Opel deal could bring Russian economy in from cold

The sale of GM's European unit to a Canadian-Russian consortium could help diversify Russia's energy-focused economy.

By , Correspondent of The Christian Science Monitor

The news that US auto giant General Motors had decided to sell a majority stake in its European operations to a Canadian-Russian consortium was lauded by German chancellor Angela Merkel as a victory for her ruling Christian Democratic Union, just weeks before a federal election.

"This has shown the patience and the singlemindedness of the federal government has paid off," she said yesterday in Berlin.

Opel, the company GM agreed to sell, employs 55,000 workers in Europe, half of whom are in Germany. In recent weeks, Mrs. Merkel and her deputies have lobbied the US government hard for a long-delayed deal to be finalized and German jobs to be secured.

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The deal is contingent on German labor unions agreeing to a restructuring of four Opel plants, and negotiations between the two sides are expected to be difficult. This could lead to some job losses, although they are not expected until after the German general election on Sept. 27.

The deal has been months in the making. Many GM executives were initially wary of the Berlin-backed consortium that they finally chose to do business with, made up of Magna International, a Canadian auto-parts company, and Sberbank, the largest bank in Russia. They considered others buyers, as well simply allowing Opel to fail.

Good reason to support Russian deal

Officials were especially concerned about Russian involvement, worried that GM technology would fall into the hands of GAZ, the Russian automaker which will take over Opel production in Russia, and a possible competitor to GM. In 2008, the Detroit-based company held an 11 percent market share in Russia.

The deal does include some limits on technology transfer, according to news reports.

GAZ's ties to the Kremlin have also raised eyebrows. Russian Prime Minister Vladimir Putin was a vocal backer of the Magna-Sberbank bid, and GAZ owner Oleg Deripaska has a close relationship with the Russian government.

Analysts also said that the plan was troubling to some because it deepened ties between Germany and Russia at a time when the economic interests of the two are becoming increasingly interconnected.

"This deal is about deepening economic connections between Germany and Russia," said Mitchell Orenstein, a professor at Johns Hopkins School of Advanced International Studies in Washington. "It's supported by [Berlin and Moscow], but raises concerns in the United States and Central and Eastern Europe."

However, Mr. Orenstein argues these concerns are unfounded, and says that the deal was ultimately done because GM executives – as well as the US government, which is a majority stakeholder in GM but shied away from public involvement in the deal – came to the same conclusion.

Russian involvement in the auto industry has the potential to allow its economy, long dominated by oil production, to expand into different sectors.

"This [deal] is a way of integrating Russia into the international economy," Orenstein says. "It's good news to have Russia anchored into the production of something that isn't oil."

Russia's economy relied on high oil prices to fuel economic growth, but suffered heavily as those prices dropped in recent years. Today, Russian President Dmitry Medvedev admitted as much in a letter published in a Russian newspaper, calling the Russian economy "primitive" and its dependence on energy revenue "humiliating."

The auto industry can generate diversification within an economy, Orenstein says. He cited India-based automaker Tata's acquisition of Land Rover and Jaguar in 2008 as an example.

Fears about GAZ competing directly with GM and emerging as a competitor in Central and Eastern European markets, as well as within Russia, are "grossly exaggerated. The process of transferring knowledge and technology to a Russian automaker is a long one, says Serguei Netessine, a visiting professor at the European Institute of Business Administration in Paris. "Right now, it's not clear how long it's going to take and what will be the result."

Technology transfer will be slow

Mr. Netessine says that it could be more detrimental to the Russian economy if GM technology were adapted for use in GAZ factories.

"GAZ is still producing cars in a way that's 50 years behind GM," he said. "If GAZ successfully transferred [GM] technology from older factories, they would have to fire 90 percent of their workers. GAZ employs 90,000 people. If they used GM technology they would need 3,000.

"It is not realistic to think this automaker, which produces cheap cars from outdated technology, would suddenly leap forward and compete with GM," Netessine adds. "After all those discussion at GM, the board realized [competition from GAZ] is not a big problem."

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