GM-Magna Fallout: What Business As Usual Is in Russia

GM (MTLQQ.PK) has finally come to its senses and rejected the sale of Opel to Canadian autoparts maker Magna (MGA)–and its Russian partner (initially Sberbank, but eventually Avtogaz). GM initially agreed to the deal when faced with an existential crisis in the early part of this year; its “choice” of partner was largely driven by Germany’s conditioning of financial support for the deal on GM selling to the Canadian-Russian tandem.

GM got cold feet in the summer, as its bankruptcy/government takeover and cash-for-clunkers gave it a financial respite. It was explicitly reluctant to get involved in a deal that could lead to the loss of its technology and intellectual property to a potential Russian competitor; no doubt it was also reluctant (though it did not say so publicly) at the prospect of getting enmeshed (as a minority partner) in the financial and business machinations of Oleg Deripaska, victor in the bloody aluminum wars, unscrupulous businessman, and arguably the world’s largest insolvent. Moreover, recent statements by the EC called into question Germany’s ability to condition its subsidies to favor factories located in Germany at the expense of others in Belgium, Spain, and the U.K.

The decision of GM’s board to maintain control of Opel touched off howls of protest from Germany–and Vladimir Putin. Putin was outraged that GM would act in such a high-handed way. A deal is a deal, after all–if it works in Russia’s favor. Putin made heavy hints that Russia would explore legal options.

Cry. Me. A. River.

Actually, the irony here is too rich for words. Let’s remember the narrative that justified the rough treatment of Shell (RDS.A) a few years ago. When Russia was on its knees, the story goes, opportunistic oil companies exploited Russia’s economic desperation by forcing it to enter into humiliating production sharing agreements that were tilted heavily against the Russians. In the mid-2000s, the worm had turned, oil prices had risen dramatically, Russia was no longer on its knees, and it redressed the injustices inflicted on it during its time of troubles by forcing Shell (through regulatory thuggery) to tear up the PSAs and sell its interest in Sakhalin at Putin’s price.

Fast forward to 2009. GM is on its knees. Russia–with the connivance of a German government facing re-election–takes advantage of the company’s distress to enter into an agreement that it would never countenance under other circumstances. Months later, its hour of desperation past, GM reconsiders the deal and tells Putin to pound sand.

Tell us how it feels, Vladimir Vladimirovich.

But note one crucial difference: unlike Shell and Russia, GM had not signed on the dotted line. It backed out before it had entered into a binding legal obligation.

An interesting lesson in corporate governance that Putin might well heed. A board of directors overrules its management.

Truth be told, there are no truly sympathetic figures in this saga. A company (GM) that wasted tens of billions of dollars in capital over decades. Its overprotected, overpaid, unionized labor force. A government (Germany’s) attempting to buy votes by subsidizing an industry plagued by overcapacity that should shrink, and doing so in a beggar-thy-neighbor fashion, all the while providing assistance to an opportunistic, corrupt Russian government and business that has co-opted wide swathes of the German political and economic elite.

This is an embarrassment to Germany’s Merkel, but one which hopefully will get her to reconsider her rather mystifying obsequiousness towards Putin and Russia. But it is a particular embarrassment to Putin, for it is a very public demonstration that only the desperate (or the deluded or the corrupted) are willing to respond favorably to his blandishments.

Some would take this as an opportunity to contemplate what changes would make his country attractive to anyone but those with no other option. But this surely will not happen in Putin’s case. Instead, we can expect a litany of whines about how the Europeans and Americans are making Russia a pariah.

Actually, VV, no help needed: you’re doing a bang up job of that all by your lonesome.

Comments

[RussianEqui...:]

Crag,

Sorry for being blunt, but world's largest insolvent is Fannie Mae, and Oleg Deripaska is merely "too big to fail" *giggle*

True, Shell sold Sakhalin at Putin's price, but before that it proved to create hardly-repairable damage to Sakhalin environment by letting the pipe residuals flow into the greenery and the ocean... Well, apparently, there is always two sides of a story... When we say "A", let us say "B" as well.

And the last note. "Embarassment" is what the German trade unions are telling this moment to GM management, not Angela Merkel herself: remember, Europe is much more socially influenced (read: socialized) than the US, and the US has to deal with it...

Nov 05 06:56 AM

[Davewmart:]

There is nothing mysterious in Merkel's obsequiousness to Russia.
Given Germany's entirely unrealistic stance on renewables, and refusal to build nuclear power plants, then without Russian gas winters in Germany are likely to get very cold.

Nov 05 07:02 AM

[BeachRider:]

If GM is 'legally' getting out of the RUS/CDN deal, then the only issue for US residents is whether this affects the payback of the Automotive TARP. After that, GM is on its own.

If this speeds the repayment terms of the TARP, then I am for it. If it does not, then Obama needs to shake up GM again...

Nov 05 02:07 PM

[likbez:]

That's pretty funny to compare rape of Russia by the Western companies with GM deal. Read Anne Williamson's testimony please before making yourself a clown in the future.

Nov 05 02:14 PM

[azzkel:]

Ironically, environmental concerns appeared just after Shell had initially refused to sell a 25% stake to Gazprom. Were they addressed after the "deal"? Hardly.


On Nov 05 06:56 AM RussianEquityExpert wrote:

> Crag,
>
> Sorry for being blunt, but world's largest insolvent is Fannie Mae,
> and Oleg Deripaska is merely "too big to fail" *giggle*
>
> True, Shell sold Sakhalin at Putin's price, but before that it proved
> to create hardly-repairable damage to Sakhalin environment by letting
> the pipe residuals flow into the greenery and the ocean... Well,
> apparently, there is always two sides of a story... When we say "A",
> let us say "B" as well.
>
> And the last note. "Embarassment" is what the German trade unions
> are telling this moment to GM management, not Angela Merkel herself:
> remember, Europe is much more socially influenced (read: socialized)
> than the US, and the US has to deal with it...

Nov 07 12:44 PM

[AndyInGA:]

I actually applaud GM board's guts to decide to pull out of selling its European subsidiary (Opel/Vauxhall). The deal did not make sense to me from day one for GM to give up sizeable European presence and still be a global player.

Now GM's Opel/Chevrolet strategy is still flowed. They still need to simplify their business model is one brand across Europe, be it Opel or Chevrolet. To cover luxury/performance end, they need to push Cadillac globally. Just look at Ford, they are moving in the direction of consolidating to one Ford brand globally.

Nov 14 11:07 AM

[Kipraios:]

No comment on the actual GM pull-out. The article though is an abominable piece of online journalism (one-sided, emotional, defensive without it being clear who the aggressor is, very few facts, nationalistic) and honestly pretty pointless. The comments are so much more valuable than the article itself. I miss good journalism.

Nov 25 09:09 AM