Russian Affairs
As GM prepares to file for bankruptcy in the wake of rejection by bondholders of a tender offer for their $28 billion in outstanding debt, the strongest bidder to emerge for its large European assets is Magna, a Canadian firm, backed by the Russian bank Sberbank and GAZ, a Russian carmaker controlled by Prime Minister Vladimir Putin.
This news comes on the heels of a deal announced yesterday for a Russian firm to take a $200 million stake in Facebook. Facebook founder Mark Zuckerberg indicated he accepted the Russian money because it came with a higher valuation than money offered by potential investors closer to home. Facebook has previously taken money from investors in China (besides a high profile deal with Microsoft) making its funding base more international than most Internet companies.
The sudden appearance of two high profile Russian deals could just be a coincidence. Or it could signal that Russia is looking to diversify away from natural resources which Prime Minister Putin had made a centerpiece of his economic strategy. It does, however, raise provocative questions about the interrelationship between strategic and economic goals in a global economy. Will Facebook's Russian investors have access to the data of Facebooks' millions of participants? What role will Gaz play in determining Opel's future? Less than a decade ago, US companies were not allowed to export strong encryption technology to Russia and many other countries. Ideally, these sorts of deals will draw Russia more into the global economy; however, the scenario more troubling to contemplate is that security may trump economics and these deals will give Russia political leverage on economic matters.
The GM deal is notable, not only because of the Russian connection but also because it demonstrates that at best, the GM that emerges from bankruptcy will be far smaller than the one today. Although not immune to the global downturn GM's European operations have long been among the company's most successful. In addition, Opel has handled most of the engineering for GM's mid-size and compact cars, precisely the cars that the government says GM should now make more of. Without Opel, GM will have to move its design and engineering operations for small and mid-sized cars to Detroit or Korea, potentially good news for laid off engineers in Michigan but problematic for the company's bottom line. Indeed, the loss of its small car engineering capability if Opel is sold separately underscores the difficulty of trying to divide up a company as vertically and horizontally integrated as GM into good an bad pieces. GM, like all the major automakers, derived its economies of scale precisely from sourcing and sharing its engineering and other components globally. A smaller GM will potentially have to allocate these engineering costs against fewer revenues,
I was an advocate of trying to avert bankruptcy, however, the die appears to be cast. Let us hope that the GM bankrupcy moves rapidly enough, while equitably addressing the rights of all stakeholders, to emerge in reasonably good condition on the other end.
