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

Nov. 05, 2009 5:10 AM ETMTLQQ, MGA, SHEL7 Comments
Craig Pirrong profile picture
Craig Pirrong

GM (OTC:MTLQQ) 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.

This article was written by

Craig Pirrong profile picture
Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University. Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues. He holds a Ph.D. in business economics from the University of Chicago.

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