OJSC AVTOVAZ A NEW DIRECTION NEW CLN ISSUE OCTOBER 2005

. OJSC AVTOVAZ A NEW DIRECTION NEW CLN ISSUE OCTOBER 2005 Lead Manager: TRUST Investment Bank Ulansky Pereulok 26, Moscow, Russia 107045 Fixed Income Research Tel. +7 (095) 247 2591 Fax +7 (095) 208 2256 E-mail: debt@trust.ru http://www.trust.ru

CONTENTS INVESTMENT SUMMARY... 3 CONCLUSION... 4 OJSC AVTOVAZ TODAY AND TOMORROW... 5 AVTOVAZ is a Leading Russian Auto Producer...5 AVTOVAZ: Mission Statement...5 Strategic Goals for the Next 5 Years...6 SHAREHOLDER STRUCTURE... 7 RUSSIAN AUTOMOBILE MARKET... 8 Key Features of the Russian Automobile Market...8 Automobile Fleet and Production...11 Government Policy on the Automobile Industry...13 AVTOVAZ A LEADING GLOBAL CAR PRODUCER...14 Company History...14 Model Range...14 Cooperation with GM and the Chevrolet Niva...16 LADA KALINA Project...17 LADA PRIORA Project...19 Sales and Marketing...21 Export...24 Development of Customer Credit Services...25 Service and Distribution Network...25 FOR THE INVESTOR...26 Credit Strengths...26 Credit Challenges...27 FINANCIAL STATEMENTS...28 AVTOVAZ Group Companies: Sales Dynamics...28 CREDIT CONSIDERATIONS...30 International Peers...32 Credit History...33 Investment Program...35 Dividends...35 Financial Forecast for 3-5 Years...35 Program to Reduce Expenses...36 APPENDIX: KEY FINANCIAL INDICATORS...37 page 2 of 38

INVESTMENT SUMMARY The Credit Linked Notes (CLNs) of OJSC AVTOVAZ provide investors with an opportunity to gain exposure to the fast growing Russian consumer market and the rapidly developing passenger automobile market, which was estimated at US$17.4 billion in 2004. AVTOVAZ has enjoyed positive financial results thanks to its leading position in one of the world s fastest growing car markets, with average annual growth of 6% over the last five years. AVTOVAZ dominates the all-important medium-price segment, supplying over 40% of all passenger cars to a market averaging 1.5 million new purchases per year. This new US$-denominated issue is the company s latest step in enhancing its credit history and raising its profile on international capital markets. Proceeds from this new CLN will be used to modernize existing production facilities and finance the production of its latest LADA KALINA and LADA PRIORA models. These new models are the most advanced passenger cars ever produced by AVTOVAZ and meet all modern-day standards for performance and safety. EXHIBIT 1. MARKET CAPACITY FOR LADA AUTOMOBILES BY REGION OF THE RUSSIAN FEDERATION - over 100,000 automobiles - 20,000-50,000 automobiles - 10,000-20,000 automobiles - 5,000-10,000 automobiles - 1,000-5,000 automobiles - under 1,000 automobiles Source: company info, TRUST estimates page 3 of 38

CONCLUSION OJSC AVTOVAZ is the largest Russian automobile manufacturer by the number of cars sold. The history of the company goes back almost 40 years. More than 23 million cars have been produced over this time. Today, LADA cars make up more than half of the Russian car fleet. The longterm outlook for AVTOVAZ is quite promising, supported by strong growth in the Russian economy and a prudent government policy for the car-making industry. AVTOVAZ regularly updates its strategy for the Russian car market and has changed its corporate structure to create a transparent, world-class company with full control over its production and distribution chains. In order to maintain its market share, AVTOVAZ plans to renew its entire model range by 2008 and develop cars in the US$6,000-10,000 price segment that offer the best price/quality ratio and meet world standards. Despite rising competition from cheap foreign cars, AVTOVAZ expects to raise sales in this price point. The mass production of LADA KALINA cars began in August 2005. The models meet the most rigid requirements and fit into the most popular segment on the domestic car market. Regional dealers have submitted large orders for LADA KALINAs. In 2004, AVTOVAZ sold over 630,000 cars in Russia, up 3% from 2003. 2004 output equaled 718,000 cars, or 64% of Russian passenger car production. The revenues of the AVTOVAZ Group rose 22.8% y-o-y to RUR160.5 billion (US$5.6 billion) in 2004; EBITDA rose 37% to RUR16.9 billion (US$586.6 million). The AVTOVAZ Group significantly improved its credit quality. Net Debt/EBITDA decreased to 1.3x in 2004 from 1.7x in 2003 and EBITDA/interest expense rose to 4.9х from 3.6х in 2003. In 2005 the AVTOVAZ Group expects to spend RUR11.0 billion (US$394 million) on capex. Preliminary investment programs for 2006 and 2007 stand at RUR5 billion a year. Stable income has allowed the AVTOVAZ Group to regularly pay dividends since 2001. Dividends for 2004 amounted to RUR739 million (US$30.6 million). OJSC AVTOVAZ has a history of good relations with respected foreign and Russian banks (including Vneshtorgbank, Sberbank and Deutsche Bank). In 2004 AVTOVAZ placed its debut US$150-million CLN and repaid it in full in September 2005. EXHIBIT 2. AVTOVAZ: KEY FINANCIAL INDICATORS IFRS (RUR mln.) 2003 2004 Revenues 130,772 160,536 EBITDA 12,358 16,926 EBIT 6,065 10,547 EBITDA margin, % 9.5% 10.5% EBIT margin, % 4.5% 5.9% Total Debt* 27,865 33,693 Net Debt* 20,994 21,727 Net Debt*/EBITDA(х) 1.6 1.3 EBITDA/interest expense (x) 3.6 4.9 Total Debt*/Equity, % 35.0% 40.4% * including restructured tax liabilities Source: company info, TRUST estimates EXHIBIT 3. OJSC AVTOVAZ MARKET SHARE, 1H 2005 US$ bln. LADA (ot her plant s) 1.6% AVTOVAZ 38.5% Source: company info Ot her domest ic cars 10.8% New foreign cars 35% Used f oreign cars 14.1% EXHIBIT 4. RUSSIAN CAR MARKET 25.0 20.0 15.0 10.0 5.0 0.0 5.7 6.5 9.0 11.1 13.4 17.4 21.0 1999 2000 2001 2002 2003 2004 2005 F Source: company info, TRUST page 4 of 38

OJSC AVTOVAZ TODAY AND TOMORROW AVTOVAZ is a Leading Russian Auto Producer OJSC AVTOVAZ is the largest producer of passenger cars in Russia and Eastern Europe, with annual production of over 700,000 automobiles. AVTOVAZ is one of the largest industrial enterprises in the country and a key company for the city of Togliatti in the Samara region. As of July 1, 2005, OJSC AVTOVAZ controlled about 40% of domestic car sales, dominating the middle price segment. The group supplies over 1000 enterprises with orders; subsequently, these enterprises employ 2 million people throughout the country, making it a key employer. AVTOVAZ is a major taxpayer to the federal budget and the budget of the Samara region, contributing RUR14.0 billion to budgets of various levels in 2004. AVTOVAZ employs over 117,000 people. AVTOVAZ is the largest producer of passenger cars in Russia and Eastern Europe AVTOVAZ: Mission Statement We create quality automobiles at affordable prices for our clients, earn stable profits for our shareholders, improve the welfare of our employees and increase the value of our company for the good of the nation. COMPANY VALUES Employee motivation Customer loyalty Strong brand High scientific-technological potential Solid business reputation Social responsibility STRATEGIC GOALS Leadership Maintaining leadership of the Russian automobile market Actively integrating into world automobile production Key strategic goals include maintaining leadership and improving quality Educating and perfecting the skills of personnel Efficiency Effectively managing resources and expenses Improving quality Promoting a result-oriented corporate culture Flexibility Introducing of state-of-the-art production technologies Rapidly responding to market demand Providing consumers with automobiles that match international safety and environmental standards page 5 of 38

Strategic Goals for the Next 5 Years Key strategic goals for OJSC AVTOVAZ include developing new automotive products and technologies and renewing the model range. AVTOVAZ strives to produce nextgeneration cars that are competitive, affordable for many segments of the Russian population and in accordance with international safety and environmental standards. The company s latest projects, the LADA KALINA and the LADA PRIORA, currently at different stages of development, pursue these objectives. LADA KALINA automobiles are designed for individuals, families and businesses. The new construction focuses on relevant international safety and environmental standards. Many of the engineering decisions significantly boost the consumer qualities of the model, improving design, comfort and maneuverability. New facilities, with the capacity to produce 220,000 cars a year, were built for the KALINA series of cars. Total investment into the KALINA project is US$630 million. LADA PRIORA, a series of front-wheel drive automobiles, is based on the LADA 110 platform. LADA PRIORA cars will have a more effective breaking system, power steering and a highly comfortable interior, with optional air conditioning and sound systems. Total investment into the PRIORA project equals US$132 million. The strategic plan of OJSC AVTOVAZ for the next five years includes: AVTOVAZ is introducing a new generation of cars: the LADA KALINA and LADA PRIORA series producing LADA SAMARA series automobiles up to 235,000 a year; modernizing ( face lifting, improving separate components, etc.) and producing LADA NIVA series automobiles; phasing out LADA 2105/2107 series automobiles; producing LADA KALINA series automobiles, increasing output to planned capacity of 220,000 cars a year by 2008; introducing LADA PRIORA series automobiles, reaching planned capacity by 2009; the combined total volume of LADA 110 and LADA PRIORA series cars will be maintained at 235,000 a year. page 6 of 38

SHAREHOLDER STRUCTURE As of December 31, 2004, OJSC AVVA, an 86% owned subsidiary of OJSC AVTOVAZ, owned 38% of the ordinary shares of OJSC AVTOVAZ. CJSC Central Branch of the Automotive Financial Corporation (CJSC CB AFC ), in which OJSC AVTOVAZ controls 60% jointly with OJSC AVVA, owned another 24% of ordinary shares of OJSC AVTOVAZ. Furthermore, CJSC IFC, a 51% owned subsidiary of OJSC AVTOVAZ, owns 2% of the ordinary shares of OJSC AVTOVAZ. As a result, 64% of the ordinary voting share capital of OJSC AVTOVAZ is held by entities within the AVTOVAZ Group. The equity capital, which amounts to RUR16.062 billion, is divided into 27,194,624 ordinary (84.65%) and 4,930,340 preferred (15.35%) shares. The market capitalization of OJSC AVTOVAZ equaled US$675 million on September 1, 2005. The company s shares are publicly traded on Russian equity markets (AVAZ/AVAZ RU) and are listed in Germany in the form of GDRs (AVVG GR). 64% of the ordinary voting share capital of OJSC AVTOVAZ is held by entities within the AVTOVAZ Group page 7 of 38

The Russian automobile market is commonly divided into 5 price segments: Under US$4,500 US$4,500-6,000 US$6,000-10,000 US$10,000-15,000 The Russian automobile market is commonly divided into 5 price segments Over US$15,000 EXHIBIT 8. SALE OF NEW CARS IN RUSSIA BY PRICE SEGMENT, 2003 EXHIBIT 9. SALE OF NEW CARS IN RUSSIA BY PRICE SEGMENT, 2004 US$10,000- US$6,000- US$10,000-15,000 10,000 15,000 6% 26% over US$15000 9% over 8% US$6,000-10,000 44% US$15,000 18% US$4,500-6,000 30% under US$4,500 30% US$4,500-6,000 7% under US$4,500 22% Source: company info, TRUST estimates Source: company info, TRUST estimates The two lowest price segments ( under US$4,500 and US$4,500-6,000 ) accounted for 60% of all sales in 2003. In 2004 their total market share decreased to 29%. This reflects both, the rising real income of the Russian population and the rising prices on AVTOVAZ cars, some of which moved to the US$6,000-10,000 segment. EXHIBIT 10. SHARE OF LADA AUTOMOBILES PRODUCED BY OJSC AVTOVAZ IN TOTAL SALES OF NEW PASSENGER AUTOMOBILES IN RUSSIA, 2004 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 59% 41% 26% 22% 52% under менее US$4500 US$4500 - US$6000 3% 35% 36% 26% US$6000 - US$10000 100% 100% US$10000 - US$15000 более over US$15000 Другие Other а/м LADA 2105/2107 LADA SAMARA LADA 110 LADA NIVA The total market share of two lowest price segments decreased from 60% of all sales in 2003 to 29% in 2004 Source: company info page 9 of 38

In 2004 the US$6,000-10,000 price segment was most popular, accounting for 44% of cars sold. LADA 110, LADA SAMARA and LADA NIVA series automobiles represent 74% of this segment. The segment also includes basic versions of new foreign cars, such as Daewoo Nexia, Volkswagen Pointer and Daewoo Matiz. LADA SAMARA series automobiles fit into the US$6,000-8,000 segment, where competition from new foreign cars is not as rigorous. Basic models of AVTOVAZ's LADA 2105/2107 series are within the under US$4,500 price segment, where foreign producers are no longer present. Thanks to the rising prosperity of the Russian population, sales in the US$10,000-15,000 and over US$15,000 segments doubled in 2004. New foreign cars, including those produced in Russia, make up the majority of the highest price segment. We expect demand to shift to higher-priced segments as real incomes in Russia increase. Nevertheless, the US$6,000-10,000 segment the target niche for AVTOVAZ remains the most popular segment. Even though the market share of LADA cars will decrease, AVTOVAZ should be able to maintain the number of cars sold at least at current levels, in part thanks to the development of car loan programs. According to the Concept for the Development of the Russian Automobile Industry, annual sales will reach 2.2-2.5 million cars by 2010, which corresponds to annual growth of 5-6.5%. We estimate that the value of the car market in 2010 will be close to US$30 billion. Changes will also affect market structure: the share of foreign cars assembled in Russia will rise to almost 39%, while the share of Russian brands will decrease to 40% (see Exhibit 11). The production and investment programs of OJSC AVTOVAZ account for changes in consumer demand. Thus, by 2008, the enterprise plans to fully renew its model range to include automobiles in the most popular middle price segment that match the latest world standards. We expect demand to shift to higher-priced segments as real incomes in Russia increase EXHIBIT 11. FORECAST FOR THE RUSSIAN AUTOMOBILE MARKET THROUGH 2010 thsd. cars 1,500 1,250 1,000 750 500 Russian producers Assembly plants Import 989 1,000 975 553 525 AVTOVAZ's production and investment programs account for changes in consumer demand 250 128 0 2004 2010 F Source: Ministry of Industry and Energy, TRUST estimates page 10 of 38

Automobile Fleet and Production Russia has one of the fastest growing car fleets in the world. Over the past decade it enjoyed average annual growth of 7% a year and we expect the pace of growth to equal at least 5% for the next five years. Russia has one of the fastest growing car fleets in the world, with average annual growth of 7% a year EXHIBIT 12. SALES OF PASSENGER AUTOMOBILES IN RUSSIA 1600 1400 1200 1134 1361 1417 1433 1502 thsd. cars 1000 800 600 400 200 0 638 46 79 111 729 690 680 690 216 406 2000 2001 2002 2003 2004 New foreign cars LADA* Total * Including LADA automobiles assembled at IzhAvto and RosLada Source: company info, TRUST estimates Despite the high growth of the Russian car market, consumer prosperity remains low: car density currently equals only about 135 cars per 1000 population, compared to 200-300 per 1000 in Eastern Europe and as many as 500 cars in Western Europe. This indicator is expected to rise to 163 cars per 1000 population by 2010. Russia s fleet of passenger automobiles has approached 25 million. Growth was most considerable in the second half of the 1990s: the car fleet more than doubled between 1994 and 2004. EXHIBIT 13. RUSSIAN FLEET OF PASSENGER AUTOMOBILES, 1994-2004 25000 20% 22500 18% 20000 16% 17500 15000 12500 10000 7500 5000 11.9% 11.4% 7.5% 11.4% 6.8% 4.8% 3.3% 4.3% 5.8% 4.1% 3.5% 14% 12% 10% 8% 6% 4% Car density is expected to increase from the current 135 cars per 1000 population to 163 cars per 1000 population by 2010 2500 2% 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fleet (thsd. cars) Fleet grow th (%) 0% Source: company info LADA automobiles manufactured at OJSC AVTOVAZ, CJSC IzhAvto and OJSC RosLada account for half of the Russian car fleet. Foreign cars increased their presence on the Russian market almost three times as fast as Russian cars over the past decade and now make up 19.4% of the car fleet. page 11 of 38

EXHIBIT 14. RUSSIAN FLEET OF PASSENGER AUTOMOBILES, 2004 LADA 50.6% Other 9.9% OKA 1.5% UAZ 2.9% GAZ 6.6% Foreign brands 19.4% Moskvich 9.1% LADA automobiles account for half of the Russian car fleet Source: company info, TRUST estimates About 50% of the Russian car fleet is aged over 10 years and 29% 5-10 years. Thus, the ageing of the car fleet will contribute to the growth of the Russian automobile market over the next few years. Over 1,116,000 cars were produced in Russia in 2004, up 8.4% from 2003. EXHIBIT 15. PRODUCTION OF PASSENGER AUTOMOBILES IN RUSSIA thsd. cars 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 706 982 767 1,033 993 1,030 1,116 703 700 718 715 1,063 2000 2001 2002 2003 2004 2005 F AVTOVAZ Other Over 1,116,000 cars were produced in Russia in 2004, up 8.4% from 2003 Source: company info, TRUST estimates The considerable growth in production in 2004 primarily reflects the 120.7% increase in the assembly of foreign brands in Russia. EXHIBIT 16. PRODUCTION OF PASSENGER AUTOMOBILES IN RUSSIA, 2004 EXHIBIT 17. PRODUCTION OF PASSENGER AUTOMOBILES IN RUSSIA, 1H 2005 AVTOVAZ 64.3% Other Russian producers 24.2% AVTOVAZ 68% Assembly plants 11.5% Assembly plants 14% RosLada 3% SEAZ 1% ZMA 3% UAZ 2% GAZ IzhAvto 5% 4% Source: company info, TRUST estimates Source: company info, TRUST estimates Changes in the volume of production resulted in changes in the market shares of output by various car producers. There is a clear tendency of rising assembly of foreign automobiles in Russia. While foreign assembly plants produced only 9,500 cars in 2002, this number increased to 58,000 in 2003 and almost 130,000 in 2004. Foreign assembly plants produced 68,000 automobiles in 1H 2005. There is a clear tendency of rising assembly of foreign automobiles in Russia page 12 of 38

OJSC AVTOVAZ remains the largest Russian car producer, accounting for the production of 68% of passenger automobiles assembled in Russia. The decrease in AVTOVAZ s share of output that has taken place over the last five years is party compensated by growth of production at the GM-AVTOVAZ joint enterprise. In addition, some LADA models (2106 and 2104) are assembled at other Russian plants: IzhAvto and RosLada. Government Policy on the Automobile Industry The state policy on automobile production is regulated by the Concept for the Development of the Russian Automobile Industry, approved by the Russian government in July 2002, which covers the period through 2010. The key goals of the Concept include: The decrease in AVTOVAZ s share of output is party compensated by growth of production at the GM-AVTOVAZ joint enterprise creating conditions that will promote the development of the Russian automobile industry; improving the effectiveness of the production of modern, competitive automotive technology that meets the demands of consumers, the government and companies; integration of the Russian automobile industry into the world automobile industry. The Concept for the Development of the Russian Automobile Industry outlines three stages. Stage 1. (2002-2004): Introducing customs tariffs on the import of used foreign cars; Replacing existing model range; In 2002, the government initiated Stage 1 of the Concept for the Development of the Russian Automobile Industry and approved a hike in tariffs on imported used cars Restructuring liabilities to the budget. Stage 2. (2005-2008): Establishing a favorable investment climate in the industry to encourage sizeable capital influx; Building facilities for the mass production of promising models; Preparing to switch to Euro-2 and Euro-3 technological and environmental standards. Stage 3. (2009-2010): Integrating into the world automobile industry; Adopting European technological and environmental safety standards. In 2002, the government of the Russian Federation initiated Stage 1 of the Concept and approved a hike in tariffs on imported used cars, which became prohibitive for cars older than 7 years and very high for cars aged 3-7 years. As a result, foreign cars have been almost completely pushed out of the lowest price segment (under US$4,500) and the share of used foreign cars purchased in Russia decreased to 15%. AVTOVAZ has been actively working on Government Resolution No. 166 On the Introduction of Changes to the Customs Tariffs of the Russian Federation for Car Components Imported for Industrial Assembly. AVTOVAZ is submitting business plans that substantiate the company s proposals to apply tax breaks for the import of components. The plant is very important for the Russian economy. Going forward, we do not rule out the possibility that the government will make decisions that support Russia s biggest car producer. AVTOVAZ has also been working with the administration of the Samara Region on plans to establish a free economic zone. A relevant proposal has been submitted to the federal government. The establishment of a free economic zone would include the creation of a research and technology park on the basis of AVTOVAZ. A tax-free regime would allow for lower costs for producing automobiles, which would certainly have a positive effect on the development of the enterprise and the production of new cars. AVTOVAZ is submitting business plans that substantiate the company s proposals to apply tax breaks for the import of components page 13 of 38

AVTOVAZ A LEADING GLOBAL CAR PRODUCER Company History In 1966, the government approved a resolution on the construction of a plant for the production of passenger cars in the City of Togliatti. The Volga Automobile Plant (VAZ) had close ties with Italy s FIAT: the enterprises signed a general agreement on cooperation in the design of automobiles, as well as the design and construction of the automobile production plant. Hundreds of enterprises that would supply materials and components were built in tandem with the Volga Automobile Plant. The first six cars came off the assembly line on April 19, 1970. A decision was made on July 8, 1971 to establish an official servicing network, AvtoVAZtekhobsluzhivanie. On July 13, 1971, the Volga Automobile Plant Production Enterprise (PO AvtoVAZ ) was founded on the basis of the head plant. On January 5, 1993, PO AvtoVAZ was transformed into Open Joint Stock Company (OJSC) AVTOVAZ. A plan for the privatization of PO AvtoVAZ, a Charter of OJSC AVTOVAZ and the Board of Directors were approved. In 2001, AVTOVAZ signed a general agreement with the General Motors Corporation and the European Bank for Reconstruction and Development on the establishment of a joint enterprise for the production of passenger automobiles. The first LADA KALINA automobile came off the assembly line in 2004. Mass production of the series began in the summer of 2005. Model Range The model range of OJSC AVTOVAZ takes into account tendencies in the development of the global automobile industry, adjusted for the demands and specific characteristics of the Russian car market. Today 12 models in five series (excluding modifications) are produced at the main assembly plant of OJSC AVTOVAZ : LADA 2105/2107 (LADA 2105, LADA 2107) The first six Volga Automobile Plant cars came off the assembly line on April 19, 1970 Today 12 models in five series are produced at the main assembly plant of AVTOVAZ LADA SAMARA (LADA SAMARA sedan, LADA SAMARA 5-door hatchback, LADA SAMARA 3-door hatchback) LADA 110 (LADA 110 sedan, LADA 110 hatchback, LADA 110 station wagon) LADA NIVA (LADA NIVA 3-door, LADA NIVA 5-door, LADA 2120) LADA KALINA (LADA KALINA sedan) The subsidiaries of OJSC AVTOVAZ mass produce pick-up trucks, vans, sport cars, armored vehicles and other special-designation automobiles, such as the VAZ-21106 (2.0- liter Opel engine), the VAZ-21218 Fora (improved comfort with all-wheel drive), the VAZ-21218B (special purpose armored cash-in-transit vehicle), the VAZ-21109 Consul (limousine), the VAZ-21108 Premier (luxury automobile) and the VAZ-2131 (5-door LADA NIVA). page 14 of 38

EXHIBIT 18. LADA MODELS BY PRICE SEGMENT (BASIC VERSION) 10.0 9.0 8.0 US$8,000-10,000 2110 2112 2111 Kalina 2120 US$ thsd. 7.0 6.0 2113 2114 2115 Niva 2131 Niva 2121 US$6,000-8,000 5.0 4.0 2105 2107 US$4,500-6,000 under US$4,500 The basic versions of all models produced by AVTOVAZ cost under US$10,000 3.0 Source: company info, TRUST estimates By 2008, OJSC AVTOVAZ plans to renew its entire model range. In the end of 2004 LADA SAMARA series cars were replaced with a new generation of LADA SAMARAs. Mass production of LADA KALINA series cars began in 2005. LADA 2105/2107 series cars are expected to be phased out by 2007. Important goals in the technological development of AVTOVAZ include introducing new products and updating the model range to include new competitive automobiles that are affordable for large segments of the Russian population. As part of its technological development program, OJSC AVTOVAZ is designing new models and car series. The enterprise is currently working on two radically new automobiles: one in the D class and one in the C class. page 15 of 38

Cooperation with GM and the Chevrolet Niva Joint Enterprise GM-AVTOVAZ was established in 2001 by OJSC AVTOVAZ, the General Motors Corporation and the European Bank of Reconstruction and Development (EBRD). OJSC AVTOVAZ received 41.6% of shares in GM-AVTOVAZ in return for patents, buildings and equipment. GM received another 41.6% of shares in exchange for a cash contribution of US$100 million and EBRD received 16.8% for a cash contribution of US$40 million and a loan of US$90 million. GM-AVTOVAZ began producing the Chevrolet-Niva off-road vehicle in the fall of 2002. 25,000 cars came off the assembly line in 2003, 58,000 cars -- in 2004 and 75,000 are expected to be produced in 2005. Participation in the joint company allows AVTOVAZ: to receive management and production experience from the world s largest car producer; OJSC AVTOVAZ, General Motors and the EBRD established the GM-AVTOVAZ Joint Enterprise in 2001 to use GM s privileged conditions for importing components and materials; to integrate smoothly into world car-making in the long term by actively applying foreign components. page 16 of 38

LADA KALINA Project The objective of the LADA KALINA project is to organize the production and distribution of a new series of B-class cars to improve the business potential of OJSC AVTOVAZ. The life cycle of the project provides for production of LADA KALINA series cars for at least 8-10 years. The technical characteristics of LADA KALINA cars are comparable to those of foreign models such as the Renault Clio, Fiat Siena, Seat Cordoba, Chevrolet Corsa and VW Polo. According to AVTOVAZ, as of August 2005, the estimated cost of the project was US$630 million (RUR17.9 billion). As of 1H 2005, about 64% of the planned amount has been invested. The first LADA KALINA cars came off the assembly line on November 18, 2004. The LADA KALINA sedan went on sale in August 2005. Dealers will offer LADA KALINA hatchbacks starting in 2006. Production will reach planned levels of 220,000 automobiles a year by 2008. About 30,000 cars are expected to be exported. The LADA KALINA series will include the following models: The first LADA KALINA cars came off the assembly line on November 18, 2004 LADA KALINA - 5-door station wagon LADA KALINA - 4-door sedan LADA KALINA - 5-door hatchback The introduction of LADA KALINA series cars will allow AVTOVAZ to maintain its market share. The new automobile meets Euro-4 environmental standards, which were introduced in Europe on January 1, 2005 and will be applied in Russia starting January 1, 2008. The design of LADA KALINA series cars focused on meeting existing international safety and environmental standards. In addition, the comfort, design and maneuverability of the vehicles were improved. The use of modern technologies and materials made it possible to significantly increase warranty provisions. LADA KALINA cars have a warranty of two years, regardless of mileage. Special anti-corrosion treatment allows for an additional warranty for the car body: 3-year warranty against surface corrosion and 6-year warranty against deep corrosion. The LADA KALINA meets Euro-4 environmental standards, introduced in Europe on January 1, 2005 page 17 of 38

EXHIBIT 19. CAPEX FOR THE LADA KALINA PROJECT RUR mln. 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-11,631 Invested as of Jan 01, 2005 17,436 17,928 15,886 Capex Capex (accrual) 4,255 1,550 491 2005 2006 2007 Source: company info The basic version of the LADA KALINA sedan is priced at about RUR225,000 (US$7,800). Available options include manual and automatic air conditioning, heated front seats, remote control locks, air bags and power steering. The market has responded positively to the LADA KALINA series: dealers are already submitting orders. Strategic regions for the LADA KALINA series include Moscow, the Moscow Region, St. Petersburg, Leningrad Region, Stavropol Krai, Sverdlov Region, the Republic of Tatarstan and the Tyumen Region. The market has responded positively to the LADA KALINA series: dealers are already submitting orders EXHIBIT 20. LADA KALINA: SALES FORECAST thsd. cars 275 250 225 200 175 150 125 100 75 50 25 0 2.9% 50 10 6.5% 120 8.2% 7.5% 190 190 190 7.0% 25 30 30 30 2006 2007 2008 2009 2010 Domestic market (left axis) Export (left axis) Share of domestic market, % (right axis) 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: company info, TRUST estimates page 18 of 38

LADA PRIORA Project LADA PRIORA is the new version of the C-class series with improved design and production quality. LADA PRIORA automobiles will gradually replace the LADA 110 series on the assembly line. The LADA PRIORA series includes the following models: LADA PRIORA is the new version of the C-class series with improved design and production quality LADA PRIORA sedan LADA PRIORA hatchback LADA PRIORA station wagon LADA PRIORA cars have a more effective braking system than LADA 110s, power steering, a modern and comfortable interior, and optional air conditioning and music systems. The LADA PRIORA is the most modern Russian series. The automobile meets the latest European safety standards for side and frontal offset impact. Assembly of LADA PRIORA cars is expected to begin in 2006, with 570 cars produced. By 2009 AVTOVAZ plans to bring production of LADA PRIORAs up to planned capacity of 235,000 models, including 35,000 for export. The assembly of the LADA PRIORA series will take place at existing facilities, which will be modernized. The transition from the LADA 110 to the LADA PRIORA series will be gradual, with the combined volumes of the two series remaining stable. The LADA PRIORA is the most modern Russian series and meets the latest European safety standards for side and frontal offset impact EXHIBIT 21. LADA PRIORA: SALES FORECAST thsd. cars 275 250 225 200 175 150 125 100 75 50 25 0 1 2.7% 47 15 9.0% 9.0% 177 25 200 200 8.6% 35 35 2006 2007 2008 2009 2010 Domestic market (left axis) Export (left axis) Share of domestic market, % (right axis) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: company info page 19 of 38

Total investment in the LADA PRIORA project will equal US$132 million, primarily spent on the technological re-equipment of production. So far about US$2.2 million has been invested. The bulk of the investment will be made in 2005, which means that capex for the LADA PRIORA project will not require significant cash outflow in the next few years. Total investment in the LADA PRIORA project will equal US$132 million EXHIBIT 22. CAPEX FOR THE LADA PRIORA PROJECT RUR mln. 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Source: company info 360 Invested as of Jan 01, 2005 3,811 3,915 2,602 Capex 2,242 Capex (accrual) 1,210 103 2005 2006 2007 page 20 of 38

Sales and Marketing AVTOVAZ sells and markets its products on both the domestic and the foreign markets. About 34% of cars are sold through official dealers and 64% through controlled dealers. The company pays special attention to improving marketing and distribution systems. The following aspects of sales and marketing are most important for AVTOVAZ: introducing comprehensive customer loans and leasing services; AVTOVAZ pays special attention to improving marketing and distribution systems on the domestic and the foreign markets improving the quality of after-sale servicing; enhancing market research technologies and introducing quantitative characteristics, such as consumer satisfaction and consumer loyalty indices, which are very popular abroad; introducing the AVTOVAZ Corporate Style at official and independent entities within the distribution network. Over 2004 the weighted average retail price for LADA automobiles rose 9.2% to RUR184,000. Average factory price rose 12% to RUR171,600. The difference between the retail and factory prices rose sharply in 1H 2004, forcing AVTOVAZ to pay closer attention to the distribution network. EXHIBIT 23. AVTOVAZ: RETAIL AND FACTORY PRICES, 2004-JULY 2005 (WEIGHTED AVERAGE PRICE) RUR thsd. 200 195 190 185 180 175 170 165 160 155 150 187.6 186.1 184.4 185.4 184.1 184.0 182.6 182.1 179.2 173.7 170.4 171.6 168.8 169.0 170.1. 165.3 162.7 163.5 163.7 161.0 161.7 162.0 159.7 154.4 Retail price 188.1 188.1 188.9 189.2 191.0 189.4 187.3 172.9 169.9 171.2 171.2 169.8 169.4 170.9 Factory price The difference between the retail and factory prices rose sharply in 1H 2004, forcing AVTOVAZ to pay closer attention to the distribution network Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Source: company info 722,000 LADA cars produced by AVTOVAZ were sold in Russia and abroad in 2004, up 4,000 from 2003. The breakdown of sales did not change significantly y-o-y: there was an even distribution among three major series: in 2004 there were about 239,000 LADA 110 automobiles, 241,000 LADA SAMARA automobiles, 212,000 LADA 2105/2107 automobiles and 30,000 LADA NIVA automobiles sold. page 21 of 38

EXHIBIT 24. LADA SALES BREAKDOWN BY SERIES 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 11% 7% 4% 32% 33% 31% 29% 29% 29% 29% 32% 34% 2002 2003 2004 LADA SAMARA LADA 2104/2105/2106/2107 LADA 110 LADA Niva Sales are distributed fairly evenly among three major series: LADA 110, LADA SAMARA and LADA 2105/2107 Source: company info In addition, the following were produced and sold: 147,000 kits for the assembly of LADA cars 101,000 kits for the assembly of other domestic cars. EXHIBIT 25. AVTOVAZ: SALES OF ASSEMBLY KITS 300,000 5,000 250,000 Kits for assembly (left axis) Sales revenues 248,348 4,500 200,000 150,000 100,000 183,679 178,127 3,158 4,026 4,000 3,500 3,000 147,000 kits for the assembly of LADA cars and 101,000 kits for the assembly of other domestic cars were produced and sold 50,000 2,904 2,500 0 Source: company info 2002 2003 2004 2,000 RUR mln. page 22 of 38

EXHIBIT 26. LADA SALES IN RUSSIA 70 thsd. cars 65 60 55 50 45 40 49.9 50.0 42.4 38.6 62.1 53.2 64.1 56.1. 51.8 50.1 55.4 50.6 52.0 48.4 50.4 45.6 43.4 59.0 35 30 2004 2005 (6M) 25 January February March April May June July August September October November December Source: company info The residents of Moscow and the Moscow Region were AVTOVAZ s main domestic consumers in 1H 2005, accounting for more than 20% of the plant s sales. The federal districts with the highest demand for AVTOVAZ cars were the Central Federal District, the Volga Federal District and the Ural Federal District. Moscow and the Moscow Region were AVTOVAZ s main regional markets in 1H 2005, accounting for more than 20% of sales EXHIBIT 27. LADA SALES BY FEDERAL DISTRICT, 1H 2005 Volga 27% Southern 13% Central 33% Far Eastern 1% Siberian 8% Urals 10% Northwestern 8% Source: company info, TRUST estimates page 23 of 38

Export AVTOVAZ exported 93,000 cars in 2004, up 1.5% from 91,700 in 2003. Including kits for assembly supplied to foreign enterprises, up to 150,000 LADAs are exported every year. LADA automobiles are sold in more than 60 countries. Export to non-cis countries accounts for about 44% of sales and export to the CIS -- about 56%. In 2004, sales increased noticeably in certain countries, including Sweden (+69%), Switzerland (+56%), Austria (+21%), Macedonia (+120%), Bulgaria (+65%) and Lithuania (+60%). EXHIBIT 28. EXPORT OF AUTOMOBILES AND ASSEMBLY KITS AVTOVAZ exported 93,000 cars in 2004; LADA automobiles are sold in more than 60 countries thsd. cars 120 100 80 60 40 20 0 99 97 92 93 86 64 21 16 10 4 2000 2001 2002 2003 2004 cars Kits for assembly Source: company info, TRUST estimates In 2004, AVTOVAZ signed an agreement for the delivery of 1,800 automobiles to Venezuela. The company is negotiating the export of cars to Chile, Mexico, Libya, Ghana and Angola. The number of importers has been rising. Markets in North Africa and South America are becoming stronger. There is growing interest in LADA cars from countries such as Turkey, Iraq, Azerbaijan, Armenia, Tajikistan, Uzbekistan and Afghanistan. EXHIBIT 29. EXPORT BY REGION The number of importers has been rising Europe 41% CIS 44% Other 15% Source: company info, TRUST estimates Requirements for the safety, environmental and consumer characteristics of automobiles remain highest in Western Europe. Despite these requirements, AVTOVAZ has been able to maintain sales levels. AVTOVAZ cars are modernized to meet the latest European environmental and safety standards. One of the latest important innovations is the use of a 1.6- liter engine designed by AVTOVAZ for the LADA110 series. With a new catalytic converter and an electronic control system, this engine enables cars to meet Euro-3 environmental standards. AVTOVAZ cars are modernized to meet the latest European environmental and safety standards page 24 of 38

Development of Customer Credit Services We estimate the Russian car-loan market at US$2.5-3 billion in 2004 and forecast that it will grow to US$5-6 billion in 2005. The value of LADA automobiles sold using customer credit services in 2004 equaled about US$750 million. AVTOVAZ estimates that one in four LADA automobiles sold in Russia in 2004 was sold using car loans offered by dealers and banks. In 1H 2005 the number of LADAs sold under crediting systems continued to rise. The share of cars sold on credit directly through official AVTOVAZ dealers rose to 30% as a result of changes in the conditions of car loans that made them more attractive. Today, various banks throughout the Russian regions offer car loans. AVTOVAZ dealers cooperate with major national banks as well as local banks. AVTOVAZ specifically works its subsidiary, Avtomobilnyi Bankirskii Dom (ABD). ABD offers customer credit services in 27 regions of the Russian Federation. ABD car loans were used for 1,667 LADA automobiles in 2003 and 15,899 in 2004. The forecast for 2005 is 32,424 LADA automobiles. We estimate the Russian car-loan market at US$2.5-3 billion in 2004 and forecast that it will grow to US$5-6 billion in 2005 Service and Distribution Network The development of the service and distribution network in 2002-2004 allows AVTOVAZ to control value added throughout the production cycle. As of August 18, 2005, the dealer network of AVTOVAZ was a two-level system and included 507 service and distribution enterprises, including: 68 distributors; 155 official dealers; 284 regional dealers. In 2004 AVTOVAZ continued working on a competitive service and distribution network in the domestic and foreign markets. By the end of 2005 the plant plans to switch to a singlelevel distribution network, selling automobiles (retail) directly through official dealers and maintaining the exclusive right to sell automobiles wholesale. Dealers have certain quotas of automobiles and all dealers face the same price conditions: no discounts are applied. OJSC AVTOVAZ covers the entire cost of delivering cars to various regions so that all dealers, regardless of location, offer automobiles at the same price. Today, all dealers must meet certain conditions that regulate the key characteristics of dealerships, service stations, premises for customers and primary equipment, as well as the types of services offered, informational support and the use of elements of corporate style. The new dealer policy will allow the plant to increase the production and distribution of spare parts, which is expected to become the second most important source of revenues. Starting in 2006, AVTOVAZ plans to switch to a system of distribution of parts exclusively through official dealers. AVTOVAZ is working on a competitive service and distribution network in the domestic and foreign markets page 25 of 38

FOR THE INVESTOR Credit Strengths Recognition of the LADA brand in Russia and abroad. The history of AVTOVAZ goes back almost 40 years. Over this time, the company has produced more than 23 million cars. LADAs account for over half of Russia s active car fleet. Brand recognition allows AVTOVAZ to promote new products in the Middle East, Latin America and Europe, as well as in Russia and the CIS. Strong financial position. Total revenues in 2004 were US$5.6 billion and EBITDA US$588 million. With Net Debt/EBITDA ratio of 1.3x, the financial position of AVTOVAZ can be defined as stable and improving. In 2004, the company reached a positive free operating cash flow. Management has also made significant efforts to reduce costs. Competitive price-to-quality ratio of cars and spare parts. AVTOVAZ fully covers the middle price range, which includes most of consumer demand for passenger cars. AVTOVAZ controls more than 40% of a market that is estimated to add 1.5 million passenger cars each year. Going forward, the company plans to retain its existing share of the market and broaden the range of cars and optional features as the purchasing power of the Russian population grows. AVTOVAZ is the sole buyer of car components from many Russian manufactures. The company produces about 70% of Russian cars and many components producers work only for AVTOVAZ. The company can therefore affect the quality and prices of materials and components it purchases. Well-developed distribution network. AVTOVAZ sells up to 98% of its cars through a network of official and controlled dealers that covers all of Russia s regions. This allows AVTOVAZ to offer a flexible price policy and trace changes in consumer demand. Government support. The Russian government has created advantageous conditions for Russian car producers. Competition from the import of old foreign cars has been drastically limited: there are prohibitive import duties for foreign cars more than 7 years old and considerable duties for cars that are 3-7 years old. We believe that AVTOVAZ is also able to lobby for other important decisions that affect its operations. High level of transparency. AVTOVAZ has published annual and half-year financial statements according to IFRS since 1993. The reports are audited by PricewaterhouseCoopers. All financial and operational information is available to investors and regularly updated on the company s website and in press releases. Brand recognition allows AVTOVAZ to promote new products in the Middle East, Latin America and Europe, as well as Russia and the CIS AVTOVAZ is the sole buyer of car components from many Russian manufactures AVTOVAZ is able to lobby for important decisions that affect its operations page 26 of 38

Credit Challenges Changes in consumer preferences. Consumers increasingly choose cars with better technical characteristics and more features. In this situation, the company plans to adapt the model range, improve quality and increase the package of services that accompany its cars. Increasing costs. Components and materials make up 78% of AVTOVAZ s costs. Some of them are imported. There are also plans to buy large quantities of imported engines. The appreciation of the rouble, as well as the growth of prices on electricity, transportation and labor, could negatively impact the financial results of AVTOVAZ. Strengthening competition. The US$6,000-10,000 price segment is the main market niche for AVTOVAZ. Most new foreign cars fall into price segments that are above US$10,000. Nevertheless, certain producers (such as Renault, Hyundai and Volkswagen) are making attempts to launch new budget models, the basic versions of which are priced slightly below US$10,000. To maintain its competitive advantages, AVTOVAZ does not plan radically change its market niche over the next few years. Changes in customs and tax legislation. The Russian tax legislation is very contradictory and has the tendency to change. A decrease in customs duties on used imported cars could strengthen competition in the middle price segment and lead to a reduction in the market share of AVTOVAZ. However, customs duties are unlikely to be reduced over the next five years and AVTOVAZ has time to fully replace its existing range of cars and present more competitive models. AVTOVAZ plans to adapt the model range, improve quality and increase the package of services that accompany its cars Customs duties are unlikely to be reduced over the next 5 years and AVTOVAZ has time to present more competitive models page 27 of 38

FINANCIAL STATEMENTS The AVTOVAZ Group makes its consolidated financial statements (according to IFRS, published twice a year for the end of the accounting periods of June 30 and December 31) available to the investment community. Quarterly (stand-alone) results are published according to Russian Accounting Standards (RAS). Since 1993, AVTOVAZ s financial statements have been audited by PricewaterhouseCoopers. The AVTOVAZ Group consolidated financial statements include the suppliers of components and materials, financial companies and service and distribution companies. The analysis provided below is based on the Group s audited consolidated financial statements for 2000-2004. The AVTOVAZ Group publishes semi-annual consolidated financial statements according to IFRS and quarterly stand-alone results according to RAS The APPENDIX at the end of the memorandum includes key financial indicators (IFRS) AVTOVAZ Group Companies: Sales Dynamics The sales revenues of the AVTOVAZ Group reflect the volume of output, car prices and the structure of the model range. The Group s consolidated revenues come from the sale of: complete automobiles and assembly kits (76.2% of revenues), car parts produced at AVTOVAZ plants (5.6%), cars produced at other plants (9.6%), other products (8.6%). Revenues equaled RUR160.5 billion (US$5.6 billion) in 2004, up 22.8% from 2003. Due to the appreciation of the rouble, revenues increased 30.7% in US$ terms. Key factors driving revenues up included growing output, rising prices and improvements in the structure of the model range. The AVTOVAZ Group increased its output 2.6% in 2004. Taking advantage of favorable market conditions, the plant raised wholesale pries 12.3% and retail prices -- 9.2%. AVTOVAZ also improved the structure of its model range to include more modern models in higher-priced segments: for example, the share of premium ten series cars produced rose from 32% in 2003 to 33% in 2004. Over 84% of consolidated revenues come from sales in the Russian market. Revenues rose 22.8% y-o-y to US$5.6 billion in 2004; output increased 2.6% y-o-y EXHIBIT 30. KEY INCOME STATEMENT INDICATORS IAS, mln. US$* 2002 2003 2004 2004 vs. 2003 Revenues 3,808 4,264 5,572 30.7% Cost of Goods Sold (3,167) (3,590) (4,640) 29.2% SG&A, other operating expenses (463) (480) (602) 25.6% Gross profit 641 673 932 38.4% EBITDA 478 403 588 45.8% EBIT 291 198 366 85.1% Net income 36 96 159 65.1% Gross margin, % 16.8% 15.8% 16.7% EBITDA, % 12.6% 9.5% 10.5% Operating income, % 7.6% 4.5% 5.9% Net income, % 0.9% 2.3% 2.8% * calculated using the weighted average US$/RUR exchange rate for the relevant period: 31.36 for 2002, 30.67 for 2003 and 28.81 for 2004. Source: company info, TRUST estimates page 28 of 38

The Group was able to restrain production costs in 2004. The growth of costs had outpaced the growth of revenues in previous years, but in 2004 AVTOVAZ was able to reverse this negative trend: the cost of goods sold increased 21.4%, while revenues rose 22.8%. The change positively affected the gross margin of the AVTOVAZ Group, which equaled 16.7% in 2004, vs. 15.8% in 2003. AVTOVAZ was able to restrain production costs in 2004 EXHIBIT 31. COST OF GOODS SOLD, 2004 Materials and components 77.7% Other 4.0% Overhead expenses 5.4% Labor costs 12.9% Source: company info To better control costs and expenses, management switched to long-term contracts with employees and suppliers, which will help lock in current prices for a longer period of time. EBITDA margin rose to 10.5% in 2004 from 9.5% in 2003 on the back of rising gross margins. Operating margins also rose, to 5.9% in 2004 from 4.5% in 2003. Gross, EBITDA and operating margins rose in 2004 page 29 of 38

CREDIT CONSIDERATIONS The credit indicators of the company were evaluated on the basis of IFRS results for 2002-2004. The overall credit quality of AVTOVAZ improved in 2004. The main changes affected the volume and profile of debt, as well as debt servicing costs. Furthermore, for the first time in three years the company demonstrated positive free cash flow (operating cash flow minus capex) at RUR1.8 billion (US$65 million). The company s overall credit quality improved in 2004 EXHIBIT 32. KEY CREDIT INDICATORS RUR mln. (IFRS) 2002 2003 2004 2004 vs. 2003, % Revenues 119,432 130,772 160,536 22.8% EBITDA 15,002 12,358 16,926 37.0% EBIT 9,133 6,065 10,547 73.9% Interest expense (3,077) (3,416) (3,451) 1.0% Operating Cash Flow 2,561 7,417 10,759 45.1% Debt, including 18,757 27,865 33,693 20.9% Restructured tax liabilities 5,456 5,426 5,146-5.2% Short-term debt 10,261 12,873 17,096 32,8% Long-term debt 8,496 14,992 16,597 10.7% Net Debt 16,006 20,994 21,727 3.5% EBITDA margin (%) 12.6% 9.5% 10.5% EBIT margin, % 7.6% 4.5% 5.9% EBITDA/interest expense (x) 4.9 3.6 4.9 Debt /EBITDA (x) 1.3 2.3 2.0 Net Debt/EBITDA (x) 1.1 1.7 1.3 Debt/Equity (%) 24.4% 35.0% 40.4% Long-term debt /Equity * (%) 10.0% 15.9% 16.6% Total Debt / Total Assets (%) 13.5% 18.3% 20.3% Current Assets/Current Liabilities (%) 84.2% 94.6% 98.6% * Long-term debt plus Equity Source:Company info, TRUST estimates The company s total debt figures include long-term restructured tax liabilities as well as loans and borrowings. As of FYE 2004, the share of restructured tax liabilities in total debt equaled 15.3%. Total debt stood at RUR33.7 billion (US$1.2 billion) on December 31, 2004, up 20.9% y-o-y. The debt increase primarily reflects higher bank loans and debt securities, which rose 27.2% to RUR28.2 billion (US$1.0 billion). At the same time, AVTOVAZ decreased its restructured tax liabilities 5.2% to RUR5.1 billion (US$185 million). The need to increase investment in development and production of new models was the main reason for the rise in debt. Despite the 20.9% increase in total debt, the net debt of AVTOVAZ rose only 3.5% to RUR21.7 billion (US$785 million) at FYE 2004. The increase in debt over 2002-2004 was the main factor affecting the balance sheet structure of the company. The Total Debt/Equity ratio rose from 24.4% in 2002 to 40.4% in 2004. The share of total debt in total assets rose from 13.5% in 2002 to 20.3% in 2004. The debt profile also changed: the share of short-term debt rose from 46.2% in 2003 to 50.7% in 2004, reflecting primarily a RUR4-billion rouble bond with a put option in August 2005, which was included in short-term debt, as well as a US$150-million CLN, maturing in September 2005. The placement of a second CLN will allow the AVTOVAZ Group to significantly improve its debt profile. In 1H 2005, revenues from writing off part of the restructured tax liabilities (under government resolution No. 264) equaled about RUR2.3 billion (US$85 million), which also helped decrease the cost of borrowing and improve the credit quality of OJSC AVTOVAZ. Despite a 20.9% y-o-y increase in total debt, the net debt of AVTOVAZ rose only 3.5% to US$785 million at FYE 2004 The placement of a second CLN will allow the AVTOVAZ Group to significantly improve its debt profile page 30 of 38