Weathering the Storm in Russia, Putin Looks to Opel

the9thwave_aviaovsky.jpgToday the Russian government has announced a 16.9% drop in industrial production in the year to April, which was the sixth consecutive month of contraction, exceeding forecasts by the banks.  The slowdown in industry has the potential to be politically catastrophic for Russia, as enormous sectors of the population (and entire regions) are employed by a relative small group of corporate and state business titans – many of which are now on the state’s lifeline.

Severstal, one of Russia’s largest steelmakers, has announced first quarter losses which Alfa Bank says may cause them to post significant debts in 2009, which may threaten their ability to attract new loans without violating Eurobond covenants.  The company is also experiencing troubles in its North American operations.  Gazprom has slashed its 2008 dividend to 1/7th of what it paid out the year before, while natural gas production has been cut by 24.3%.  Metals tycoon Mikhail Prokhorov, who now seems more interested in utilities, has compared the crisis to a 19th century painting by Ivan Aivazovsky (pictured), which “depicts people on the wreckage of a ship facing a high wave as dawn breaks after a night storm” – in reference to Russia experiencing the last, and most severe, wave of the crisis.

Interestingly, one of the hardest hit areas of the Russian economy has been automobile production, which sank by 55.9% in the year to April.  Why then, is this also the area that Prime Minister Vladimir Putin appears to be so interested in doing some more business?

Some weeks ago (May 11) we noted the rather interesting news that Putin was making comments to the press about GAZ making a bid on a stake in Germany’s Opel.  GAZ, which is part of Oleg Deripaska’s fallen empire at Basic Element (and may as well be considered as state property at this point), was apparently asked by their Canadian auto parts partner Magna to make the bid on the German industrial giant (there’s a long history there also).  If the Magna-GAZ-Sberbank bid were successful, it would create one of the world’s biggest car companies, with hundreds of thousands of employees and the ability to produce 5 million cars a year … all with the Kremlin right behind the management.

Opel certainly needs the help.  Representing the largest of GM’s European assets with significant operations and employees in Germany, the company needs some 1 billion euros in loans and some 3.3 billion euros in funding in order to survive apart from its American parent company.  The struggles of the company have become quite a headache for Chancellor Angela Merkel, who is asking that the bidders make their formal offers by May 20.  Thanks to the prodding of Sberbank and GAZ, which Putin is keen to reiterate were requested to go after Opel by Magna, the Russians are now competing with the leading bidder Fiat.

By all appearances, it is not unusual for Magna nor the debt-laden GAZ to have an interest in expanding in Europe and picking up GM’s assets on the cheap.  Magna even reportedly has ideas to make Opel profitable by turning them into a large scale parts subcontractor to other car companies.  But why then has the Prime Minister shown such a high degree of interest and personal knowledge of the transaction?

There seems to be some evidence that Putin’s comments were meant to assuage any worries of nationalism within Germany.  Kurt Beck, for example, has spoken about the importance of Opel’s “independence” to operate within Europe.  Other members of the Bundestag representing states where Opel factories are based might not enjoy the idea of going to work for the Russians – which may bring to mind less than savory business experiences such as the gas supply cutoffs to the Ukraine and other recent clashes.

One thing is for certain – whoever ends up owning the majority stake in Opel will find themselves with a lot of political capital and influence within the German government.