Kia, Hyundai in assembly talks with Russia's Izhavto

South Korean automakers Kia Motors (000270.KS) and Hyundai Motor Co (005380.KS) are in talks with IzhAvto on the assembly of cars at the distressed Russian company's plant, the Russian government said on Friday.

"We are hoping that the talks will be successful and all the terms including one on location will be agreed," government spokesman Dmitry Peskov said.

Russia has successfully lured leading global automakers through a mixture of protectionist measures and incentives to open local assembly lines.

IzhAvto's plant with an annual capacity of about 220,000 cars came to a standstill at the start of last year amid Russia's worst economic downturn in a decade. The company has debts of some 14.5 billion roubles ($498.1 million) and is undergoing a bankruptcy procedure.

IzhAvto's plant, which before the demise of the Soviet Union made cars under the Izh brand, is located in the city of Izhevsk, also home of weapons maker Mikhail Kalashnikov whose AK-47 assault rifles are made there.

United Auto Group, which acts as an agent of Sberbank (SBER03.MM) which holds about half of IzhAvto's debt, is driving the project with the Korean firms, aiming to assemble 60,000 vehicles a year.

The group's head Igor Kulgan said the plant could assemble 45,000 Kia cars and 15,000 Hyundai light commercial trucks. Sberbank will finance the project.

Russia's biggest car maker Avtovaz (AVAZ.MM) also wants to make up to 90,000 of its outdated Lada models at IzhAvto, to free up capacity at its main plant in Togliatti for making more modern cars.

Russian car sales for the first seven months of this year are up 9 percent on 2009 to 963,688, although this is still 45 percent below 2008 levels.