely notto be applied during 2003.

This matter, together with AVTOVAZ’s gradual reduction of its net monetary liability position is likely to result in a reduction in the monetary gain in 2002 and an elimination of this gain in 2003.

Gains on extinguishment and forgiveness of tax debts and other liabilities

Restructuring and forgiveness of taxes

In the years subsequent to privatisation, AVTOVAZ’s main task was to be in a position to compete with for�eign manufacturers that were increasingly showing interest in the Russian marketplace. To achieve this, significant financing was required to maintain its research and development expenditures or capital investments to modernise production processes and produce new models.

Significant expenditures were made as part of the development of the Chevrolet�Niva model (to be pro�duced by the associate ZAO GM�AVTOVAZ) and the bringing to production of the 2110 family. However,AVTOVAZ was not able both to maintain these levels of expenditure and remain current with its payments totax authorities.

Prior to 1998 AVTOVAZ had a significant overdue balance in relation to unpaid taxes. Interest was chargedand accrued by AVTOVAZ on these unpaid taxes, at an average rate of 70% per annum.

In order to compensate Russian companies for these excessive interest rates, the Government forgave80% of interest accumulated on unpaid tax liabilities for all Russian companies. This amounted toa RR 11,882 million reduction of tax liabilities in 1997 and 1998.

Management initiated negotiations with the Russian government to restructure its remaining tax liabilities to be made over the subsequent 10 to 15 years at zero or preferential interest rates. Management’s suc�cessful efforts resulted in the restructuring of taxes with various tax authorities during 1997�2001.

Financial reportFinancial report

Financial report


Financial report


Restructured taxes with a nominal value of RR 11,571 million werediscounted using rates as at the adoption of IAS 39 (1 January2001) or as at the date of restructuring if this occurred after 1 January 2001. As at 31 December 2001 the carrying value of long�term taxes payable is RR 4,763 million (2000: RR 10,553million). Discount rates of 26% to 30% were used.

Upon adoption of IAS 39 the difference of RR 2,648 million betweenthe 2000 carrying value and the reassessed IAS 39 value wasrecorded in the consolidated statement of changes in shareholders’equity.

During 2001 previously restructured tax debt and previously non�restructured tax debt were restructured. The difference between thepresent value of these restructured tax obligations and the carryingamount was recorded as a gain in the consolidated statement ofoperations. This gain amounted to RR 4,125 million.

Tax interest in accordance with the Tax Code cannot be in excess ofthe principal debt. As the result of the enactment of this provision,and other agreements with the tax authorities, interest of RR 2,976million and RR 4,379 million was forgiven in 2001 and 2000, respec�tively.

Other debt

AVTOVAZ had loans of approximately US$ 630 million for past invest�ments made by the Russian government that it inherited upon privatisa�tion. Although the US dollar interest rate ranged from 3.8% to 8.6%,the severe devaluation of the Rouble following the 1998 crisis causedAVTOVAZ to suffer significant exchange losses. Recognising the needto reduce AVTOVAZ's foreign currency exposure, management over thepast three years has extinguished US$ 504 million (2001: US$ 126 mil�lion, 2000: US$ 260 million, 1999: US$ 118 million) of current and long�term debt through consideration of RR 4,347 million of cash, RR 1,276million of non�interest bearing Rouble denominated bills of exchangepayable within one year and RR 11,132 million of non�interest bearingRouble denominated bills of exchange payable between 18 and 20years.

AVTOVAZ has discounted these non�interest bearing Rouble denomi�nated bills of exchange using rates as at the adoption of IAS 39(1 January 2001) or as at the date of restructuring if this occurred after1 January 2001. As at 31 December 2001 the nominal value of thesediscounted non�interest bearing Rouble denominated bills of exchangeis RR 9,129 million (2000: RR 7,648 million), and is reflected at a carry�ing value of RR 132 million (2000: RR 619 million) within long�termdebt. Discount rates of 22.5% to 24.5% were used.

Upon adoption of IAS 39 the difference of RR 431 million between the 2000 carrying value and thereassessed IAS 39 value was recorded in the consolidated statement of changes in shareholders’ equity.

A gain of RR 1,400 million resulting from the 2001 restructuring has been recognised in the consolidatedstatement of operations as an extinguishment of debt.

Taxation

Current taxation

AVTOVAZ accrued RR 5,998 million of profit tax in 2001 (2000: RR 4,686 million). Included within the 2000tax expense is an expense of RR 2,733 million in relation to various claims raised by the tax authorities.Management is still vigorously defending itself against these claims.

Deferred taxation

The basis of deferred tax is explained in Note 4J to the IAS consolidated financial statements.

AVTOVAZ has a net deferred tax liability of RR 6,742 million at 31 December 2001 and a net deferred taxasset of RR 44 million. The deferred tax liability has arisen primarily because the carrying value of property,plant and equipment exceeds the tax base of these assets and as a result of fair value adjustments of debtas discussed in "Gains on extinguishment and forgiveness of tax debts and other liabilities."

The reduction in the deferred tax charge in 2001, a credit of RR 4,336 million, resulted from a significantrevaluation of property, plant and equipment (RR 2,781 million) and the reduction in the enacted tax ratefrom 35% to 24% (RR 3,070 million).

Bus iness rev iew o f 2 0 0 1

Page 64 Page 70 Page 74 Page 78

Page 46

Main events of the year

Production and dispatch

of finished goods

Sourcing of supplies

Qualitycontrol

Social and personnel policy

Page 54

Research and technology

Page 48

AVTOVAZ's position in the automobile

market

Main

events

of the year

JanuaryThe Pilot Production Division assembled the firstvehicle of the VAZ�2123 model. The development of this first pilot batch took twoyears.

FebruaryAVTOVAZ shipped first automotive assembly kits forthe VAZ�21043, VAZ�2107 and VAZ�2106 models toLutsk and Kherson in Ukraine.

MarchAVTOVAZ assembled the one and a half millionthvehicle of the Niva model. This model has been inproduction for 24 years and has enjoyed substantialdemand both in Russia and overseas.

April The ‘Slavyanskoye Koltso’ (Slavic Ring) race of7,500 km was completed.

May

AVTOVAZ signed an agreement for the establish�ment of a VAZ�2107 assembly operation in Egypt.

JuneJSC AVTOVAZ produced its twenty millionth vehicle,a VAZ�2111.

JulyJSC AVTOVAZ, General Motors Corporation and the

European Bank for Reconstruction andDevelopment signed an agreement to establish anassembly plant in Togliatti. This plant is expected toassemble up to 75 thousand units of the Chevrolet�Niva vehicle.

AugustThe Final Assembly Division of JSC AVTOVAZ beganto install a welding line for the Chevrolet�Niva vehicle. SeptemberJSC AVTOVAZ completed construction of a ring

high�speed testing road. This new road is consid�ered to be one of the best in Europe. JSC AVTOVAZ produced a record of 71,770 vehiclesfor the month – the highest ever for one month.

OctoberAVTOVAZ’s main production lines began producingthe VAZ�2114 model, a restyled version of the VAZ�21093 model.

November The Large Press Shop division obtained a qualitycompliance certificate from UTAC, an international

quality�certifying organisation. As a result, all majorproduction divisions of JSC AVTOVAZ were certifiedfor compliance with international quality standards.

DecemberJSC AVTOVAZ stopped the assembly of the VAZ�2106 model on the main assembly line. A total of4,175,000 of these vehicles were produced during25 years. Production of this vehicle will be continued by Izhmash�Avto in Udmurtia under alicence from AVTOVAZ.

Potential owners of the VAZ-2110 range vehicles by income level, %

Potential owners of the VAZ-2110 range vehicles by professional status,%

Highly skilled professional- 16 %Senior executive - 8 %Middle level executive - 20 %White collar worker - 27 %Skilled worker - 26 %Other - 3 %

Affluent - 4 %Upper middle- 30 %Lower middle - 59 %Low income - 7 %

Business review of 2001



AVTOVAZ’sposition in the automobile market

Due to continued efforts to streamline

the sales and distribution network and establishfurther regional sales

centres, the Company succeeded in overcoming

seasonal fluctuations of demand, and eliminated

discounts in selling prices and unplanned

reductions in retail prices

JSC AVTOVAZ performed comprehensive research of the Russian auto�motive market in 2001 to identify potential customers.

This research shows that the main customer is the Russian middle classirrespective of these people’s positions in their businesses.

This is especially demonstrated by research for the VAZ�2110 family.

Vehicle sales in Russia by price segment in 2000, US$ thousand

Vehicle sales in Russia by price segment in 2001, US$ thousand

Below 3 - 29 %3 to 5 - 34 %5 to10 - 34 %10 to 15 - 1 %15 to 20 - 1 %Over 25 - 1 %20-25 close to 0 %

Below 3 - 10 %3 to 5 - 47 %5 to 10 - 37 %10 to 15 - 2%15 to 20 - 1 %20 to 25 - 1 %Over 25 - 2 %

This research of the Russian market also provides clear proof that themajority of Russian consumers tend to buy a vehicle priced under US$5 thousand. More than 94% of the total market constitutes vehiclespriced under US$ 10 thousand. Analysts forecast that this pattern ofvehicle purchasing will continue until 2015.

Passenger vehicle unit sales in Russia in 2000, %*

Passenger vehicle unit sales in Russia in 2001, %*

AVTOVAZ - 54.8%Second hand imports - 14.2%GAZ - 10.5%Brand new imports - 6.5 % SeAZ - 4.0%UAZ - 3.6%Roslada - 2.9%Izhmash-Avto - 2.5%Moskvich - 0.5%Other - 0.5%

AVTOVAZ - 48.6%Second hand imports - 26.6%Brand new imports - 6.5% GAZ - 5.8%SeAZ - 3.6%Izhmash-Avto - 3.2%Roslada - 2.8%UAZ- 2.5%Moskvich - 0.1%Other - 0.3%





In 2001 the leaders in Russia were:

Class C (includes all LADA vehicles, except for the VAZ�2121 Niva model and foreign�made vehicles), at 71% of the market;Class E (Volga, foreign vehicles), at 9%; andClass SUV (Niva, UAZ, foreign vehicles), over 11%.

1,433,234 vehicles (except for Russian�made second hand vehicles)were sold in the domestic market in 2001, up 29.8% from 2000.

Brand new vehicles made in Russia account for 66.8% of total vehiclesales. Sales of second hand foreign vehicles have grown sharply (by87.3%) while sales of brand new foreign vehicles have not increased.

Despite the reduction in the market share of JSC AVTOVAZ (54.8% in2000 to 48.6% in 2001), we have sold an all�time record of 774 thousand vehicles.

In addition to vehicles, in 2001 we produced 115,540 assembly kits(2000: 53,866 kits), including those to be shipped to AO Izhmash�Avtoand AO Roslada.

Vehicle sales in Russia by class in 2000, %

D - Close to 0%

A - 9 %B - Close to1 %MPV - Close to 0%

Rouble value of new AVTOVAZ vehicles as a percentage of passenger vehicles sold in Russia, %*

New vehicle sales by registered dealers of foreign makers by class in Russia, %

JSC AVTOVAZ - 37.9 %Second hand imports - 34.1 %Brand new imports - 15.4 % Other Russian makes - 12.6 %

C - 31.5 %D - 25.4 %SUV - 14.0 %B - 12.8 %E - 9.9 %MPV- 2.6 %F - 2.0 %LCA - 1.4 %A - 0.4 %

Vehicle sales in Russia by class in 2001, %

71

96

B - Close to 1%MPV - Close to 0%

The major reasons for the increased actual demand for domestic passenger vehicles in Russia include:

Low price of domestically produced vehicles in comparison with similar western vehicles;Relatively low cost of technical service and repair;Improved quality of domestically produced vehicles; Growth of GDP and increase in personal incomes of Russian citizens; and A trend to have two and more vehicles in a family.

Prices of various models and the change in selling prices (of most popular variants) during the year, as shownbelow, corresponded with customer evaluation and market trends.

Model Average prices Average prices Change,in 2001, RR in 2000, RR %

VAZ�2104 91,851 74,223 23.8VAZ�2105 83,573 63,682 31.2VAZ�2106 87,679 68,652 27.7VAZ�2107 90,482 73,471 23.2VAZ�2108 114,822 100,613 14.1VAZ�2109 118,732 103,178 15.1VAZ�21099 127,271 111,234 14.4VAZ�2110 153,548 141,878 8.2VAZ�2111 170,764 169,739 0.6VAZ�2112 151,577 145,362 4.3VAZ�2115 141,873 134,637 5.4VAZ�2121 110,179 90,567 21.7

Change in average selling prices

* Sales of Russian�made second hand vehicles are excluded.* Sales of Russian�made second hand vehicles are excluded.

We have managed to maintain a high percentage of the value of new LADA vehicles in the overall value ofpassenger vehicles sold in Russia.

An analysis of sales volumes by registered dealers of foreign makers by class in Russia indicates that newforeign vehicles fill a gap in the market due to the lack of Russian�produced vehicles in Class B and Class Dand highly comfortable and expensive Russian vehicles in Class C, Class E and Class SUV.

25

30

Export sales by range as a percentage of total exports, %

40

35

20

0

15

10

5

Old model Samara VAZ-2110 Niva

2001 2000





JSC AVTOVAZ is working hard to improve its marketing and sales tech�niques. Deliveries to regions in 2001 generally corresponded to theallocation of the population’s purchasing power in the domesticmarket. They also corresponded to the location of 50 regional salesunits and over 300 companies from the dealer network.

In the near future we plan to concentrate on the following tasks:

General implementation of consumer credit and leasing;

Substantial improvement of the quality of after sales service;

Improvement in market research techniques and implementation of quantitative indicators such as a consumer satisfaction index and loyalty index that are widely used in foreign countries;

Wide use of e�commerce instruments both as modern tools of sales and as an effective feedback from the market; and

Implementation of corporate image in our own and independent segments of the distribution network.

Export sales

The actual level of export shipments in 2001 of 84,866 units slightlysurpassed the planned level of 83,869 units.

We continued to export automotive assembly kits and have increasedtheir variety.

1997 1998 1999 2000 2001

Export shipments of LADA vehicles and assembly kits in 1997-2001 by region, units

Europe

E. Europe

M. East

Asia-Pacific

S. America

N. America

CIS

Africa

20,000

30,000

40,000

50,000

60,000

70,000

10,000

0

The assembly plant in Ecuador produced 2,591 units of the VAZ�21214 model. Another assembly operationbased in Lutsk, Ukraine, produced a total of 8,037 units of the VAZ�21043, VAZ�2107, VAZ�2109 and VAZ�21213 models.

Geographic coverage expanded in the past year. We exported vehicles to 33 foreign countries and sevenCIS counties. AVTOVAZ commenced direct deliveries to Jordan, Romania, Belarus, Tajikistan and Ecuador.

JSC AVTOVAZ plans to develop its foreign sales and distribution network as follows:

Strengthen its position in existing markets of the European Union and Eastern Europe. To succeedin this sector AVTOVAZ is upgrading its production facilities to ensure that vehicles meet emission and safety directives;

Reinforce and develop the dealer network in the CIS and Middle East;

Develop a technical maintenance and distribution network in Latin America by establishing assemblyoperations in Uruguay and Ecuador, and expand distribution of products;

Regain formerly abandoned markets including countries with left hand drive; and

Enter new markets in Asia and Africa.

These initiatives are intended to support and increase export sales in 2002.

Customer services

AVTOVAZ continues to consolidate the structure of its network in both the domestic and export markets. Inorder to further develop warranty and post�warranty services and to make them more accessible and of ahigher quality, in 2001 AVTOVAZ made contracts on provision of warranty services for LADA vehicles with 114technical service centres and stations that cover all geographic regions of Russia. Overall there are 621 cen�tres that consist of 3,863 stations in the dealer network of JSC AVTOVAZ that perform technical service andrepair.

Establishment of a distribution network implies that the automaker would delegate to a distributor part of itsresponsibilities related to expanding after�sales services within the specified territory. As part of expandingits services network in 2001, our distributors acted on our behalf to engage dealers to provide technical andwarranty services.

Companies involved in presale preparation and trading were included into the ‘Dealer’ information system in2001, which will enable better monitoring of flows of goods and tracking of each vehicle after sale.In early 2001 we launched an electronic version of the spare parts catalogue of LADA vehicles; this is updat�ed on a regular basis.

AVTOVAZ currently works on the development of organisational requirements, specifications and standardsfor technical service and distribution companies. We also developed optimal reconstruction projects andtechnological upgrading of technical service stations of all types of ownership.

During 2001 JSC AVTOVAZ invested in upgrading this network. In accordance with the List of equipment,tooling and instruments AVTOVAZ supplied equipment and tooling in the amount of RR 4.3 million for techni�cal service centres in 2001. This allowed us to start preparing for certification of quality systems for compli�ance with ISO 9000.

Our well�established and well�organised sales and distribution network is one of the key competi�tive strengths of JSC AVTOVAZ. We intend to continue to improve this network in order to maintainour market share in Russia in the years to come.

Shipment of vehicles to a selectionof regions of Russia in 2001 and 2000 as a percentage of total domestic shipments, %

2001 2000

1.0

1.5

2.0

2.5

0.5

0

Sai

nt

Pe

ters

bu

rg

Tata

rsta

n

No

vosi

bir

sk

Re

gio

n

Sve

rdlo

vsk

Re

gio

n

Kra

sno

dar

Te

rrito

ry

Vo

log

da

Re

gio

n

No

vgo

rod

R

eg

ion

…rev iva l

Our major goal of technological development for the near term is

to launch full�scaleproduction

of the VAZ�1118 Kalina family.

The future success of JSC AVTOVAZ

depends to a great extent on the timely and

complete implementation of this project


Main objectives of technological development

The main objectives of technological development for JSC AVTOVAZare:

Create new, modern and attractive vehicles;

Achieve a significant increase in the quality of products through the implementation of a quality control system based on ISO quality standards, both at JSC AVTOVAZ and our suppliers;

Consolidate our leading position in the industry and passenger vehicle�manufacturing sector in Russia. Much of the responsibility for achieving this is borne by the technological and production potential of the Research and Development Centre (R&D Centre) of the Technological Development Directorate of JSC AVTOVAZ;Ensure that fixed assets are maintained and replaced on a timely basis;



Researchand technology

Ensure that investment projects in the technological developmentarea have a pay�back period of no more than seven years;

Reduce the time gap between new product development and production launch to five years;

Enrich the product mix by adopting modern technology in designand production in order to be able to offer new competitive vehicles to the Russian people at affordable prices;

Attract new customers;





Reduce design and production costs through:

� Modernisation and improvement of strategic research, projectpreparation and execution stages, manufacturing and management techniques that reduce the level of resources consumed and management costs;

� Increase in production capacity (including co�operation withother producers, efficient utilisation of R&D potential, unification of platforms and components, reduction in the number of suppliers accompanied by arrival of larger entities); and

Maintain the image of JSC AVTOVAZ as that of a company strivingto modernise itself.

The R&D Centre is a large research facility, performing a full cycle ofresearch and development work. One of its main tasks is to co�ordinatelaunches of new vehicles and materials.

In 2001 the R&D Centre’s projects were:

VAZ�2115 � production launch;

Chevrolet�Niva (Project VAZ�2123 in JSC AVTOVAZ) – preparationfor the production of the automotive kit that will be supplied to ZAO GM�AVTOVAZ for vehicle assembly;

VAZ�1118 � design and testing work, production preparation;

VAZ�2110M � development of an upgrade model, with further transition to the VAZ�2116 model;

VAZ�2151� development of a new generation of «classic» vehicles that will replace theVAZ�2105/07/04 range; and

VAZ�11YY and VAZ�11ZZ � pilot work on potential projects. Resulting models will be produced beyond 2010.

Eight new manufacturing processes were implemented in day�to�day production operations. We obtained sixpatents during the year.

The substitution of imported materials by domestic production resulted in a reduction in vehicle production costs.

In 2001 the R&D Centre oversaw the adoption of 20 new materials in the production process of the VAZ�2110range.

As a result of production process improvements implemented the Company realised savings of RR 103 million.

UTAC, a quality systems auditor, issued a certificate of compliance with ISO 9001�94 to the TechnicalDevelopment Directorate for their quality system in the development of new vehicles and product upgrades.This is the first time that the R&D function of JSC AVTOVAZ has been internationally certified.

The quality system that is used in the development of vehicles gives us confidence that future generations ofvehicles will enjoy continued demand, and will be sold competitively both domestically and internationally.This in turn will ensure the financial stability of the manufacturing operation.

Capital construction

In order to implement our plans discussed above, in 2001 AVTOVAZ’s capital expenditures on constructionfor production amounted to RR 6,843 million (2000: RR 6,253 million). The total value of assets completedduring the year and transferred to production was RR 10,076 million (2000: RR 10,455 million). The levels ofcapital construction decreased from RR 16,134 million in 2000 to RR 12,901 million in 2001.





Utilise special marking on rubber and plastic parts to make further recycling of old vehicles and components easier.

This year was a turning point in environment protection developmentsin Russia. New and stricter rules were introduced. In 2001 the StateCommittee for Standards enacted new toxic emissions standardsEuro�2, which we anticipated.

We have completed all necessary tests and "Approval Type TS" wasobtained in relation to all vehicles produced at the main assembly lines,including the compulsory installation of converters. In addition, we obtained a short�term permit for the production of vehi�cles without converters for the Russian market during 2002. The num�ber of such vehicles should not exceed 50% of our total output.

In 2001 we produced 395,203 vehicles that were fitted with fuel injec�tion systems, including:

Without converters – 273,354 vehicles;

With converters for the Russian market – 102,282 vehicles;

With converters for export markets, Euro�2 compliant – 5,651 vehicles; and

With converters for export markets, Euro�3 compliant – 13,916vehicles.

The remaining large number of vehicles that are not equipped withconverters is largely due to the fact that Russian customers are not yetprepared to accept price increases without direct improvements in consumer features to match.

Consumption of water, cubic metres per vehicle

Consumption of water from surface and underground sources

Consumption of water from surface sources

Consumption of artesian water

2000 2001

70

60

50

40

30

20

10

0

Change in emissions of main toxic substances, kg per vehicle

Solvents

Organic and inorganic dust

CO

1996 1997 1998 1999 2000 2001

5

6

7

8

4

1

2

3

0

Environmental policy of JSC AVTOVAZ

JSC AVTOVAZ has always paid significant attention to environment protection. We have focused our development policy on improvements in environmental safety of our products and manufacturing processes.

The cornerstone of the environmental policy of JSC AVTOVAZ has beenthe manufacturing of goods that comply with both domestic and inter�national environmental directives, rendering minimum adverse impacton the environment.

We implement the environmental policy of JSC AVTOVAZ on the following key principles:

Minimise consumption of energy and materials in production, continue to improve technology and all processes in order to reduce the adverse impact on the environment;

Ensure secondary utilisation and environmentally safe recycling of products once past their service, together with materials and components at the end of their life cycles;

Ensure easy access to all environment�related information and provide environment education to the Company’s employees; and

Ensure strict compliance with domestic and international environmental regulations, and proactively participate in environment protection programmes both in Russia andworldwide.

From early stages of development of new LADA models we striveto ensure that new vehicles are environmentally safe throughouttheir life cycle.

We are currently working on the following tasks to ensure compliancewith international rules of environmental cleanliness:

Reduce the toxic levels of exhaust gases and ensure compliancewith international requirements Euro�3 and Euro�4;

Reduce the consumption of fuel and emissions of carbon dioxide (CO2);

Eliminate or reduce the application of environmentally hazardousmaterials and substances. These primarily are cadmium, barium,lead, mercury and chlorofluoride hydrocarbons;

Utilise materials and carrying elements that can be easily dismounted and recycled; Reduce the level of external and internal noise; and

Change in emissions of main toxic substances, kg per vehicle

NO2 SO2

1996 1997 1998 1999 2000 2001

0.3

0.15

0

Toxic emissions by the VAZ�21103 model

Variant Measurement unit EMISSIONS Note

СО СН NOх

No converter Grams/km per 1 vehicle 6.694 1.48 2.1 Annual mileage of 15,000 km

Kg per 1 vehicle per year 100.4 15.01 31.5

Tons per year for the Annual output of the production output 20,000 3,000 6,300 VAZ�2110 of 200

of the VAZ�2110 thousand units

Converter Grams/km per 1 vehicle 0.448 0.125 0.08 Annual mileage of 15,000 km

Kg per 1 vehicle per year 7.2 1.875 1.2

Tons per year for the 1,440 375 240 Annual output of theproduction output VAZ�2110 of 200of the VAZ�2110 thousand units





Its consumer features characterise this vehicle as a family vehicle. This can seat five persons. Its primaryuse is for commuting. This requires comfortable entry and exit, and better visibility in urban traffic and parking in limited space.

This range will be fitted with 16�valve engines (centre�to�centre distance of 89 mm and 95 mm). Theseengines will have an electronic control system. It is required that such engines conform to Euro�3 and Euro�4 norms. In order to test safety and durability, we have performed the entire cycle of evaluation work.

In the Final Assembly Division, new sectors for the welding of the body frame and hinged components wereestablished. The welding lines will be produced in the Machine Building Division of JSC AVTOVAZ with participation of specialists from Kuka of Germany.

New body painting equipment will be bought from Eisenmann of Germany; a contract was signed with thissupplier.

The new assembly line for the VAZ�1118 range will use two types of conveyor systems: floor and overhead.

Components of chassis and engines for the VAZ�1118 range will be primarily produced using existing equip�ment; necessary upgrades of equipment will be done. New equipment will be installed in existing facilitiesby partially replacing obsolete equipment, reorganising work areas and outsourcing the manufacture ofcomponents to outside companies.

Research and Development Projects

Chevrolet�Niva (Project VAZ�2123 in JSC AVTOVAZ)

In 2001 we continued work on the base Chevrolet�Niva model andimproved a number of its consumer features. In accordance with theEuropean classification of vehicles, this model is classified as an SUV.

This project is being implemented together with GM’s specialists at ourjoint venture with GM, ZAO GM�AVTOVAZ, established in July 2001.

We identified steps to improve the technical level of the variants of thismodel for the Russian and export markets, following suggestions pro�vided by GM’s International Technical Development Centre.

The joint venture started to prepare for the production of this model in April2001, and the first vehicle will be assembled in September 2002.

We finalise the transfer of original design documentation on this model tothe joint venture. This documentation is property of JSC AVTOVAZ inaccordance with the General Agreement that AVTOVAZ and GM signed on27 June 2001.

We are finalising the testing of the antilock braking system. We continuedto improve the exhaust system in order to increase the engine power andreduce the level of external noise. Compliance with the emissions Euro�3norms was crucial.

We continued testing and evaluation of two variants of electric steeringboosters manufactured by Russian suppliers.

We continued fatigue tests, including tests of the vehicle’s body when driv�ing on cobblestone surfaces.

We have begun the adaptation of air bags and self�adjusting seat beltswith the automotive component firm BREED of Germany.

VAZ�1118

The VAZ�1118 family should significantly extend the range of our vehicles. These vehicles should be highly competitive in our domesticmarket against similar imported vehicles.

In accordance with the European classification of vehicles, this is aClass B model.

Models to be produced in this range include:

Model BodyVAZ�1118 Four�door sedan, five seatsVAZ�1119 Five�door hatchback, five seatsVAZ�1117 Four�door station wagon, five seats





VAZ�2110M

In order to avoid price competition between the VAZ�2110 and theVAZ�2112 models, and potentially the VAZ�1118, we understand theneed to modernise the VAZ�2110 range to be able to charge higherprices. This will require a significant improvement of consumer fea�tures.

This range should partially replace the existing 2110 family. Theyshould be highly competitive in our domestic and export marketsagainst the base model.

In accordance with the European classification of vehicles, this is aClass C model.

Two variants of the VAZ�2110M model will be produced. The basemodel will be a sedan (four doors and five seats).

VAZ�2151

This range will replace the VAZ�2104/05/07 family. This new range isdesigned to be more competitive than its predecessor both in domes�tic and overseas markets.

Retention of the «classic» vehicles together with the launch of the VAZ�1118 range will enable JSC AVTOVAZ to increase total output of vehi�cles to 950 thousand units a year at minimum cost.

In accordance with the European classification of vehicles, this is aClass C model.

Since the rear�wheel models of LADA vehicles, which are currently inproduction (VAZ�2104/05/07), had not been modernised for a longtime, it was an urgent matter to upgrade the design of these vehicles toensure compliance with current safety rules and anticipate futurechanges.

Additionally, in order to improve the competitive position of rear�wheelmodels significant improvements needed to be introduced, including:

� The interior and exterior of the vehicle;� Roominess; and � Steering responsiveness.

In developing this new range we use modernised chassis of the «clas�sic» models. With this, we are trying to minimise project costs andmake use of existing production facilities.

These vehicles will be fitted with a modernised 1.7 litre engine (used inthe VAZ�2104/05/07) and will comply with Euro�3 and Euro�4.

The body of the model will be new reflecting modern trends in design.This will comply with safety requirements, and will have improved durability, quality and comfort.

During 2001 the R&D Centre developed design proposals and imple�mented them in scale models. A demo�working sample will be shownat the Seventh International Motor Show in Moscow (MIMS�2002).

In 2002 we will prepare design documents for the first batch of trialmodels. Production of the VAZ�2151 range on the second assemblyline will not require halting production of the VAZ�2104/2105/2107family, rather a gradual replacement will occur.

Project ANTEL

We continue research into possibilities of reducing toxic emissions. As part of this, we are working on a vehicle powered by hydrogen�oxygen fuel cells. In order to create such a vehicle, we are workingwith the Uralski Electrochemical Combine and the Rocket and SpaceCorporation. As a result of this co�operation, we have defined a con�cept of development of a traveling trial model on the basis of the electrochemical generator «Photon». In addition, we have created aworking VAZ�2131 Antel that is powered by hydrogen�oxygen fuelcells.

We have constructed and tested a mobile refuelling and maintenancemodule for this vehicle.

In accordance with the approved programme we are carrying outlaboratory and on�the�road tests that allow us to refine the mainperformance features of the fuel cell.

If this programme is successful, a prototype of this vehicle will be cre�ated in the near future. This model will be similar to an ordinary vehiclein terms of towing performance and cruising range. However, comfortand environmental cleanliness will be significantly improved.

We understand that faster renewal of models and their varietyare key to a successful future. With this in mind, we contin�ued work on the other new projects, VAZ�11YY and VAZ�11ZZ.



…rev iva lProduct ion

and dispatch of finished goods

Demand for our vehicles

now exceeds our production

capacity. Today this

is our crucial constraint


Overall production and export of LADA cars, thousand units

1997

Overall production volume

Overall production volume for export markets

1998 1999 2000 2001

500

600

700

800

900

400

100

300

200

0

Plan, units Actual, units Change, %

Vehicles

Total vehicles 742,513 753,844 1.5

Including:vehicles with electronic engine control system 395,000 395,203 0.1VAZ�2110 family 222,090 225,431 1.5VAZ�2115 family 43,619 45,893 5.2

Assembly of vehicles at main assembly lines

Shipment of vehicles for the year Vehicles produced at main assembly lines by model

Model Russia, units Export, units Total, units

VAZ�2104 47,282 6,148 53,430VAZ�2105 17,873 2,286 20,159VAZ�2106 36,182 10,691 46,873VAZ�2107 95,811 10,046 105,857VAZ�2108 11,164 1,264 12,428VAZ�2109 84,854 4,699 89,553VAZ�21099 75,897 9,044 84,941VAZ�2110 118,935 12,399 131,334VAZ�2111 43,417 5,043 48,460VAZ�2112 44,751 4,947 49,698VAZ�2115 42,494 3,661 46,155VAZ�2121 56,287 14,638 70,925

TOTAL 674,947 84,866 759,813

In 2001 the total value of goods sold was RR 112,843 million. In comparable terms, this was a 14.2% increase on the prior year.

Total revenue from vehicle sales in 2001 was RR 93,232 million, up12.0% from 2000.

In 2001 JSC AVTOVAZ produced 768,030 vehicles, which was 8.1%more than in 2000. Of this number, 753,844 units were produced atthe main assembly lines.

The number of vehicles of the VAZ�2110 family produced was 225,431units, which represents a 28.1% increase on 2000. We produced395,203 vehicles fitted with the electronic engine control system, a74% increase on 2000.

Domestic shipments were 674,947 vehicles, a 12.8% increase on 2000. We exported 84,866 vehicles ascompared with the planned level of 83,869 units, which is a 25.4% reduction in comparison with 2000. Thisreduction is a result of the need to focus on satisfying expanding domestic demand.





The R&D Centre’s special design bureau of rotary engines (Wankelengines) assembled 33 vehicles and the Pilot Production Divisionassembled 14,119 vehicles.

The average rate of production at main assembly lines was 169.75vehicles per hour in 2001 as compared with 168.34 units per hour in2000.

Since early 2001 main production divisions of JSC AVTOVAZ haveoperated 11 shifts a week. Special working schedules were applicableonly to employees who were directly involved in meeting productiontargets.

This allowed for more rational workload borne by service�divisionemployees and management.

Overall production labour�intensity decreased by 5.3% and work out�put per employee increased by 4.9% in comparable terms.

The number of vehicles produced per worker increased by 8.9% in2001 as compared to 2000.

We have almost completed implementation of production in accor�dance with dealers’ orders. In particular, we have satisfied 96% oforders in terms of models and 86% in terms of colour.

We have produced tools and fittings for a value of RR 963 million,which represents 106.4% of the planned production. Included in thisamount are tools and fittings produced for internal consumption for atotal of RR 875 million.

Average rate of production at main assembly lines, units per hour

1997 1998 1999 2000 2001

175

170

165

155

160

150

Production equipment utilisation of main production divisions, shifts

1997 1998 1999 2000 2001

1.8

1.7

1.6

1.5

1.4

Number of vehicles produced per worker, units (net of R&D and Tooling)

1997 1998 1999 2000 2001

6

8

10

12

4

2

0

Spare parts production volume, RR million

1997 1998 1999 2000 2001

4,000

3,000

2,000

1,000

0

Overall output of production equipment at JSC AVTOVAZ was 100.9%of planed output.

In order to prepare for production of new vehicles and modernisationof existing models we have produced RR 291 million worth of equip�ment and another RR 178 million worth of equipment was produced forreplenishment of existing production capacity.

In 2001 we produced RR 2,437 million worth of spare parts, a 13.6%decrease as compared to 2000. This was caused by a significantincrease in the production of automotive assembly kits from 53,866units in 2000 to 115,540 units in 2001.

Production capacity utilisation

Annual vehicle production capacity in 2001 was 730,000 units and hasremained unchanged from 2000. This is a result of the commissioningof VAZ�2110 capacity for 15 thousand units carried out in parallel withthe disposal of VAZ�2106 capacity for the same number of units.

In 2001 the rate of utilisation of automobile production capacityincreased to a critical 105% (2000: 97%).

Production equipment utilisation of main production divisions wasequal to 1.78 shifts (2000: 1.66 shifts).





Improving production efficiency

In addition to market demand, we also considered production capabili�ty and profitability of each model before changing selling prices, themodel mix to be produced, the number of units of specific body paintand the number of model variants.

This allowed us to stabilise the vehicle cost structure during the year.

In 2001 the mix of vehicles produced changed. A larger number ofmodern VAZ�2110 vehicles were shipped. In addition, we producedmore vehicles of the VAZ�2115 model.

Our ongoing efforts to increase the production output of modernand attractive vehicles will enable us to retain our position in theRussian automobile market in case of Russia’s accession to theWTO.

Components of cost of sales, %

Materials and components used - 76.06%Labour costs - 8.03%Production overheads - 7.95%Depreciation - 5.70%Social expenditure - 2.26%

As a result of the constraints on production capacity in the main plant,we have changed our assembly operations. We are currently increas�ing output capacity by creating assembly operations in other parts ofRussia, CIS and foreign countries. As part of such projects we transfertechnology and ship automotive assembly kits.

In view of continued lack of vehicle production capacity in our mainplant we have increased the output of automotive assembly kits byidentifying efficiencies in other divisions.

We believe that our efforts to establish assembly plants in Russiaand foreign countries will enable us to satisfy demand of LADAvehicles in 2002, and beyond.

Output of automotive assembly kits in JSC AVTOVAZ, units

1997 1998 1999 2000 2001

60,000

80,000

100,000

120,000

40,000

20,000

0

Information system

We understand that a modern management system should be built on modern information technol�ogy. JSC AVTOVAZ pays significant attention to developing its information system.

In 2001 the information system of JSC AVTOVAZ was developed with a focus on higher requirements of quality and prompt availability of information used by executives and divisions for managing in times ofreform.

We are currently upgrading our management information system.

Implementation of a system that will capture and accumulate external marketing information is under way.This is important for market research, and supporting decisions about sales volumes, terms and sellingprices. Customer orders are collected and processed, production and shipment orders are prepared, andsales of vehicles by distributors and dealers are monitored interactively. In addition, we continued to imple�ment a system that monitors the status of suppliers’ shipments to the automobile manufacturing operation.This is built on e�procurement principles.

Each day we review the variances in utilisation of materials in production. The information system enablesus to generate reports for review of monthly variances in operational and accounting data, with cumulativeamounts from the beginning of the quarter and year.

In order to reduce the design�to�production phase, we are developing and implementing an information system of design and technical research together with planning and co�ordinating production preparation.

Daily processing of the data in the automobile production area was implemented based on new technology,which reduced the time to generate and issue reports. In 2001 we continued working on the capability toidentify and track goods in the production cycle.

We have completed the deployment of real�time records of defects.

We believe the prime objective of developing information systems for the near term is building aunified system of planning and control at JSC AVTOVAZ, together with the capability to monitorbusiness units’ budgets.

Vehicle deliveries by model

Model Percentage of total Percentage of total Change (+/�)deliveries in 2000, % deliveries in 2001, %

VAZ�2104 8.0 7.0 (1.0)VAZ�2105 5.2 2.7 (2.5)VAZ�2106 9.3 6.2 (3.1)VAZ�2107 15.6 13.9 (1.7)VAZ�2108 2.2 1.6 (0.6)VAZ�2109 9.9 11.8 1.9VAZ�21099 14.9 11.2 (3.7)VAZ�2110 16.1 17.3 1.2VAZ�2111 5.3 6.4 1.1VAZ�2112 1.9 6.5 4.6VAZ�2115 1.9 6.1 4.2VAZ�2121 9.6 9.3 (0.3)




Sourc ingo f s u p p l i e s

We view our suppliers as key

strategic partners. We set our

requirements high but provide any

support possible

Key to the profitability of AVTOVAZ’s operations has been to reverse thegrowth of resource prices in excess of vehicle prices, which has beenthe result of many years of inflation in Russia.

In 2001 we made significant progress.

For the first time in many years, during 2001 we achieved an accept�able balance of growing vehicle prices and growing component costs.

This has contributed significantly to overall growth of profitability ofJSC AVTOVAZ.

This relative stabilisation of costs of components and materials wasattained thanks to our steady work over a number of years in the past on:

Working with alternative suppliers in establishing production of components at their sites together with healthy competition.This helped to improve specifications and manufacturing processes;

Allocating order volumes promptly and flexibly;

Reducing production inventory levels to optimum quantities;

Substituting imports with domestic materials and components; and

Establishing a multi�tier supply structure under which whole systems would be supplied to JSC AVTOVAZ.





These positive results will not lull us into complacency.

We recognise significant improvements still need to be made. There a number of inventories whose costs we have not been able tokeep down.

Furthermore, vehicle price increases are not yet sufficient to set offcosts of purchased components that increase safety, improve environ�mental protection and overall consumer features (converters, electron�ic engine control systems, air bags, conditioners, etc.).

Cumulative change in factors of metals price increases compared to 1998

Strip iron

Rolled sheet metal

1999 2000 2001

2.0

2.5

3.0

3.5

4.0

0.5

1.5

1.0

0

1998

Substitution of imported components and materials with domestic sup�plies has also yielded positive results.

In 2000 we imported components and materials for a total of US$ 99million. However, in 2001 imports amounted to just US$ 93 million,despite growing output levels and the increasing share of modern vehi�cles in the product mix.

We continued to develop a network of consignment warehouses thatsource major groups of components and materials. While there werethree such warehouses in 2000, this number rose to 17 in 2001.

There were 613 suppliers that were certified by JSC AVTOVAZ in 2001.Of this number, there are 67 large suppliers that cover between 25%and 90% of their respective segments of goods supplied to us. We purchased 16.5 thousand individual inventory lines of componentsand materials during the year.

Establishing production of components at alternative suppliers’ resulted in savings of over RR 15 million in 2001.

We pay significant attention to developing supplier businesses in theSamara Region. While there were 140 such companies in 2000, theirnumber has grown to 200 in 2001. Total volume of purchases fromsuppliers based in the region has increased to RR 20 billion.

Reduction in imported components as a percentage of average cost of vehicle, %

1999 2000 2001

6

8

10

12

14

4

2

0

1998

Change in the number of suppliers based in the Samara Region

1999 2000 2001

100

150

200

50

0

1998

We are confident that in 2002 we will continue our focus onreductions in costs of input resources. This will further contribute to production profitability.

Total volume of purchases from suppliers based in the Samara Region, RR million

1999 2000 2001

10,000

15,000

20,000

5,000

0

1998

Results are satisfactory: companies from the Samara Region currentlysupply over 40% of components and materials to the AVTOVAZassembly lines.




Improving the quality of vehicles is impossible

without a systematicapproach to solving

quality problems throughout the product

life cycle

Ensuring the quality of our vehicles has been a priority for all divisionsin the Company. The management of the Company have announced along�term policy in the product quality area. This is to reiterate thatproduction of vehicles on high technical and organisational level is thetask of every worker. Meeting this requirement will help to make surethat existing customers are satisfied, new customers are attracted andprofitability is further improved. We have developed an action plan toaddress the following major areas:

Improve production processes in order to reduce wastage and defects;

Continue working with suppliers to improve the quality of theirproducts on an ongoing basis; and

Continue developing the quality system on the basis of ISO 9000.

In 2001 we continued to improve the quality of LADA vehicles, whichyielded the following results:

A 30% reduction in the level of defects at the assembly line; and

A 13% reduction in the number of vehicles that were rejected for quality reasons at the point of shipping.

Qual i t yc o n t ro l

Change in defect rate of a VAZ-2110 finished vehicle

1997 1998 1999 2000 2001

300

250

200

100

150

50

0

Rat

e





In 2001 losses from defects were by 0.14% lower than in 2000.

In 2001 we actively continued our work on improving divisional qualitysystems and preparation of these systems for quality certification.

UTAC certified quality systems of the Plastic Parts Division, the LargePress Shop Division and the Directorate of Technological Developmentafter its audits in 2001. As a result, all the key six divisions of JSCAVTOVAZ have obtained certification of compliance with internationalstandards of quality systems.

Similar work was done at production facilities of our suppliers.

In December 2001, there were 94 companies that had their quality systems certified, a 62% increase on 2000.

Our plan is that certified companies produce no less than 80% of supplied components by the end of 2002. However, there are individual components where the progress of quality increases laggedbehind. Around 50% of warranty costs results from defects of components.

We continue to develop a system whereby vehicles that are still covered by warranty will be returned from vehicle service companiesand suppliers will have to replace defective components.

Our plans for 2002 include:

Complete work on improving the reliability of the VAZ�2110 range and achieve a drastic reduction in customer complaints;

Launch major improvements in the quality system in line with the newly adopted ISO/TS 16949 standard;

Continue to deploy a system that allows 100% identification of components in order to be able to trace the background, place of production and utilisation of goods as well as their location; and

Launch the production of components for the GM�AVTOVAZ joint venture to specifications required by GM.

JSC AVTOVAZ has to achieve the quality level of similar foreignvehicles in the near future. We are confident that this will beachieved.




Personnel ands o c i a l p o l i c y

Cultivating a new generation of employees

who understand the targets

of the Company,and who understand

that their company takes care of them,

continues to be one of our most important tasks

Personnel structure, %

Non-production employees - 14.52 %

Workers - 67.83 %

Salaried employees - 17.65 %

Training of employees of JSC AVTOVAZ, number of persons who attended

1997

Salaried employeesWorkers

1998 1999 2000 2001

20,000

25,000

30,000

35,000

5,000

15,000

10,000

0

While JSC AVTOVAZ alone employs 124,091 people, the total numberof people working in the parent company and subsidiaries is in excessof 150 thousand.

In 2001 the core production divisions adopted a working schedule of11 shifts a week. This has not infringed on the rights of workers established in statutory labour regulations, specifically a 40�hour weekper employee.

Overall revenue growth was 14.2% while net increase in the number ofemployees was 5.7%.

To achieve 2001’s production targets, JSC AVTOVAZ hired 14,704persons, 13,603 of which were workers. This number includes 336young specialists, 484 graduates of technical colleges and 1,320 graduates of schools and basic lyceums.

Turnover of workers was4.8%, and turnover of man�agers and salaried personnel was 2.17%.

In 2001 we provided opportu�nities to improve professionalskills of our employees. Thisis an important area in view ofour production targets.Various introductory trainingand continuing educationevents were organised in theCompany.

Incidence of occupational diseases (by 10,000 persons employed in hazardous environment), number of cases

1997 1998 1999 2000 2001

60

40

20

0





In 2001 productivity increased by 4.9% in comparison with 2000.

During each quarter of 2001 we indexed employees’ wages.

We took into account the increase in prices for goods and servicestogether with the financial resources of JSC AVTOVAZ, specifically percentage of wages in turnover.

From December 2000 to December 2001 price inflation grew by18.8%. During the same period wages were raised by 17.6% as aresult of indexation.

Overall labour compensation fund increased by 33.8%. In December2001 the average wage was RR 5,671 (December 2000: RR 4,608).

Change in average wage in JSC AVTOVAZ and Russia in 2001 roubles, RR

1997

Change in average wage in JCS AVTOVAZ

Change in average wage in Russia

1998 1999 2000 2001

4,000

5,000

6,000

7,000

8,000

1,000

3,000

2,000

0

In December 2001 average wage paid to employees involved in production was RR 5,938, a 23.2% increase on December 2000.

In addition to wages, various benefits paid were over RR 16,000 peremployee, which contributed to an increase in real incomes of employ�ees by a third.

In 2001 bonuses paid to employees amounted to RR 129.2 million.

There are stable working relations between management andemployees in JSC AVTOVAZ.

Social expenditure, RR million

1997 1998 1999 2000 2001

2,000

3,000

1,000

0

We have fulfilled all plans contained in the 2001 social programme.In accordance with the Collective Agreement JSC AVTOVAZ makes significant payments towards social benefits and protection. We paidmonthly allowances to women who are on maternity leave with childrenunder age 3; these payments amounted to RR 36.8 million in 2001.Female employees are entitled to a ten�week prenatal paid leave in addition to the leave established by labour legislation. These payments were about RR 9.2 million for the year.

We made pension payments to employees who reached retirementage, including as a result of disability. These payments were equal toRR 24.7 million. Allowances were paid to 1,296 individuals.

In order to continue social protection of former employees we made charity payments of RR 14.8 million. We pay considerable attention to providing health�care services to the Company’s employees in our medicaland rehabilitation facilities. In order to provide additional medical services to employees JSC AVTOVAZspent RR 20.4 million.

We provided RR 24 million in non�repayable housing subsidies to our employees. As part of our housingprogramme in 2001, five dwelling houses were built and commissioned with an area of 61 thousand squaremetres. Employees paid part of these expenses. However, the Company compensated to these persons thecost of access to all utilities.

We are responsible for the up�keep of 60 pre�school facilities that take care of 11,079 children of theCompany’s employees. These expenditures were RR 66 million in 2001.

In 2001 we managed to maintain a good match of quantity and quality of work force to meet business targets of JSC AVTOVAZ. This was done by establishing and consolidating positivechanges in the structure of personnel.

Page 88 Page 90 Page 92

Management system reform

Board of Directors of JSC AVTOVAZ

Board of Managementof JSC AVTOVAZ

Management structure

The Company’s management

Page 94

Corporate philosophy

Consol idatedf i n a n c i a l s t a t e m e n t s

Page 96 Page 97

Auditors' report on IAS consolidated

financial statements of JSC AVTOVAZ

IAS consolidated financial statements

of JSC AVTOVAZ

Page 86

Transactions with shares

Page 85

Share capital

Page 86

Shareholdings


Share capital

As at 31 December 2001 the statutory value of the Company’s sharecapital is equal to RR 16,062,482 thousand.

It is divided among 32,124,964 shares of equal nominal value, andconsists of:

27,194,624 ordinary shares; and

4,930,340 Type A preference shares.

In 2001 the total number of shareholders increased from 209,285 to211,428 as a result of the exchange of share depository certificates ofOAO All�Russia Automobile Alliance (AVVA) for shares of JSC AVTOVAZ.

The percentage of individuals in the share capital of the Company hasdecreased from 29.06% to 25.87%.


The Company’smanagement

The management of JSC AVTOVAZ are fully

aware of how importantis the contribution

of AVTOVAZ to the Russianeconomy. Hundredsof thousands of jobs throughout Russian

industry depend on AVTOVAZ’s success

in maintaining stable production and growing

its business

Share issues

Issue and year of issue Number of state Quantity Status of issueregistration and category

of shares

1. First issue – 1993 42�1п�0164 5,354,161 Cancelled Preference Type A as a result

6,424,993 of conversionPreference Type B

9,637,489Ordinary

2. Second issue – 1994 МФ 42�1�0283 10,708,321 Cancelled as a result Ordinary of conversion

3. Second issue – 1998 2�02�00002�А 4,930,340 Placed Preference Type A

4. Third issue – 1998 1�03�00002�А 27,194,624 Placed Ordinary

5. Fourth issue – 1999 1�04�00002�А 32,124,965 Deemed non�existent, Ordinary cancelled

for the restructuringof the debt to the budget

6. Fifth issue – 2000 1�05�00002�А 32,124,965 Deemed non�existent, Ordinary cancelled

for the restructuring of the debt to the budget

7. Sixth issue – 2001 1�06�00002�А 32,124,965 On 16 January 2002 Ordinary deemed non�existent,

for the restructuring cancelledof the debt to the budget

Composition of share capital of JSC AVTOVAZ in accordance with the shareholders’ register of the Company at 31 December 2001,%

Legal entities - 72.08%

Individuals - 25.87 %

Federal property - 2.05 %

In 2001 JSC AVTOVAZ obtained registration of ownership rights to 323 properties and all necessary state regis�tration certificates were received.


85





Transactions with shares

In 2001 the shares of JSC AVTOVAZ led the Russian stock market in terms of share price growth.

By the close of 2001 the Company’s ordinary shares traded 11.03 times the price at the end of 2000, at US$ 17.65 per share, while preference shares appreciated 21.2 times trading at US$ 13.47 per share.

The Company’s ordinary shares continued to rise to $29.6 per share by 1 July 2002.

Trading volumes of shares of JSC AVTOVAZ has also increased in comparison with 2000.

Shareholdings

JSC AVTOVAZ owns shares in 243 entities where the Company exercises corporate management and con�trol. These include:

14 foreign entities, in six of which JSC AVTOVAZ has an equity of more than 50%;

46 entities located in the CIS, Baltic countries and Georgia, in 20 of which the Company has a controlling stake (50% + 1 share);

In the Russian Federation:

� 29 entities where JSC AVTOVAZ has a 100% holding;� 113 entities where JSC AVTOVAZ has a control block of shares (50% + 1 share);� 22 associate companies (20% and more);� 19 entities where JSC AVTOVAZ has less than a 20% holding.

Management system reform

Since 1999 JSC AVTOVAZ has undertaken an in�depth reform of itsbusiness. The Company has begun to establish separate businessunits without creating independent legal entities.

As a result of establishing business units in the automobile productionarea, JSC AVTOVAZ was able to adopt a flexible operating structurebased on business units. This enabled us to manage the Company ontwo levels: a corporate centre; and business units. We have finalisedthe establishment of business units within the technological develop�ment sector: R&D Centre, Machine Building Production and Divisionof die moulds and dies.

To ensure proper management of business units, from September2001 JSC AVTOVAZ has begun to form budgets of revenues andexpenses for business units for testing and fine�tuning the economicmanagement system.

In respect of the high�priority areas of developing centralised order,revenue and expense budgets, and the system of internal financial settlements, our progress was sufficient for the system of budgetingand control to become operational since January 2002.

JSC AVTOVAZ has begun to establish a system of logistics and model�ling processes in the main production area. With business units inplace, this will act as a tool of planning and monitoring. This will ensurethat the centralised order is fulfilled, production schedule deadlines are met and consumer orders are fulfilled.

Further tasks of reform in 2002 include:

Establish a corporate management centre;

Implement strategic and medium�term planning;

Improve logistics management; and

Improve the efficiency of management of our subsidiaries.

Achieving these goals will contribute significantly to the manageability of JSC AVTOVAZ and its subsidiaries. In addition,this will make all business processes more transparent.

07.02.01 20.02.01 06.03.01 20.03.01 04.04.01 17.04.01 28.04.01 16.05.01 30.05.01 13.06.01 26.06.01 09.07.01 20.07.01 02.08.01 16.08.01 29.08.01 11.09.01 24.09.01 08.10.01 19.10.01 01.11.01 15.11.01 28.11.01 11.12.01 25.12.01

Change in price per ordinary share and preference share in 2001, US$

Price per ordinary share Price per preference share

4

6

8

10

12

14

16

18

20

2

0

N.V. LYACHENKOVFirst Vice�President, First Deputy General Director,JSC AVTOVAZ

V.A. KAZAKOV First Deputy Governor, Samara Region

Board o f D i rectors o f J S C A V T O V A Z

A.V. NIKOLAEVPresident � General Director,

JSC AVTOVAZ

V.V. KADANNIKOVChairman of the Board ofDirectors, JSC AVTOVAZ

K.G. SAKHAROVVice�President,

Research and Development, JSC AVTOVAZ

V.A. VILCHIKFirst Vice�President, Strategy and CorporateGovernance, JSC AVTOVAZ

N.M. KARAGINChairman the of workers’ union, JSC AVTOVAZ

N.N. KOSOVFirst Deputy Chairman,

Vnesheconombank

A.A. PUGACHHead of Personnel Department

of Sub�Assembly Division,JSC AVTOVAZ

R.L. SHEININGeneral Director, ZAO «CentralBranch of Automobile Finance

Corporation»

Elected at the Annual General Shareholders' Meeting on 26 May 2001

A.P. BYCHKOVGeneral Director, OAO IK RUSS�INVEST

Y.B. STEPANOVVice�President,

Personnel, JSC AVTOVAZ

N.V. LYACHENKOVFirst Vice�President, First Deputy General Director,JSC AVTOVAZ

A.K. MAMONTOVDirector, OAO SAAZ

Y.I. MERZLYAKOVDirector, Precision Tooling � Production, JSC AVTOVAZ

M.V. MOSKALYOVVice�President, Finance, JSC AVTOVAZ

P.A. NAKHMANOVICHDirector, Corporate Governance, JSC AVTOVAZ

V.A. NESTEROVDirector, Security, JSC AVTOVAZ

V.I. OVCHARENKODirector, Foundry, JSC AVTOVAZ

S.N. PEREVEZENTSEVDirector, Pilot Production Division of R&DDepartment, JSC AVTOVAZ

V.P. PERESYPKINSKYChief Manufacturing Engineer, JSC AVTOVAZ

V.P. POTEMKINGeneral Director, OAO DAAZ

P.M. PRUSOVChief Designer, JSC AVTOVAZ

A.N. PUSHKOVDirector, Large Press Shop, JSC AVTOVAZ

A.P. SARYCHEVDirector, Personnel, JSC AVTOVAZ

K.G. SAKHAROVVice�President, R&D, JSC AVTOVAZ

P.R. SENKOVDirector, VAZ�1118 Project, JSC AVTOVAZ

P.N. SKRINSKYVice�President – Director, Purchasing, JSC AVTOVAZ

Y.B. STEPANOVVice�President, Personnel, JSC AVTOVAZ

S.A. SYCHYOVGeneral Director, OAO AvtoVAZagregat

V.I. TIKHONOVDirector, Information Systems, JSC AVTOVAZ

N.P. KHATUNTSOVChief Accountant – Director of Accounting,Taxes and Audit, JSC AVTOVAZ

A.S. CHERYOMUKHINDirector, Spare Parts Productionand Sales � Director of Main Spare Parts Centre, JSC AVTOVAZ

V.V. SHARAYEVDirector, Export Sales and Markets, JSC AVTOVAZ

V.G. SHENDYAPINDirector, Final Assembly Division, JSC AVTOVAZ

V.B. ENSDirector, Social Infrastructure, JSC AVTOVAZ

Individual executive body(At 31 December 2001)President � General Director of JSC AVTOVAZ Aleksei Vasilyevich NIKOLAEV

Collective executive bodyB O A R D O F M A N A G E M E N T O F J S C A V T O V A Z

A.V. NIKOLAEVChairman of the Board of Management,President � General Director,JSC AVTOVAZ

V.M. ALSHINDirector, Power Supply, JSC AVTOVAZ

V.I. BELYAKOVGeneral Director, OAO AVTOVAZTRANS

V.A. VILCHIKFirst Vice�President, Strategy and CorporateGovernance, JSC AVTOVAZ

N.M. GOLOVKODirector, Development, JSC AVTOVAZ

V.N. GOLDBERGDirector, Production Recycling,JSC AVTOVAZ

A.I. GRECHUKHINDirector, Manufacturing Logistics � Chief Engineer, JSC AVTOVAZ

V.A. DAVYDOVDirector, Machine Production, JSC AVTOVAZ

M.N. DOBYNDOVice�President, Production, JSC AVTOVAZ

Y.A. DOKUTOVICHDirector, Production, JSC AVTOVAZ

N.P. DYBINDirector, Cars technical services and provision of spare parts, JSC AVTOVAZ

A.V. YEROFEYEVDirector, Die Moulds Division of R&D Department, JSC AVTOVAZ

Y.P. YEDUNOVDirector, Sales Operations, JSC AVTOVAZ

V.P. YELISEYEVDirector, Plastic Parts Production, JSC AVTOVAZ

K.P. YEROSLAYEVDirector, Equipment Production, Repair andMaintenance, JSC AVTOVAZ

Y.S. ZEKTSERDirector, Representative Office of JSC AVTOVAZ in Moscow

G.I. KAZAKOVAFinance Director � Head of Treasury, JSC AVTOVAZ

V.V. KARMAZINDirector, Production Organisation (GlavAVTO), JSC AVTOVAZ

V.Y. KOKOTOVDirector, Quality, JSC AVTOVAZ

V.K. KOTENEVDirector, Sub�Assembly, JSC AVTOVAZ

I.A. KROPACHEVDirector, OAO SeAZ

B.A. KRUPENKOVDirector, Economics, JSC AVTOVAZ

N.A. KUZNETSOVDirector, Property Department, JSC AVTOVAZ

V.N. KUCHAIVice�President, Marketing, Sales and Cars Technical Services, JSC AVTOVAZ

Board of Management of JSC AVTOVAZ

Management s t ructure o f

BOARD OFMANAGEMENT

OF JSC AVTOVAZ

SHAREHOLDERSТ’ MEETING OF JSC AVTOVAZ

Directorate of Corporate Governance

Directorate of Economy and Planning

Information Systems Directorate

Property Department

Technological Development Committee

Social and PersonnelPolicy Committee

Marketing CommitteeManagement System Reform

CommitteeFinancial

Committee

BOARD OF DIRECTORSOF JSC AVTOVAZ

PRESIDENT �GENERAL DIRECTOR

OF JSC AVTOVAZ Security DirectorateOffice of the President � General

DirectorDirectorate of accounting, tax

and auditQuality Directorate

Moscow Representative Office ofJSC AVTOVAZ

Analytical Centre of JSC AVTOVAZ (Moscow)

FIRST VICE�PRESIDENT � First Deputy

General Director

Customs Declarations andSupervision Centre

Finance Directorate

VICE�PRESIDENTFinance

VICE�PRESIDENTResearch and Development

Development Directorate

Capital Construction Division

Equipment ManagementDivision

Personnel Centre

Planning and Control Centre

Market Research and PurchasesOrganisation Division

Purchasing Directorate

VICE�PRESIDENTPurchasing

Personnel Centre

Centre of Economics

Marketing Department

Directorate of Supplies of SpareParts and Automotive

Assembly Kits

Directorate of Cars TechnicalService and Spare Parts Provision

Directorate of Dealers NetworkOrganisation

Directorate of SalesOrganisation

VICE�PRESIDENTCars Marketing, Sales and

Technical Service

VICE�PRESIDENTPersonnel

Directorate of Personnel

Directorate of Social Issues

Press Centre

Broadcasting and PublishingCompany

Canteen Combine

Planning, Budgeting and Control Centre

VICE�PRESIDENTProduction

Directorate of Production

Directorate of Technological andEngineering Provision

Planning and Control Centre

Consolidated Budget Planning andControl Centre

Production CommitteeAudit, Budget and

Corporate Policy Committee

FIRST VICE�PRESIDENTStrategy and Corporate

Governance

J S C A V T O V A Z

As at 31 December 2001

... revival... revival... revivalCorporate

ph i losophy o f J S C AV TOVA Z

Our competitors demand our constant attention. We are ready to compete. Moreover, we are ready to co�operate with automotive

producers that work for the benefit of Russians and Russia.

The Company recognises the need

to take care of both the physical and spiritual well�being of its people and the wider community.

The Company maintainscomfortable and safe working conditions, provides social guarantees that give employees confidence in their

future.

The Company respects the environment Improving the environmental cleanliness of our vehicles is a major priority.

The Company is open to dialogueWe welcome all contacts with the mass media that present competent and impartial information about AVTOVAZ

and the current state and further development of the national automotive industry.

AVTOVAZ is for RussiaThe Company welcomes governmental programmes whose goal is the welfare of Russians and enhancing the

reputation of Russia. We will do anything possible to ensure their successful implementation.

We believe in the unlimited innovative and technological

potential of our people. We believe that Russia will

become a strong automotive power.

We aim to fulfil the ambitionof Russian people to have affordable,

comfortable and high qualitymeans of personal transportation

Our vehicles

embody the Company’s manufacturing culture and the professional excellence of our employees.

Our commercial interests

span the entire world. The Company understands what needs to be done to secure a stable position on the global market.

Our main asset

is our people. The Company is a community of people working for the common goal – efficient

and profitable business.

Our judges are our shareholders and investors. They trust us with their capital and measure the efficiency of our performance.

Our suppliersare part of our team. The Company endeavours to strengthen long�term relationships with suppliers on the basis

of co�operation, respect, fairness and mutual benefit.

Our future

depends on the good image of our LADA brand. The Company strives to ensure growing respect of our brand by

both existing and potential customers.

Our key partners are our dealers. They represent and protect the reputation of the LADA brand in their communities.

Our customers

pay our wages. Our progress depends on them.

The firm is an authorised licensee of the tradename and logo of PricewaterhouseCoopers.

Auditors' report on IAS consolidated financial statements of JSC AVTOVAZ

To the shareholders of JSC AVTOVAZ:

1. We have audited the accompanying consolidated balance sheet of JSC AVTOVAZ and its subsidiaries ("AVTOVAZ") as of 31 December 2001 and the related consolidated statements of operations, of cash flows and of changes in share�holders’ equity for the year then ended, as expressed in the equivalent purchasing power of the Russian Rouble (RR) at31 December 2001. These financial statements are the responsibility of AVTOVAZ’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we planand perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audit provides areasonable basis for our opinion.

3. In our opinion, the accompanying consolidated financial statements, expressed in the equivalent purchasing power ofthe Russian Rouble at 31 December 2001, present fairly, in all material respects, the financial position of AVTOVAZ as of31 December 2001, and the results of its operations and its cash flows for the year then ended in accordance withInternational Accounting Standards.

4. Without qualifying our opinion, we draw your attention to Note 2 to the financial statements which sets out a number ofmatters that raise substantial doubt that AVTOVAZ will be able to continue as a going concern as well as management’splans regarding the strengthening of the financial condition and performance of AVTOVAZ. The accompanying financialstatements have been prepared assuming that AVTOVAZ will continue as a going concern and, consequently, do notinclude any adjustments that might be required if AVTOVAZ proves not to be a going concern.

5. As explained in Note 3, US dollar (US$) amounts presented in the financial statements are translated from RR as amatter of arithmetic computation only, at the official rate of the Central Bank of the Russian Federation at 31 December2001 of RR 30.14 to US$ 1. The US$ amounts are presented solely for the convenience of the reader and should not beconstrued as a representation that the RR amounts have been or could have been converted to US$ at this rate, nor thatthe US$ amounts present fairly the financial position of AVTOVAZ or its results of operations or cash flows in accordancewith International Accounting Standards.

Moscow, Russia28 June 2002

AUDITORS’ REPORT

ZAO PricewaterhouseCoopers AuditKosmodamianskaya Nab. 52, Bld. 5115054 MoscowRussiaTelephone +7 (095) 967 6000Facsimile +7 (095) 967 6001

96 97

JSC AVTOVAZ Consolidated Balance Sheet at 31 December 2001(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001, Note 3)(Amounts translated into US dollars for convenience purposes, Note 3)

The accompanying Notes 1 to 25 are an integral part of the consolidated financial statements.

RR million US$ millionAt 31 December

Unaudited

2001 2000 2001

ASSETSCurrent assets:Cash and cash equivalents (Note 6) 3,969 3,294 132Trade receivables, net (Notes 5 and 7) 7,919 8,156 263Prepaid expenses, advances and other receivables 5,939 6,069 197Inventories (Note 8) 12,735 12,559 422

Total current assets 30,562 30,078 1,014

Property, plant and equipment (Note 9) 84,655 86,488 2,809Available�for�sale investments (Note 10) 308 1,336 10Investments in associates 372 � 12Deferred tax assets 44 � 2Other assets 364 320 12

Total assets 116,305 118,222 3,859

LIABILITIES & SHAREHOLDERS’ EQUITY

Current liabilities:Trade payables current (Note 5) 14,444 16,148 479Other payables and accrued expenses (Note 11) 6,995 6,302 232Taxes payable�current (Note 14) 5,368 9,493 178Warranties (Note 12) 1,002 898 33Short�term debt (Note 13) 4,297 4,864 143Advances from customers 3,674 4,176 122

Total current liabilities 35,780 41,881 1,187

Long�term debt (Note 13) 2,860 7,134 95Long�term taxes payable (Note 14) 4,763 10,553 158Deferred tax liability (Note 22) 6,742 12,512 224

Total liabilities 50,145 72,080 1,664

Minority interest 10,671 7,672 354

Shareholders’ equity:

Share capital (Note 16) 26,227 26,243 870Currency translation adjustment 835 714 28Retained earnings 28,427 11,513 943

Total shareholders’ equity 55,489 38,470 1,841

Total liabilities and shareholders’ equity 116,305 118,222 3,859

Approved on behalf of Management, 28 June 2002.

V. Vilchik N. KhatuntsovPresident – General Director Chief Accountant

99

JSC AVTOVAZ Consolidated Statement of Cash Flows for the year ended 31 December 2001(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001, Note 3)(Amounts translated into US dollars for convenience purposes, Note 3)

RR million US$ millionYear ended 31 December

Unaudited

2001 2000 2001

Cash flows from operating activities (Note 4H):Profit before taxation 18,215 14,820 604Adjustments for:Depreciation 5,166 5,324 171Provision for bad debts (183) 567 (6)Loss on disposal of property, plant and equipment 925 812 31Gains on extinguishment and forgiveness of tax debts and other borrowings (8,501) (11,335) (282)Financial instruments recognition effect, net (200) � (6)Interest expense 3,158 3,776 105Profit from disposal of investments (51) (41) (2)Impairment loss on investments in associates 876 � 29Warranties 104 (612) 3Unrealised foreign exchange effect on non�operating balances 163 425 5Monetary effect on non�operating balances (4,169) (3,987) (138)

Operating cash flows before working capital changes 15,503 9,749 514Decrease (increase) in gross trade receivables (241) (391) (8)Decrease (increase) in prepaid expenses, advances and other receivables 130 41 5Decrease in inventories (176) 8 (6)Increase (decrease) in trade payables and other payables and accrued expenses 1,516 (2,131) 50Increase (decrease) in other taxes payable (3,399) (1,267) (113)Increase (decrease) in advances from customers (501) 2,032 (16)

Cash provided from operations 12,832 8,041 426Income taxes paid (3,771) (618) (125)Interest paid (1,358) (1,629) (45)

Net cash provided from operating activities 7,703 5,794 256Cash flows from investing activities:Purchase of property, plant and equipment (5,863) (5,525) (195)Proceeds from the sale of property, plant and equipment 65 35 2Proceeds from the sale of investments 18 16 1Purchase of investments (35) � (1)

Net cash used in investing activities: (5,815) (5,474) (193)Cash flows from financing activities:Proceeds from borrowings 4,364 2,773 144Reduction of loans and long�term taxes payable (9,320) (7,466) (309)Net proceeds from the sale (purchase) of treasury shares � (1) �Inflation effect on financing activities 3,916 4,094 130

Net cash used in financing activities (1,040) (600) (35)Effect of inflation on cash (267) (358) (9)Effect of exchange rate changes 94 112 4

Net increase (decrease) in cash and cash equivalents 675 (526) 23Cash and cash equivalents at the beginning of the period 3,294 3,820 109Cash and cash equivalents at the end of the period (Note 6) 3,969 3,294 132

JSC AVTOVAZ Consolidated Statement of Operations for the year ended 31 December 2001(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001, Note 3, except for earnings per share)(Amounts translated into US dollars for convenience purposes, Note 3)

98The accompanying Notes 1 to 25 are an integral part of the consolidated financial statements.

RR million US$ millionYear ended 31 December

Unaudited

2001 2000 2001

Net sales (Note 17) 112,843 98,841 3,744Cost of sales (Note 18) (91,549) (82,695) (3,037)

Gross profit 21,294 16,146 707

Selling, general and administrative expenses (Note 19) (8,790) (12,633) (292)Research and development expenses (Note 20) (2,496) (1,375) (83)Other operating expenses (Note 21) (2,842) (1,974) (94)

Operating income 7,166 164 238

Interest expense (3,158) (3,776) (105)Foreign exchange loss (Note 4L) (72) (358) (2)Monetary gain (Note 3A) 5,578 7,455 185Gains on extinguishment and forgiveness of tax debts and other borrowings (Note 15) 8,501 11,335 282Financial instruments recognition effect, net (Note 10) 200 � 6

Profit before taxation 18,215 14,820 604

Income tax expense (Note 22) (1,662) (10,863) (55)

Net profit 16,553 3,957 549

Minority interest (2,726) (688) (90)

Net income attributable to shareholders of JSC AVTOVAZ 13,827 3,269 459

Weighted average number of shares outstanding during the year (000’s) 15,101 15,123 15,101

Earnings per share (in RR and US $) (Note 4R) 916 216 30



101

JSC AVTOVAZNotes to the Consolidated Financial Statements at 31 December 2001(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001, Note 3)

1. JSC AVTOVAZ and subsidiaries

JSC AVTOVAZ and its subsidiaries’ ("AVTOVAZ") principal activities include the manufacture and sale of passenger automobiles.AVTOVAZ’s manufacturing facilities are primarily based in the Samara Oblast of Russia. AVTOVAZ has a sales and service network span�ning the former Soviet Union and a number of other countries. The parent company, JSC AVTOVAZ ("the Company" or JSC AVTOVAZ),was incorporated as an open joint stock company in the Russian Federation on 5 January 1993. On that date the majority of assets andliabilities previously managed by the state conglomerate Volga Association for the Production of Passenger Vehicles (PO "AvtoVAZ") weretransferred to AVTOVAZ. The transfer of assets and liabilities was made in accordance with Decree No. 721 on the privatisation of statecompanies approved on 1 July 1992. The Order of the State Committee of the Russian Federation for the Management of State Propertyapproving the privatisation plan was issued on 5 January 1993 ("the privatisation date"). In accordance with the privatisation plan jointstock company "AVTOVAZ" included, apart from the Volga Automobile Plant (VAZ), the following legal entities: DimitrovgradskyAvtoagregatny Zavod, Skopinsky Avtoagregatny Zavod, Serpukhovsky Avtomobilny Zavod, Zavod "AvtoVAZagregat", Tolyatinsky ZavodTekhnologicheskogo Oborudovaniya, Production Firm "AvtoVAZtrans", Production, Construction and Assembly Association"AvtoVAZstroimontazh", other legal entities and entities where PO "AvtoVAZ" had equity stakes. Subsequently, those entities were for�mally incorporated as subsidiaries of the Company. At 31 December 2001 JSC AVTOVAZ and its subsidiaries employed 151,343 employ�ees. JSC AVTOVAZ is registered at Yuzhnoye Shosse, 36, Togliatti, 445633, Russian Federation.

2. Going concern and operating environment of AVTOVAZ

A. Operating environment of AVTOVAZ

The economy of the Russian Federation continues to display characteristics of an emerging market. These characteristics include, butare not limited to, the existence of:

A currency that is not freely convertible outside of the country;Extensive currency controls;A low level of liquidity in the public and private debt and equity markets; and High inflation.

The prospects for future economic stability in the Russian Federation are largely dependent upon the effectiveness of economic meas�ures undertaken by the government, together with legal, regulatory, and political developments.

B. Going concern

During the transition to a market economy AVTOVAZ has experienced, as have other large manufacturing entities in Russia, financial difficulties. This has resulted in losses in prior years and the build�up of outstanding obligations to the tax authorities, lenders of financeand suppliers. As a result of these matters AVTOVAZ’s current liabilities exceeded its current assets as at 31 December 2001 by RR 5,218(2000: RR 11,803), which may cast doubt on the ability of AVTOVAZ to continue as a going concern.

Over recent years management has made significant improvements to AVTOVAZ’s financial position through the following initiatives:

The majority of tax and debt obligations have been restructured; A new family of higher margin automobiles has been introduced; The sales and distribution system has been reorganised resulting in the elimination of the incidence of bad debts;Cash flows have been accelerated by the introduction of full prepayment for all domestic sales;The creation of a strategic partnership with General Motors Corporation ("GM") and the European Bank for Reconstruction andDevelopment ("EBRD") for the development of the Niva 2123 model; production to commence in September 2002;Successful negotiation with the government, resulting in the abolition of a restrictive mortgage on the Company’s share capital, thusenabling the Company to consider raising finance; and Continued focus on cost reduction, leading to improvements in gross margin.

JSC AVTOVAZ Consolidated Statement of Changes in Shareholders’ EquityFor the year ended 31 December 2001(In millions of Russian Roubles in terms of purchasing power of the Rouble as of 31 December 2001, Note 3)(Amounts translated into US dollars for convenience purposes, Note 3)

100

In RR million


Sale of treasury shares (ordinary) � 442 � (50) 392Purchase of treasury shares (preference) � (505) � 505 �Currency translation adjustment � � (251) � (251)Profit for the year � � � 3,269 3,269

Balances as of 31 December 2000

� as previously reported 55,812 (29,569) 714 11,513 38,470� effect of adopting IAS 39, net of income

tax (Note 25A) � � � 2,803 2,803� as restated 55,812 (29,569) 714 14,316 41,273Sale of treasury shares (ordinary) � 36 � 234 270Purchase of treasury shares (preference) � (52) � 50 (2)Currency translation adjustment � � 121 � 121Profit for the year � � � 13,827 13,827


In US$ million (Unaudited)

Balances as of 31 December 2001 1,852 (982) 28 943 1,841

Profits and reserves available for distribution to shareholders are only those as stated in the Russian statutory financial statements ofJSC AVTOVAZ ("the Company") prepared in accordance with rules of the Russian Federation, which are not included herewith.Subsequent to the year�end, the Company declared dividends, see Note 16.

Share capital

Treasury shares

Currencytranslation

adjustmentRetained earnings

Total shareholders’

equity

Share capital

Treasury shares(Note 16)

Currency translation adjustment

Retained earnings

Total shareholders’

equity

103



102

Year Indices Conversion Factor1997 659,403 3.61998 1,216,400 2.01999 1,661,481 1.42000 1,995,937 1.22001 2,371,572 1.0

3. Basis of presentation of the consolidated financial statements (continued)A. Rouble consolidated financial statements (continued)

The main guidelines followed in restating the financial statements are:All amounts, including corresponding figures, are stated in terms of the measuring unit current at 31 December 2001; Monetary assets and liabilities are not restated because they are already expressed in terms of the monetary unit current at 31December 2001; Non�monetary assets and liabilities which are not expressed in terms of the monetary unit current at 31 December 2001 and compo�nents of shareholders’ equity are restated by applying the relevant conversion factors; and All items in the consolidated statement of operations and consolidated statement of cash flows are restated by applying the relevantconversion factors.

The effect of inflation on AVTOVAZ’s net monetary position for the period is included in the consolidated statement of operations as a mon�etary gain or loss.

B. U.S. Dollar TranslationU.S. dollar ("US$") amounts shown in the accompanying consolidated financial statements are translated from the RR as a matter of arith�metic computation only, at the official rate of the Central Bank of the Russian Federation at 31 December 2001 of RR 30.14 = US$1. TheUS$ amounts are presented solely for the convenience of the reader, and should not be construed as a representation that RR amountshave been or could have been converted to US$ at this rate, nor that the US$ amounts present fairly the financial position and results ofoperations and cash flows of AVTOVAZ in accordance with IAS.

Since 1 January 2002 the devaluation of the RR against the US$ has continued. As of 30 April 2002, the official exchange rate was RR31.20 = US$ 1 and the CPI 2,490,151 (1988 = 100), representing devaluation and inflation rates of approximately 4% and 5%, respec�tively, for this period.

4. Summary of significant accounting policiesA. Group accounting

Subsidiary undertakingsSubsidiary undertakings, which are those entities in which AVTOVAZ has an interest of more than one half of the voting rights, or other�wise has power to exercise control over the operations, are consolidated. Subsidiaries are consolidated from the date on which controlis transferred to AVTOVAZ and are no longer consolidated from the date that control ceases. All intercompany transactions, balances andunrealised gains on transactions between AVTOVAZ’s companies are eliminated; unrealised losses are also eliminated unless cost can�not be recovered. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policiesadopted by AVTOVAZ.

Minority interest at the balance sheet date represents the minority shareholders’ portion of the pre�acquisition carrying amounts of theidentifiable assets and liabilities of the subsidiary at the acquisition date, and the minorities' portion of movements in equity since the dateof the combination. Minority interest is presented separately from liabilities and shareholders’ equity.

Associated undertakingsInvestments in associated undertakings are accounted for by the equity method of accounting. These are undertakings over which AVTO�VAZ generally has between 20% and 50% of the voting rights, or otherwise AVTOVAZ has significant influence, but which it does not con�trol. Unrealised gains on transactions between AVTOVAZ and its associated undertakings are eliminated to the extent of AVTOVAZ’s inter�est in the associated undertakings; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of theasset transferred. AVTOVAZ’s investment in associated undertakings includes goodwill (net of accumulated amortisation) on acquisition.

Equity accounting is discontinued when the carrying amount of the investment in an associated undertaking reaches zero, unless AVTO�VAZ has incurred obligations or guaranteed obligations in respect of the associated undertaking.

B. Adoption of new standardsWith effect from 1 January 2001, AVTOVAZ has adopted IAS 39, Financial Instruments: Recognition and Measurement. The effects ofadopting this standard are summarised in the consolidated statement of changes in shareholders’ equity (on page 6), and further infor�mation is disclosed in Note 4C, in Note 10 and summarised in Note 25A. Comparative information was not restated as prescribed by thetransitional provisions of this standard. IAS 40, Investment property, also becomes operative in 2001, however, AVTOVAZ does not holdany investment property.

2. Going concern and operating environment of AVTOVAZ (continued)B. Going concern (continued)

During 2001 these initiatives have led to:

A significant operating income of RR 7,166;A reduction in net current liabilities of RR 6,585;A significant reduction in overdue payables;An increase in sales, including a 10% increase in sales by the parent company up to 774 thousand units from 706 thousand units in 2000.

Management is currently negotiating to raise substantial long�term finance with Russian lenders. This proposed financing is intended toallow AVTOVAZ to further reduce its net current liabilities and enable it to introduce new models on a timely basis.

Management is confident that this finance and the continued strength from underlying operations will enable AVTOVAZ to continue as agoing concern for the foreseeable future. Therefore, these financial statements do not include any adjustments relating to the recover�ability and classification of recorded asset amounts and classification of liabilities that would be necessary if AVTOVAZ is unable to con�tinue as a going concern.

3. Basis of presentation of the consolidated financial statementsA. Rouble consolidated financial statements

JSC AVTOVAZ and its subsidiaries maintain their books of accounts and prepare their statutory financial statements in accordance withthe Regulations on Accounting and Reporting of the Russian Federation or of the country in which the particular subsidiary is resident. Inthe case of companies resident in the Russian Federation, which account for approximately 95% of assets and liabilities of AVTOVAZ, thefinancial statements are based on the statutory records, with adjustments and reclassifications for the purpose of fair presentation inaccordance with International Accounting Standards ("IAS") as issued by the International Accounting Standards Committee ("IASC").Similarly, adjustments to conform with IAS, where necessary, are recorded in the financial statements of companies not resident in theRussian Federation. The financial statements are maintained under the historical cost convention, except as disclosed in Note 4"Summary of significant accounting policies" below.

The preparation of financial statements in conformity with IAS requires management to make prudent estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statementsand the reported amounts of revenues and expenses during the reporting period. Estimates have principally been made in respect to theimpairment provisions, the fair value of available�for�sale investments, deferred income taxes and provision for doubtful debts. Actualresults could differ from these estimates.

The adjustments and reclassifications made to the statutory records for the purpose of IAS presentation include the restatement of bal�ances and transactions for the changes in the general purchasing power of the Russian rouble ("RR") in accordance with IAS 29("Financial Reporting in Hyperinflationary Economies"). IAS 29 requires that the financial statements prepared in the currency of a hyper�inflationary economy be stated in terms of the measuring unit current at the balance sheet date. Corresponding figures, for the yearended 31 December 2000, have also been restated for the changes in the general purchasing power of the RR at 31 December 2001.

The restatement was calculated using the conversion factors derived from the Russian Federation Consumer Price Index ("CPI"), pub�lished by the Russian State Committee on Statistics ("Goscomstat"), and from indices obtained from other sources for years prior to1992. The indices used to restate the financial statements, based on 1988 prices (1988 = 100) for the five years ended 31 December2001, and the respective conversion factors, are:

105


4. Summary of significant accounting policies (continued)G. Inventories

Inventories are recorded at the lower of restated cost and potential net realisable value. Cost of inventory is determined on the weightedaverage basis, and includes material, labour and the appropriate indirect manufacturing costs (based on normal operating capacity).Obsolete and slow�moving inventories are written down, taking into account their expected use, to their future realisable value.

H. Cash and cash equivalents

Cash comprises cash on hand and demand deposits. Cash equivalents comprise short�term investments which are readily converted tocash, are not subject to significant risk of changes in value and mature within three months of the balance sheet date.

I. Property, plant and equipment

Property, plant and equipment are recorded at purchase or construction cost restated to the equivalent purchasing power of the RR at 31December 2001. However, when the amount AVTOVAZ expects to recover from the future use of an asset declines below the carryingamount, the carrying amount is reduced to the recoverable amount and the difference is recognised as an expense in the consolidatedstatement of operations.

Depreciation is calculated on the restated amounts of property, plant and equipment on a straight line basis. The depreciation periods,which approximate to the estimated useful economic lives of the respective assets, are as follows:

Repair and maintenance expenditure is expensed as incurred. Major renewals and improvements are capitalised and the assets replacedare retired. Gains and losses arising from the retirement of property, plant and equipment are included in the consolidated statement ofoperations as incurred.

J. Deferred income taxes

Deferred tax assets and liabilities are calculated in respect of temporary differences using the balance sheet liability method for financialreporting and accounting for deferred income taxes. Deferred income taxes are provided for all temporary differences arising betweenthe tax basis of assets and liabilities and their carrying values for financial reporting purposes. A deferred tax asset is recorded only tothe extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised.Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the lia�bility is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timingof the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the fore�seeable future.

K. Borrowings

Borrowings are recognised initially at the fair value of the proceeds received (which is determined using the prevailing market rate of inter�est for a similar instrument, if significantly different from the transaction price), net of transaction costs incurred. In subsequent periods,borrowings are stated at amortised cost using the effective yield method; any difference between fair value of the proceeds (net of trans�action costs) and the redemption amount is recognised as interest expense over the period of the borrowings. All borrowing costs areexpensed.

Number of yearsBuildings 40 to 50Foundry equipment 25Plant, machinery and equipment 10 to 20Other 5 to 10


104

4. Summary of significant accounting policies (continued)C. Investments

At 1 January 2001 AVTOVAZ adopted IAS 39 and classified its investments into the following categories: trading, held�to�maturity andavailable�for�sale. Investments that are acquired principally for the purpose of generating a profit from short�term fluctuations in priceare classified as trading investments and included in current assets. Investments with fixed maturity that the management has the intentand ability to hold to maturity are classified as held�to�maturity and are included in non�current assets; during the period AVTOVAZ did nothold any investments in this category. Investments intended to be held for an indefinite period of time, which may be sold in response toneeds for liquidity or changes in interest rates, are classified as available�for�sale; these are included in non�current assets unless man�agement has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will needto be sold to raise operating capital, in which case they are included in current assets. Management determines the appropriate classi�fication of its investments at the time of the purchase and re�evaluates such designation on a regular basis.

All purchases and sales of investments are recognised on the settlement date, which is the date that the investment is delivered to or byAVTOVAZ. Cost of purchase includes transaction costs. Trading and available�for�sale investments are subsequently carried at fair value,whilst held�to�maturity investments are carried at amortised cost using the effective yield method. Realised and unrealised gains andlosses arising from changes in the fair value of trading investments and of available�for�sale investments are included in the consolidat�ed statement of operations in the period in which they arise.

Prior to the adoption of IAS 39 AVTOVAZ had recorded marketable securities at market value. Other investments had been recorded atcost and provisions were recorded only where there was a diminution in value other than temporary.

The adjustment on the carrying values of available�for�sale investments related to the adoption of IAS 39 is recognised in the retainedearnings as at 1 January 2001 – see Note 10.

D. Revenue recognition

Revenues on sales of automobiles, spare parts and miscellaneous production are recognised when they are dispatched to customers asthis is the date that the risks and rewards of ownership are transferred to the customers. Value�added and excise taxes are deducted toobtain the value of revenue.

E. Trade receivables and payables

Accounts receivable and payable are recorded at nominal value. Accounts receivable include value�added and excise taxes. Accountsreceivable are written down to estimated recoverable amount by recording a provision for doubtful debts based on analysis of expectedfuture cash flows relating to doubtful receivables. Bad debts are written off when deemed uncollectible.

F. Value added tax

Value added taxes related to sales is payable to tax authorities upon collection of receivables from customers. Input VAT is reclaimableagainst sales VAT upon payment for purchases for production purposes or other transactions that are subject to VAT. The tax authoritiespermit the settlement of VAT on a net basis. VAT related to sales and purchases which have not been settled at the balance sheet date(VAT deferred) is recognised in the balance sheet on a net basis and disclosed separately from the actual VAT payable. VAT deferred isclassified as a current asset or liability. Where provision has been made against debtors deemed to be uncollectible, bad debt expenseis recorded for the gross amount of the debtor, including VAT. The related VAT deferred liability is maintained until the debtor is written offfor tax purposes.

107


4. Summary of significant accounting policies (continued)U. Provisions

Provisions are recognised when AVTOVAZ has present legal or constructive obligations as a result of past events, it is probable that a sig�nificant outflow of resources will be required to settle the obligations, and a reliable estimate of the amount of the obligation can be made.

V. Dividends

Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they are declared for payment before oron the balance sheet date. Dividends are disclosed in the Notes to the financial statements when they are proposed or declared for pay�ment after the balance sheet date but before the financial statements are authorised for issue.

5. Balances and transactions with related parties

The principal subsidiaries of AVTOVAZ and the degree of control exercised by the Company are as follows:

All of the above subsidiaries have been consolidated.

All associated companies are immaterial to AVTOVAZ and are included as available�for�sale investments, with the exception of ZAO GM�AVTOVAZ. The principal associated companies and degree of ownership by AVTOVAZ are as follows:

The transactions with related parties noted below are made in the ordinary course of business on normal commercial terms. The volumeof transactions with these related parties is not significant in the context of AVTOVAZ’s overall activities. Balances and transactions withrelated parties of AVTOVAZ as at and for the years ended 31 December 2001 and 2000 consist of the following:

A. Balances with related parties:

Country of 2001 2000Entity Incorporation Activity % share % share

OAO DAAZ Russia Car components 100 100OAO SAAZ Russia Car components 100 100OAO AvtoVAZtrans Russia Transport 100 100OAO TEVIS Russia Utilities 100 100OAO SeAZ Russia Car assembly 100 100Lada International Ltd. Cyprus Car distribution 99.9 99.9OAO AVVA Russia Investments 84 83Oy Konela Ab Finland Car distribution 70 70ZAO CB AFC Russia Financial 57 57ZAO IFK Russia Financial 51 51OOO Eleks�Polyus Russia Car distribution 51 51Lada Hellas S.A. Greece Car distribution 50 50Lada Parts Hellas S.A. Greece Spare parts distribution 50 50142 Technical Service Centres Russia Car service centres 50.1�100 50.1�100

Country of 2001 2000Entity Incorporation Activity % share % share

FerroVAZ GmbH Germany Metal production 50 50ZAO GM�AVTOVAZ Russia Vehicle production 47.6 �

Consolidated balance sheet caption Relationship 2001 2000

Trade receivables, gross: Associates 558 1,019Provision for doubtful debts: Associates (192) (238)Trade payables current: Associates 366 215


106

4. Summary of significant accounting policies (continued)L. Foreign currency transactions and translation

Monetary assets and liabilities of AVTOVAZ, which are denominated in foreign currencies at 31 December 2001, are translated into the RRat the exchange rate prevailing at that date. Foreign currency transactions are accounted for at the exchange rate prevailing at the dateof the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets andliabilities denominated in foreign currency are recognised in the consolidated statement of operations. Foreign subsidiary balance sheetsand statements of operations have been translated in RR at the year�end and average rates of exchange, respectively. Differences aris�ing from translation of foreign subsidiaries’ balances are included in shareholders’ equity as currency translation adjustments.

Exchange restrictions and controls exist relating to converting the RR into other currencies. The RR is not a convertible currency outsideof the Commonwealth of Independent States (CIS).

M. Product warranty costs

Estimated costs of future product warranties are fully provided for at the time of the sale of products.

N. Research and development costs

Research expenditure is recognised as an expense as incurred. Costs incurred for development projects are recognised as intangibleassets only to the extent that such expenditure is expected to generate future economic benefits.

O. Social costs

AVTOVAZ incurs costs on social activities, principally within the City of Togliatti. These costs include the provision of health services andkindergartens. These amounts represent an implicit cost of employing principally production workers and, accordingly, have beencharged to cost of sales in AVTOVAZ’s IAS consolidated financial statements.

P. Taxation charges

The profits’ tax expense for the year within the consolidated statement of operations includes current profits’ tax payable for the year andthe movement in the deferred tax account. Provisions and settlements of claims and similar charges, in accordance with IAS, includesprovision for all claims submitted by third parties and government authorities where management believe claims are substantiated (Note22). Interest accrued on overdue tax liabilities has been included in interest expense.

Q. Interest expense and interest income

Interest income and expenses are recognised on the accrual basis, as earned or incurred.

R. Earnings (loss) per share

Preference shares are considered to be participating shares as their dividend may not be less than that given to ordinary shares. Earningsper share is determined by dividing the net income attributable to ordinary and preference shareholders by the weighted average num�ber of ordinary and preference shares outstanding during the reporting year. Losses are not allocated to preference shares in this calculation.

S. Pension costs

AVTOVAZ contributes to the Russian Federation state pension scheme in respect of its employees. AVTOVAZ’s pension scheme contri�bution amounts to 28% of employees’ gross salaries, and is expensed as incurred.

T. Treasury shares

Treasury shares are stated at nominal value, restated to the equivalent power of the RR at 31 December 2001, any difference betweencost and nominal value on the purchase of treasury shares is recorded direct to retained earnings. Any gains or losses arising on the dis�posal of treasury shares are recorded direct to the consolidated statement of changes in shareholders’ equity.

109


Assets Under Construction ("AUC") includes the cost of fixed assets which have yet to be put into production. The majority of the trans�fers out from AUC were placed in service and transferred into Buildings and Plant and Equipment. AVTOVAZ presently does not have fundsavailable to finance the completion of some of the remaining projects in AUC. However, management believes that the completion ofthese assets will be financed through funds generated from operations and additional financing.

Management assessed the recoverability of property, plant and equipment at 31 December 1999. Value in use of cash generating unitswere estimated through a review of estimated discounted cash flows. Based upon this reassessment, management recorded an impair�ment provision of RR 9,069. For the year ended 31 December 2001, management have assessed the adequacy of its existing impairmentprovision and concluded that the amount reflected in the 2000 consolidated financial statements is still appropriate. No further adjust�ments have been recorded. Real discount rates approximating to 20% have been used to discount these future cash flows in assessingthe appropriateness of the impairment provision.

8. InventoriesInventories consist of the following:

2001 2000

Raw materials 7,734 6,632Work in progress 2,546 2,588Finished products 2,455 3,339

12,735 12,559

9. Property, plant and equipmentProperty, plant and equipment and related accumulated depreciation consist of the following:

CostBalance at 31 December 1999 62,594 82,892 8,937 20,336 174,759Additions / Transfers in 1,773 8,885 264 6,253 17,175Disposals / Transfers out (2,475) (3,292) (573) (10,455) (16,795)Balance at 31 December 2000 61,892 88,485 8,628 16,134 175,139Additions / Transfers in 1,437 5,924 513 6,843 14,717Disposals / Transfers out (1,110) (1,629) (152) (10,076) (12,967)


Accumulated DepreciationBalance at 31 December 1999 (26,892) (47,683) (6,764) (5,379) (86,718)Depreciation expense for 2000 (1,778) (3,135) (411) � (5,324)Disposals 1,183 1,823 284 101 3,391Balance at 31 December 2000 (27,487) (48,995) (6,891) (5,278) (88,651)Depreciation expense for 2001 (1,676) (3,254) (236) � (5,166)Disposals 620 811 67 85 1,583

Balance at 31 December 2001 (28,543) (51,438) (7,060) (5,193) (92,234)

Net Book ValueBalance at 31 December 2000 34,405 39,490 1,737 10,856 86,488


BuildingsPlant and

equipment OtherAssets underconstruction Total


108

5. Balances and transactions with related parties (continued)B. Transactions with related parties:

C. Shares of JSC AVTOVAZ held by subsidiaries:

As at 31 December 2001 61% (2000: 61%) of ordinary outstanding shares of JSC AVTOVAZ are held by subsidiaries. The shares of JSCAVTOVAZ that are owned by subsidiaries are recognised as treasury shares in these financial statements.

D. Compensation of the Board of Directors and the Management Board:

Compensation paid to members of the executive bodies of AVTOVAZ for their services in executive management positions is made up ofa contractual salary and a performance bonus.

Discretionary bonuses may be also payable to the members of the Board of Directors, which are approved by the Annual General Meeting,provided the Company has statutory profit for the year.

Upon the decision of the Annual General Meeting, additional fees may be paid to the members of the executive bodies, including forattending board committees’ meetings.

Total compensation of the members of the executive bodies included in Selling, general and administrative expenses in the consolidatedstatement of operations amounted to RR 19 for the year ended 31 December 2001 (2000: RR 11).

Consolidated statement of operations caption Relationship 2001 2000

Net sales: Associates 2,641 3,140Purchases: Associates 4,504 4,012

6. Cash and cash equivalentsCash and cash equivalents comprise the following:

2001 2000

RR denominated cash on hand and balances with banks 2,634 1,803Foreign currency denominated balances with bank 1,335 1,491

3,969 3,294

7. Trade receivables

2001 2000Trade receivablesRouble denominated 4,786 5,306Foreign currency denominated 3,911 3,666

8,697 8,972

Less Provision for doubtful debtsRouble denominated (484) (578)Foreign currency denominated (294) (238)

(778) (816)

Net receivableRouble denominated 4,302 4,728Foreign currency denominated 3,617 3,428

7,919 8,156

111


11. Other payables and accrued expenses (continued)

Currently the Company has claims that were not reflected in the financial statements for 2001. Specifically, Vittorio�Martorelli submitteda claim against JSC AVTOVAZ in the amount of RR 837 for the alleged non�supply of cars and missing parts, warranty claims and com�pensation for the termination of the Agent agreement on 19 May 1999. Management are defending this claim and believe that this isunlikely to result in any significant payment and, therefore, this claim is not reflected in the financial statements.

Customs claims

The amount above represents management’s best estimate of the probable liability in respect of claims for the non�timely repatriation ofproceeds of export automobiles. Legislation prior to recent amendments required proceeds from the sale of automobiles to be repatri�ated within 90 days. This provision is expected to be utilised in 2002.

12. Warranties

JSC AVTOVAZ gives warranties for one year or until a mileage of 30,000 kilometres is reached on certain products and undertakes to repairor replace items that fail to perform satisfactorily. A provision of RR 567 (2000: RR 509) has been recognized at the year�end for expect�ed warranty claims based on past experience of the level of repairs and returns. The remaining balance of RR 435 (2000: RR 389) relatesto actual invoices received by AVTOVAZ in respect of warranty obligations.


110

9. Property, plant and equipment (continued)

The accumulated depreciation within assets under construction of RR 5,193 at 31 December 2001 and 2000 represents the cumulativeimpairment provision on assets under construction. The cumulative impairment provision included within the accumulated depreciationof the remaining property, plant and equipment is RR 3,876 at 31 December 2001. Management has used various assumptions in thecalculation of the recoverable value of property, plant and equipment. Variations in these assumptions may give rise to a significantly dif�ferent amount for the impairment provision. In management’s opinion, this provision represents the best estimate of the impact of impair�ment.

The assets transferred to AVTOVAZ upon privatisation do not include the land on which AVTOVAZ’s factory and buildings, comprisingAVTOVAZ’s principal manufacturing facilities, are situated. AVTOVAZ has the option to purchase this land upon application to the PropertyFund of the Samara Oblast or to continue occupying this land under a rental agreement. Russian legislation does not specify an expirydate to this option. At 31 December 2001 AVTOVAZ has not filed any application to exercise the purchase option.

At 31 December 2001 and 31 December 2000, the gross carrying value of fully depreciated property, plant and equipment was RR 38,035and RR 36,879, respectively.

10. Available�for�sale investments

Available�for�sale investments comprise principally non�marketable equity securities, which are not publicly traded or listed on theRussian stock exchange. Due to the nature of the local financial markets, it is not possible to obtain current market values for theseinvestments. For these investments, fair value is estimated by reference to the discounted cash flows of the investment.

Following the adoption on 1 January 2001 of IAS 39, fair value of available�for�sale investments was estimated to be RR 246 at that date.In accordance with IAS 39, the consolidated statement of operations and the consolidated statement of changes in shareholders’ equityfor the year ended 31 December 2000 and the consolidated balance sheet at 31 December 2000 have not been restated. The adjust�ment of the previous carrying amounts of available�for�sale investments has been recognised as an adjustment of the opening balanceof retained earnings and amounted to RR 1,090. At 31 December 2001, fair value of available�for�sale investments was RR 308. Includedwithin Effect on recognition of financial instruments is a gain of RR 200 for unrealised fair value adjustments to available�for�sale invest�ments.

11. Other payables and accrued expenses

Other payables and accrued expenses includes the following:

2001 2000

Payables to financial institutions 1,594 �Loan interest payable 1,480 1,585Vacation pay allowance 1,191 970Provisions 775 1,427Payable to customs authorities 477 1,310Salaries payable 270 371Other 1,208 639

Total 6,995 6,302

Included within Other payables and accrued expenses are provisions in the amount of RR 775 (2000: RR 1,427). During 2001 the fol�lowing movements of these provisions took place:

Customs claims Legal claims Total

Balance at 31 December 2000 1,187 240 1,427Inflationary gain (188) (38) (226)Utilised or released (999) (202) (1,201)Additional provisions 775 � 775

Balance at 31 December 2001 775 � 775

13. Short�term and long�term debt due after one yearShort�term and long�term debt by principal lender may be analysed as follows:

Short�term debt (including current portion of long�term debt) 2001 2000

Vnesheconombank 1,527 1,988Sberbank 593 521Ministry of Finance of the Russian Federation 576 535GAZBANK 364 489KB Solidarnost 176 119AvtoVAZbank 4 143Various financial institutions 1,057 1,069

4,297 4,864

Short�term debt by main categories:

Currency Interest Rate 2001 2000

US$/DM 3.8%�8.6% 2,138 2,883US$/DM 14% 42 �RR 18%�25% 2,117 1,981

Total loans from financial institutions 4,297 4,864

Long�term debt 2001 2000

Vnesheconombank 1,859 5,600Ministry of Finance of the Russian Federation 339 556KB Avtomobilniy Bankirskiy Dom 96 521Other 566 457

2,860 7,134

During 2001 the Company restructured its obligations with Vnesheconombank resulting in a reduction in the fair value of its obligations.This is discussed further in Note 15. Also during 2001 the Company defaulted on the repayment of the Vnesheconombank and Ministryof Finance (the Lenders) loans and, as a result, the Lenders have the option to call these loans. However, the Lenders have not exercisedthese options and have represented that they do not intend to exercise these options in 2002. Management is confident that the balanceclassified as long�term amounting to RR 2,198 will not become payable on demand.

113


14. Taxation (continued)Long�term taxes payable (continued)

The fair value of this debt and its maturity profile is as follows:

2001 2000

Current 183 372 555 340 292 6321 to 2 years 182 681 863 339 3,988 4,3272 to 3 years 152 554 706 339 729 1,0683 to 4 years 124 332 456 339 738 1,0774 to 5 years 105 322 427 340 530 870Thereafter 1,439 872 2,311 1 848 1,363 3,211Total restructured 2,185 3,133 5,318 3,545 7,640 11,185Less: portion of taxes payable � current (183) (372) (555) (340) (292) (632)Long�term portion of restructured taxes 2,002 2,761 4,763 3,205 7,348 10,553

Restructured taxes and other state funds includes RR 4,763 at 31 December 2001, which accrue interest as follows:

RR 1,574 at one fourth of the official rate of financing of the Central Bank of Russia (31 December 2001: 6.25%); from 1 January 2002interest will accrue at a fixed rate of 5.5%;

RR 69 accrue interest at half of the official rate of the Central Bank of Russia per day (31 December 2001: 12.5%); and RR 3,120 accrue no effective interest.

The total outstanding liability of RR 4,763 at 31 December 2001 has been discounted using a discount rate between 26% and 30% toreflect the fair value of the liability (see Note 15).

Comparatively, restructured taxes and other state funds included RR 10,553 at 31 December 2000, which accrue interest as follows:

RR 2,884 at the official rate of financing of the Central Bank of Russia (31 December 2000: 25%);RR 1,195 at three fourths of the official rate of financing of the Central Bank of Russia (31 December 2000: 19%); RR 591 accrued interest at one three hundredths of the official rate of the Central Bank of Russia per day (31 December 2000: 30%); and

RR 5,883 accrued no interest.

The amount of RR 5,883 as at 31 December 2001, which accrues no interest, has been discounted to reflect the fair value of the liabilityusing discount rate of 12 % to 16 % (see Note 15).

AVTOVAZ submitted to the Government of the Russian Federation a programme of long�term development and improvement in the invest�ment attractiveness. This proposed programme included the abolition of the requirement to register with the Russian Federal PropertyFund (RFPF) the issuance of 50% plus one share as collateral under the Agreement on restructuring of the Company’s debts to theFederal Budget. In accordance with Resolution of the Government No. 927 of 29 December 2001, the terms of restructuring ofAVTOVAZ’s liability to the Federal Budget were revised. In future, the restructuring agreement will not require that the Company issueadditional shares.

AVTOVAZ is in compliance with the terms of restructuring the federal, regional and local tax debts at 31 December 2001.

Federal

Regional taxesand other state

funds Total Federal

Regional taxes and other

state funds Total


112

13. Short�term and long�term debt due after one year (continued)Long�term debt by category of loan consists of the following:

Currency Interest Rate 2001 2000

US$/DM/Euro 3.8%�8.6% 2,320 6,291RR 18%�25% 408 224RR � 132 619

Total loans from financial institutions 2,860 7,134

Long�term debt is repayable as follows:

2001 2000

1 to 2 years 1,065 1,6342 to 3 years 561 1,1773 to 4 years 481 1,1774 to 5 years 413 1,098Over 5 years 340 2,048

2,860 7,134

As at 31 December 2001 and 2000 loans for RR 2,856 and RR 3,161, respectively, inclusive of short�term borrowings, are guaranteed bycollateral of receivables and inventories.

AVTOVAZ has not entered into any hedging arrangements in respect of its foreign currency obligations or interest rate exposures.

14. TaxationTaxes payable�currentTaxes payable�current are comprised of the following:

2001 2000

Profit tax 1,750 233Property, road users, pensions and other taxes 959 3,750Penalties and interest on other taxes 759 1,586Value�added tax 673 454Penalties, interest and provisions for profit tax 485 2,464Excise tax 187 374Current portion of taxes restructured to long�term 555 632

5,368 9,493

The principal tax liabilities past due accrue interest each day at one three hundredth of the current refinancing rate of the Central Bank ofRussia which, at 31 December 2001 was equal to an effective rate of 8.3% (2000: 30%). The principal tax liabilities past due at 31December 2001 and 2000 were approximately RR 746 and RR 2,944, respectively.

Long�term taxes payable

Long�term taxes payable comprise various taxes payable to the Russian Government which were previously past due and which havebeen restructured to be repaid over a period of up to 10 years following the application of the Russian Government Resolutions 254"Terms of the restructuring of payables to the Federal Budget" (dated 5 March 1997) and 1316 "Restructuring of payables of JSC AVTOVAZ to the Federal Budget" (dated 15 October 1997), as described below.

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16. Share capital

The carrying value of share capital, as restated in terms of the purchasing power of the Rouble as at 31 December 2001, and the legalshare capital value subscribed, issued and fully paid up, consists of the following classes of shares:

2001 2000

Class A preference 4,930,340 2,465 8,566 4,930,340 2,465 8,566Ordinary 27,194,624 13,597 47,246 27,194,624 13,597 47,246Total share capital 32,124,964 16,062 55,812 32,124,964 16,062 55,812Less:treasury share capitalClass A preference (13,163) (6) (23) (13,163) (6) (23)Ordinary (17,015,684) (8,508) (29,562) (17,006,800) (8,504) (29,546)Total treasury share capital (17,028,847) (8,514) (29,585) (17,019,963) (8,510) (29,569)

Total outstanding share capital 15,096,117 7,548 26,227 15,105,001 7,552 26,243

Class A preference shares, which were issued to employees free of charge at the privatisation date (see Note 1), give the holders the rightto participate in general shareholders’ meetings without voting rights except in instances where decisions are made in relation to re�organisation and liquidation of the Company, and where changes and amendments to the Company’s charter which restrict the rights ofpreference shareholders are proposed.

In accordance with the Company’s Charter adopted in 1993, and subsequently amended in General Shareholders’ Meetings since then,preference shareholders are not entitled to convert their shares into ordinary shares. However, preference shareholders are entitled to adividend of a portion of net statutory profits for the year. In the years that the Company cannot pay dividends or the Company has no prof�it, the preference shareholders obtain the right to vote on all matters within the remit of the General Shareholders’ Meeting. Preferenceshares have enjoyed voting rights since 1996 and will do so until the proposed dividend for 2001 is paid.

Dividends declared for a single common share cannot exceed the dividend declared for a single preference share for any period. As such,the preference holders share in earnings along with ordinary holders and thus the preference shares are considered participating sharesfor the purpose of the calculation of earnings per share.

The Annual General Shareholders’ Meeting of JSC AVTOVAZ on 25 May 2002 decided to pay a dividend of RR 47.58 per share to prefer�ence shareholders.

No. of shares

Legal statutory

value Carrying amount No. of shares

Legal statutory

value Carrying amount

17. Net sales revenueThe components of net sales were as follows:

2001 2000Finished vehicles 93,232 83,226Automotive components and assembly kits 15,971 11,998Other sales 3,640 3,617

112,843 98,841


114

15. Gains on extinguishment and forgiveness of debt

Gains on forgiveness and extinguishment of debt credited to the consolidated statement of operations comprise:

2001 2000Gain on extinguishment of tax debts 4,125 142Gain on forgiveness of tax debts 2,976 4,379Gain on extinguishments of other borrowings 1,400 6,814

8,501 11,335

The net gain on extinguishment of tax debt arises from the application of Resolutions 254 and 1316 of the Russian Government andcertain other restructuring agreements that restructure current tax debts by deferring payment of liabilities to the federal and regionaltax authorities and the pension and other funds at interest rates of either zero or less than market rate. This restructuring constituteda derecognition of a financial liability. In 2000 gains on the extinguishment of tax debts of RR 142 were recorded based on the differ�ence between the recorded and net present value of the future cash flows of restructured tax liabilities. Following the adoption of IAS39 the fair value of all previously restructured tax debts was reassessed as at 1 January 2001 using discount rates of 26% to 30%.Previously these had been reflected at the value of discounted future cash flows using discount rates of 12% to 16%. The resultant gainof RR 2,648 was credited direct to the consolidated statement of changes in shareholders’ equity. During 2001 previously restructuredtax debt and previously non�restructured tax debt were restructured. The resultant gain of RR 4,125 was credited direct to the consol�idated statement of changes in shareholders’ equity in 2001.

The Tax Code provides that the amount of accrued interest cannot be in excess of the principal debt. During 2000 previously accruedinterest of RR 2,941 in excess of the principal balance was forgiven. Furthermore, during 2000 interest of RR 1,438 accrued in priorperiods was forgiven in accordance with an agreement with the medical insurance fund. During 2001 a gain was recorded reflectingthe forgiveness of the interest previously accrued in excess of the principal debt of RR 2,110. In addition, tax liabilities of RR 728 wereforgiven following court decisions, and a further RR 138 was forgiven in accordance with a decision of the Tax Inspectorate of Togliatti.

During 2000, management negotiated the settlement of US$ 260 million of debt through consideration of RR 1,876 of cash, RR 702 ofnon�interest bearing rouble�denominated bills of exchange payable within one year, and RR 6,289 of non�interest bearing bills ofexchange payable between 26 and 30 years. The present value of these bills of exchange, using discount rates of 16% was estimatedto equal RR 99 as at 31 December 2000. The resultant gain of RR 6,814 was credited to the consolidated statements of operations in2000 as an extinguishment of debt. Following the adoption of IAS 39 the current value of restructured borrowings was reassessed asat 1 January 2001 using discount rates of 22.5% to 24.5%. The resulting gain of RR 431 was credited direct to the consolidated state�ment of changes in shareholders’ equity. During 2001, management negotiated the settlement of a further US$ 126 million of currentand long�term debt payable to Vnesheconombank through consideration of US$ 55 million cash, RR 566 of non�interest bearing billsof exchange payable within one year, and RR 1,481 of non�interest bearing bills of exchange payable in 2020. The fair value of the set�tlement was considerably less than the initial value of the debt. The resultant gain of RR 1,400 was credited to the consolidated state�ment of operations in 2001.

117


22. Income tax expense

2001 2000Current profits tax 5,998 4,685Movement in deferred tax account (1,266) 4,390Effect of increase (reduction) in tax rate (3,070) 1,788

1,662 10,863

In accordance with IAS 37 ("Provisions, contingent liabilities and contingent assets") AVTOVAZ accrued in 2000 a provision of RR 2,733 inrespect of certain claims raised by the tax authorities for profits taxes. AVTOVAZ included this within the current profits tax expense in2000. This provision is reflected within Taxes payable�current in the consolidated balance sheet.

The tax charge of AVTOVAZ may be reconciled as follows:

2001 2000IAS profit before taxation in JSC AVTOVAZ’s consolidated financial statements 18,215 14,820

Theoretical tax charge at statutory rate of 35% (2000: 30%) 6,375 4,446

Tax effect of items which are not deductible or assessable for taxation purposes:

Tax penalties and interest 282 379Qualifying capital expenditure � (336)Non�temporary elements of monetary gains / losses 2,826 2,452Non�deductible expenses, net 1,991 1,081Temporary difference on statutory revaluation (4,056) (3,048)Gains on extinguishment of tax obligations (2,485) (1,356)Provision for tax claim � 2,531Other 1,783 4,120

Inflation effect on deferred tax balance at the beginning of the year (1,982) (1,193)Effect of increase (reduction) in tax rate (3,070) 1,787

Tax charge 1,662 10,863

In general during 2001 AVTOVAZ was subject to tax rates of approximately 35% on taxable profits. As a result of the changes in theRussian tax legislation, a profit tax rate of 24% has been enacted starting from 1 January 2002. Deferred tax assets/liabilities are meas�ured at the rate of 24% as at 31 December 2001 (35% as at 31 December 2000). The net effect of the change on deferred tax balancesrecognised as at 31 December 2001 is reflected in the consolidated statement of operations for the year ended 31 December 2001.


116

18. Cost of salesThe components of cost of sales were as follows:

2001 2000

Materials and components used 68,926 59,103Labour costs 7,278 7,120Production overheads 7,209 7,510Depreciation 5,166 5,324Social expenditure 2,044 1,959Changes in inventories of finished goods and work in progress 926 1,679

91,549 82,695

21. Other operating expensesThe components of other operating expenses were as follows

2001 2000

Write�off or loss on disposal of fixed assets 925 812Impairment loss on investments in associates 876 �Provisions and settlements of claims and similar charges 736 870Gain on disposal of investments (51) (41)Other 356 333

2,842 1,974

20. Research and development expensesResearch and development expenses comprise:

2001 2000

Labour costs 884 595Materials 635 507Other 977 273

2,496 1,375

19. Selling, general and administrative expensesSelling, general and administrative expenses comprise:

2001 2000

Labour 2,472 2,340Transportation 1,701 1,879Taxes (property, dwelling) 1,589 2,610Road user tax 1,011 2,364Administration overheads 913 937Materials 563 457Advertising 361 520Discounts and commissions to dealers 21 72Bad debt expense (183) 567Other 342 887

8,790 12,633

119


24. Contingencies, commitments and guaranteesA. Contractual commitments and guarantees

As at 31 December 2001 AVTOVAZ had contractual commitments for the purchase of property, plant and equipment from third par�ties for RR 880 (2000: RR 442).

Other than these commitments, there are no other commitments and guarantees in favour of third parties or related companies thatwere not disclosed in these consolidated financial statements.

B. Taxation

Russian tax legislation is subject to varying interpretations and changes occur frequently. The interpretation of tax legislation by taxauthorities as applied to the transactions and activity of AVTOVAZ may not coincide with that of management. As a result, transactionsmay be challenged by tax authorities and AVTOVAZ may be assessed additional taxes, penalties and interest, which can be significant.The periods remain open to review by the tax and customs authorities with respect to tax liabilities for three years. In addition, AVTOVAZis subject to several claims from tax authorities for additional taxes and related fines and penalties. In the opinion of management, theultimate outcome of these claims should not have a material adverse effect on the result of operations or financial position of AVTOVAZ.

C. Insurance policies

AVTOVAZ holds no insurance policies in relation to its assets, operations, or in respect of public liability or other insurable risks, with theexception of insurance policies covering export shipments and for all events subject to mandatory insurance, and no provisions for self�insurance are included in the accompanying consolidated balance sheet.

D. Environmental matters

The enforcement of environmental regulation in Russian Federation is evolving and the enforcement posture of government authorities iscontinually being reconsidered. AVTOVAZ periodically evaluates its obligations under environmental regulations. As obligations aredetermined, they are recognised immediately. Expenditures which extend the life of the related property or mitigate or prevent futureenvironmental contamination are capitalised. Potential liabilities which might arise as a result of stricter enforcement of existing regula�tions, civil litigation or changes in legislation or regulation cannot be estimated but could be material. In the current enforcement climateunder existing legislation, management believes that there are no significant liabilities for environmental damage.

E. Legal proceedings

During the year, AVTOVAZ was involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the ordinarycourse of business. Also, AVTOVAZ is subject to various environmental laws regarding handling, storage, and disposal of certain prod�ucts and is subject to regulation by various governmental authorities. In the opinion of management, there are no current legal proceed�ings or other claims outstanding which could have a material adverse effect on the result of operations or financial position of AVTOVAZ.

25. Financial instruments and financial risk factors A. Adoption of IAS 39 "Financial Instruments: Recognition and Measurement"

AVTOVAZ adopted IAS 39 at 1 January 2001. The impact on shareholders’ equity and on various balance sheet captions at 1 January 2001is shown below.

Available�for�sale investments; remeasured to fair value (1,090) 1,591 (83) 418Restructured debt and taxes payable 3,079 (151) (485) 2,443Accounting for embedded derivatives (107) 37 12 (58)

1,882 1,477 (556) 2,803

Adjustments toBalance Sheet

items

Deferredprofits

tax impact Minorityinterest

Retained earnings impact


118

22. Income tax expense (continued)

A. Deferred tax assets

Tax effects of temporary differences:Trade receivables � � 13 (4) 9Inventories � � � � �Property, plant and equipment � � (7) 2 (5)Investments � 268 (214) (16) 38Other temporary differences � � 3 (1) 2

Deferred tax assets � 268 (205) (19) 44

31 December2000

Effect of adopting

IAS 39Movement

in yearReductionin tax rate

31 December2001

B. Deferred tax liabilities

Tax effects of temporary differences:Trade receivables 93 (44) (29) (6) 14Inventories 837 � (788) (15) 34Property, plant and equipment (10,607) � 2,273 2,619 (5,715)Investments (328) 1,323 (260) (231) 504Accounts payableand provisions 471 81 7 (176) 383

Long�term debt (2,998) (151) � 990 (2,159)Other temporary differences 20 � 268 (91) 197

Deferred tax liability (12,512) 1,209 1,471 3,090 (6,742)

31 December2000

Effect of adopting

IAS 39Movement

in yearReductionin tax rate

31 December2001

The deferred tax assets will be realised in different periods than the deferred tax liabilities will be settled. Management believes that therewill be sufficient taxable profits available at the time the temporary differences reverse to utilise the deferred tax assets.

Under the profits tax legislation currently enacted, the statutory revaluation of property, plant and equipment as at 1 January 2002 can betaken into account when calculating deductible depreciation charge for profits tax purposes. Accordingly, the deferred tax liability hasbeen reduced by the amount of RR 2,781 to reflect the impact of the increased tax base of property, plant and equipment resulting fromthe statutory revaluation recorded by AVTOVAZ as at 1 January 2002. Furthermore, profits tax legislation presently does not directlyexclude statutory revaluation surplus from the profits subject to income tax. As a result, there is a risk that the surplus may be taxable.Management believes that it is not probable that the company will be assessed taxes related to the revaluation surplus, therefore, nodeferred profit tax liability is recognised in these financial statements. If additional taxes were to be assessed, deferred tax liability in rela�tion to the revaluation would amount to RR 2,781.

23. Barter transactions

Included in sales are non�cash transactions amounting to RR 688 (2000: RR 718). The transactions represent mainly sale of products inexchange of raw materials and services or cancellation of mutual balances with customers and suppliers within the operating cycle.


120

25. Financial instruments and financial risk factors (continued)B. Credit risk

Financial assets, which potentially subject JSC AVTOVAZ and subsidiaries to concentrations of credit risk, consist principally of tradereceivables. Although collection of receivables could be influenced by economic factors, management believes that there is no signifi�cant risk of loss to AVTOVAZ beyond the allowance already recorded.

C. Foreign exchange risk

AVTOVAZ’s manufacturing operation is in the Russian Federation with limited imports of raw materials and components. AVTOVAZ exports11% (2000: 14%) of its automobile production to western and eastern Europe, these sales are denominated in hard currency. Net foreigncurrency receivables amount to RR 3,617 (2000: RR 3,428). AVTOVAZ has debt obligations of RR 4,458 (2000: RR 9,174) denominated inhard currency.

D. Interest rate risk

The majority of interest rates on debt are fixed, these are disclosed in Note 13. Assets are generally non�interest bearing.

E. Fair values

In assessing the fair value of non�traded financial instruments AVTOVAZ uses a variety of methods including estimated discounted valueof future cash flows, and makes assumptions that are based on market conditions existing at each balance sheet date.

The carrying amount of financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values.At 31 December 2001 and 2000, the fair value of long�term debt and long�term taxes, which is estimated by discounting the future con�tractual cash flows at the current market interest rate available, in the opinion of the management, did not materially differ from the car�rying amount of this financial instrument.

Location and mailing address: JSC "AVTOVAZ"445633, Russian Federation, Samara Region,Togliatti, Yuzhnoye Shosse, 36Telephone: (8482) 37 76 17Facsimile: (8482) 73 82 21Telex: 214 115 TLT.RUWebsite: www.vaz.ru

Date of the Company’s state registration: 5 January 1993, registration number 2925

Location and mailing address Property Department of JSC AVTOVAZof Shareholder Relations: 445633, Russian Federation,

Samara Region,Togliatti, Yuzhnoye Shosse, 36Telephone: (8482) 34 96 66Facsimile: (8482) 73 81 61e�mail: [email protected]

Location and mailing address Open Joint Stock Company of the Keeper of the Shareholders’ Register: "Tsentralny Moskovskiy Depositariy"

107066, Russian Federation,Moscow, ul. Olkhovskaya, 22Telephone: (095) 263 81 53Facsimile: (095) 263 80 69Website: www.mcd.ru

Regional branches of OAO "Tsentralny Moskovskiy Depositariy" which receive documents for processing in the Shareholders’Register of JSC AVTOVAZ:

163061, Arkhangelsk, ul. Voskresenskaya, 12. Telephone: (8182) 65 75 44. 362025, Vladikavkaz, Republic of Northern Osetia�Alania, ul. Frunze, 24. Telephone: (8672) 54 56 93.620062, Yekaterinburg, prospekt Lenina, 60a, office 540. Telephone: (3432) 75 70 71. 428057, Izhevsk, Republic of Udmurtia, ul. Krasnogvardeiskaya, 18, office 21. Telephone: (3412) 22 12 53.156000, Kostroma, ul Pyatnitskaya, 49. Telephone: (0942) 31 62 79. 350023, Krasnodar, ul. Krasnaya, 182. Telephone: (8612) 51 74 391. 685000, Magadan, ul. Proletarskaya, 11. Telephone: (4132) 29 71 92. 423821, Naberezhnye Chelny, Republic of Tatarstan, Tsvetochny bulvar, 13. Telephone: (8552) 56 37 95. 603098, Nizhny Novgorod, prospekt Gagarina, 28, office 43. Telephone: (8312) 34 24 43. 644037, Omsk, ul. Nekrasova, 1. Telephone: (3812) 23 01 55.440600, Penza, ul. Volodarskogo, 47. Telephone: (8412) 66 28 16. 614000, Perm, ul. Lenina, 50. Telephone: (3422) 18 01 66. 390005, Ryazan, ul. Mashinostroitelei, 4а. Telephone: (0912) 24 04 10. 443086, Samara, ul. Polevaya, 5, office 209. Telephone: (8462) 35 68 94.191194, Sankt Peterburg, ul. Shpalernaya, 36, office 417. Telephone: (812) 320 86 40. 410028, Saratov, ul. Chernyshevskogo, 153. Telephone: (8452) 24 25 21.392002, Tambov, ul. Sovetskaya, 34, office 206. Telephone: (0752) 71 16 58.170000, Tver, ul. Simeonovskaya, 30, office 55. Telephone: (0822) 33 82 39. 445051, Togliatti, Samara Region, ul. Frunze, 6а. Telephone: (8482) 34 52 59. 300041, Tula, ul. Zhavoronkova, 1a. Telephone: (0872) 31 96 60.432067, Ulyanovsk, prospekt Leninskogo Komsomola, 38. Telephone: (8422) 20 38 77.454084, Chelyabinsk, prospekt Pobedy, 160, office 243. Telephone: (3512) 66 15 01. 357100, Cherkessk, Republic of Karachayevo�Cherkessiya, ul. Lenina, 34a. Telephone: (87822) 5 69 87. 693000, Yuzhno�Sakhalinsk, ul. Karla Marksa, 23. Telephone: (4242) 74 22 81.

General information

JSC AVTOVAZ annual report 2001

Documents

Transcript of JSC AVTOVAZ annual report 2001