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TOGLIATTI, Russia—Bo Andersson laid off thousands and renegotiated supplier contracts as chief executive of Russia's largest auto maker, a perennial money-loser for its controlling shareholder, Renault SA of France.

The cost-saving moves angered many in Togliatti, a one-industry city some 500 miles east of Moscow. Discontent trickled up to the highest echelons of Russia's political elite and prompted a warning shot last spring from an ally of President Vladimir Putin.

"You're playing with fire," Sergei Chemezov, the Putin friend, recalls telling Mr. Andersson. Mr. Chemezov runs a state-owned defense and industrial company that holds a minority stake in the auto maker, OAO AvtoVAZ.

Last month, Mr. Andersson, a Swedish-born industry veteran, was pushed out, barely two years after Renault brought him in to handle its multibillion-dollar bet on the Russian car market.

Such are the challenges Western investors face in Russia, where the state-led capitalism of Mr. Putin's regime often blurs the lines between business and politics, a combination that has confounded a litany of companies that once saw the country as a promising and large new market.

"Bo Andersson did all the things that any Western-schooled businessman would do: He right-sized the company and cut costs," said Tim Urquhart, an analyst at research firm IHS Automotive. "But the Russian government wants it both ways—AvtoVAZ as a social project and a competitive business in the modern era. It's impossible."

Compounding those challenges is the depressed Russian economy, which has been laid low by weak oil prices and economic sanctions imposed for Russia's intervention in Ukraine.

Renault, along with minority partner Nissan Motor Co., poured $2.3 billion into AvtoVAZ a few years ago, gaining control and hoping to cash in on a market that seemed to have a bright future. Rostec Corp., the defense and industrial company Mr. Chemezov heads, owns about 25%.

Mr. Chemezov said Mr. Andersson mishandled layoffs and shouldn't have taken business away from local suppliers. He also said a large 2015 loss AvtoVAZ reported in February was the main reason the CEO was pressed to resign. He called that a joint decision, which Renault didn't dispute.

"Now, we need to change the person," Mr. Chemezov, a friend of Mr. Putin since the 1980s, said in a Wall Street Journal interview on March 4, three days before Renault and Nissan announced that Mr. Andersson would be leaving.

Although Renault was able to pick Mr. Andersson's successor, it appears to face new limits on its freedom to operate. Rostec is set to choose a senior Russian figure to handle AvtoVAZ's relations with the regional and federal governments and with unions, a Rostec official said.

Renault wouldn't comment on how this appointment might affect its ability to run the Russian auto maker. Renault and Nissan said there is no rift among the shareholders. They said all parties "fully agreed on the strategic direction of AvtoVAZ, and we remain committed to this strategy."

Mr. Andersson, 60 years old, declined to comment. A person familiar with his thinking said pressure to step down came as a surprise because his major decisions, including layoffs, had been approved by an AvtoVAZ board that includes Mr. Chemezov.

Mr. Andersson's assignment, when he arrived at AvtoVAZ early in 2014, was to lead an efficiency drive at the lumbering giant by, among other steps, cleaning up a supply chain historically infested with graft.

"It's a tough job," Carlos Ghosn, CEO of both Renault and Nissan, said at a news conference last month, a few days before the announcement that Mr. Andersson was resigning. Mr. Ghosn commended Mr. Andersson for modernizing the Russian auto maker's plant and improving its quality and productivity.

Citing the "awful situation" in the Russian economy, Mr. Ghosn said that "we are long-term investors and we can [withstand] difficulties on the short-term as long as we see a future…At a certain point in time, growth will resume, and we want to really be the major group contributing to this."

Renault and Nissan have been allied since 2009, with a share cross-ownership. A holding company that has about 75% of AvtoVAZ is split among Renault, Nissan and Rostec. Renault owns just over half of the holding company, while Nissan has around 17% and Rostec the rest.

AvtoVAZ dates back to 1966, when the Soviet Union built a mammoth factory on the banks of the Volga and renamed the city that mushroomed around it for the Italian Communist leader at the time, Palmiro Togliatti. The plant sold all of its output with ease to Russians who had to wait years to get a car.

Bad roads and shoddy quality meant a lot of time in the shop. For owners, "it was a repeat cycle," recalls Andrey Soldatov, a third-generation AvtoVAZ employee: "The car would break, we'd repair, then break, and repair. Everybody worked on their cars on the weekend."

In the post-Soviet era, criminal groups infiltrated the factory, which sprawls over 1,000 acres, larger than New York's Central Park. Mr. Putin in 2006 addressed that problem by placing AvtoVAZ under Rostec, which asserted control with the help of hundreds of police.

When Rostec, back in 2007, put an initial one-quarter stake in AvtoVAZ up for sale, it drew keen interest from foreign companies excited by the potential of a country where car ownership was far below that in the West. Renault acquired the stake.

Then the global financial crisis of 2008 pushed AvtoVAZ to the financial brink, and Moscow pressured Renault to put in more cash, threatening to dilute its interest if it didn't. After first resisting, Mr. Ghosn agreed to provide $448 million in technology and equipment, with Nissan now chipping in. AvtoVAZ used some of the money to build a production line that could roll out Renaults and Nissans in addition to AvtoVAZ's Ladas and Jeep-like Nivas.

At Mr. Putin's invitation, Renault and Nissan agreed in 2012 to sink in still more money, gradually taking control for a total investment of $2.3 billion.

At the time, Russia appeared on the verge of blossoming into Europe's largest auto market. Strong prices for oil, the country's largest export, supported a consumer boom in which many Russians bought new cars for the first time.

AvtoVAZ was in the thick of this with a 35% market share. Renault and Nissan hoped their money and expertise could raise that to 40% as the plant at Togliatti produced their brands, too, including vehicles bearing Nissan's revived Datsun nameplate.

To execute, Renault and Nissan sent in Mr. Andersson, a onetime Saab and General Motors executive who had led a quick rebound in his previous job at a Russian truck and bus maker called GAZ Group that was loss-ridden when he arrived.

The problems he faced at AvtoVAZ were extensive: low morale, rampant corruption, a reputation for poor quality and a Soviet-style employee culture that rewarded seniority over job performance.

Not to mention theft. "People used to carry parts out on their person as they left the factory," said Sergei Zaitsev, the top union representative at the factory. "Hundreds of cars would disappear."

Said Mr. Andersson, in an interview last spring: "It was the biggest mess I've ever seen in my career."

Diving in, he scheduled a meeting for dozens of plant managers every day ahead of the 7 a.m. start of assembly work. He began paring the 66,000-member workforce he inherited, one that Rostec, when it was in control, had already slashed by 45,000.

Mr. Andersson got rid of assets unrelated to the car business, including giving the city of Togliatti a company-owned hockey team and a military museum.

On his first day, Mr. Andersson, a 12-year veteran of the Swedish army who speaks in calm, clipped tones, told employees to clean the filthy toilets. "The only way we'll become world-class is if we're clean—toilets and floors, too," he said.

Then, three months after he arrived, the Russian economy took a hit. The U.S. and European Union began imposing sanctions on Russian politicians, tycoons and companies because of Russia's seizure of Crimea and support of separatists in eastern Ukraine.

Among those sanctioned was Rostec's Mr. Chemezov. The action limited his travel and froze any assets he might have in the U.S. and the EU, though it didn't keep Renault and Nissan from continuing to work with him. Asked about being sanctioned, Mr. Chemezov said he had been to America many times, "and I don't have any particular desire to fly so far. If they're not letting me in, it's OK."

In the summer of 2014 came a mightier blow to Russia's economy, when oil prices began their long slide and undermined consumer spending. Vehicle sales in the country crashed by more than one-third in 2015 alone.

Auto makers in Russia cut production. GM got out altogether, closing its Russian assembly plant in St. Petersburg. Renault and Nissan hung on. For Renault, Russia was its only real shot at growth beyond its core market of Western Europe.

Mr. Andersson undertook an intensive review of parts contracts, embroiling AvtoVAZ in fights with suppliers. Production at the Togliatti plant halted twice last year as some suppliers temporarily stopped shipping to protest Mr. Andersson's demands for 5% price cuts and longer payment terms.

Russia's economic downturn included a fall in the value of the ruble, which drove up the price of foreign-produced parts. Mr. Chemezov said he told Mr. Andersson during a monthly meeting that the CEO's push for better-quality parts, by looking abroad for new suppliers, was becoming too costly.

"You need to work with our suppliers. You need to work with them so that they provide quality products," Mr. Chemezov said he told Mr. Andersson.

The person familiar with Mr. Andersson's thinking denied Mr. Chemezov had admonished the CEO against buying foreign parts. The person added that many local suppliers were importing shoddy parts from Turkey or other neighboring countries and passing them off as domestically made.

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April 10, 2016 20:55 ET (00:55 GMT)

Vitaly Zykov, the owner of Togliatti businesses that have been suppliers to AvtoVAZ for two decades, said corruption used to be a large problem at the factory, with some managers taking kickbacks from vendors who supplied low-quality parts. Mr. Zykov praised Mr. Andersson for overhauling procurement and putting the focus on quality rather than connections.

"Bo Andersson is one of the most effective managers. He was carrying out the right policies at AvtoVAZ," Mr. Zykov said. "He got rid of intermediaries and kickbacks."

Unrest grew in Togliatti, however. The thousands of layoffs and the overhaul of supply contracts rippled out to local parts makers, some of which imposed layoffs of their own.

By last fall, several hundred people were gathering at protest demonstrations in the city's Victory Square, organized by trade unions and the Communist Party. In November, Mr. Chemezov told news reporters "people have been kicked out onto the streets," in a public rebuke of Mr. Andersson.

Mr. Chemezov said Mr. Andersson should have handled the layoffs quietly rather than announcing them. He said the CEO should have worked with the regional governor to help workers find new jobs or training programs, which he said Rostec did in a previous round of layoffs.

"You are working in Russia. You have to take it into account," Mr. Chemezov said.

Russian officials, including Prime Minister Dmitry Medvedev, have visited the AvtoVAZ factory in recent months. They have pledged a government injection of billions of rubles to aid the auto industry.

In February, AvtoVAZ reported that its loss for last year nearly tripled to 74 billion rubles, equal to about $1.2 billion. It projected that Russia's overall car sales would fall again in 2016, to around 1.3 million from 1.6 million. Citing that estimate, it took a large impairment charge that worsened its loss.

The company said it needed a bailout to keep operating. It put workers on a four-day week and cut pay by a fifth.

The following month, Mr. Andersson was gone.

For Renault, strong sales in Western Europe are offsetting the performance of its investment in Russia. Still, that was supposed to be the one foreign market the French company could dominate. Now, a payoff on its Russian bet is likely to be postponed years longer. Renault and Nissan face a need to add more cash as part of a rescue plan for AvtoVAZ.

Mr. Andersson's successor as AvtoVAZ CEO is Nicolas Maure, who previously headed Renault's Romanian-based brand, Dacia. Like AvtoVAZ, that company dates from the Communist era. Renault has turned it into its powerhouse budget brand in Western Europe.

Mr. Maure, new in his job, declined to discuss his plans for AvtoVAZ, his office said.

Pyotr Zolotaryov, the head of a labor union in Togliatti, said there is little any CEO can about the basic problem, weak demand. "In these economic conditions in Russia," he said, "whoever comes will fall into a ditch."

(END) Dow Jones Newswires

April 10, 2016 20:55 ET (00:55 GMT)

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