Ships, chips and automobiles: “Reset” German-style begins

Graham Stack for Russia Profile (www.russiaprofile.org)

 

Germany is opening its doors to Kremlin –linked companies looking for technologies in automotive manufacture, ship-building and microchip production. While the current German election campaign means any investors promising to save jobs are welcomed, the new openness could also point to an economic, European dimension to “reset”.

 

When US President Barack Obama came to power ten months ago and promised a “reset” to relations between the West and Russia, the talk was of missile shields, NATO expansion, Iran and Afghanistan. No one thought that reset could ripple out to include the ownership of embattled German car plant Opel. But precisely this seems to be the case, according to Arkady Dvorkovich, econmomic adviser to Prime Minister Vladimir Putin.

 

“It is a very good political signal,” Dvorkovich said on Tuesday, September 16, referring to the deal that will see Russia’s state-owned Sberbank and Canadian car components producer Magna take a majority stake in Opel, European subsidiary of bankrupt US car giant General Motors. “It means the U.S. administration is ready for maximum economic cooperation with us,” Dvorkovich said at the Reuters Russia Investment Summit. Following bankruptcy, GM is owned by the US Treasury.

 

According to Dvorkovich, powerful anti-Russia interest groups were out to scupper the deal, accounting for General Motors’ down-to-the-wire hesitancy over the deal. But President Barack Obama’s support for the Russian bid tipped the scales, according to Dvorkovich.

 

As a result, Sberbank, Russia’s largest bank, and Magna, the world’s largest car components producers, will each receive 27.5% of the car maker. Sberbank will inject $0.5m and the German government $1.7m. Magna will oversee the restructuring of the company, with an eye to the Russia market.

 

Coming in the same week that Obama implemented a key reset policy by tearing up plans for an anti-missile shield stationed in Poland and Czech republic that Russia opposed, the presidential nod for Russia’s Opel bid raises the question whether there is an economic – and European – dimension to reset.

 

Certainly the German government under Chancellor Angela Merkel has been warming to Russia ever since Obama came to power in January 2009. Merkel had previously positioned herself as a skeptic on Russia, compared to her predecessor in office Gerhard Schroeder, and sought closer ties with the US. But Germany now seems to be moving in the wake of Obama’s reset to reembrace Russia.

 

In 2007, a wave of acquisitions by Russian oligarchs in sectors ranging from airlines to tourism caused jitters in German.  But last week, visiting the prestigious International Automotive Fair in Frankfurt last week, Merkel talked down the risks associated with Russian investors. calling Russia a “market of the future, not something to be kept at arm’s length.”

 

Merkel backed the Sberbank-Magna-Opel deal strongly and publicly all the way, despite criticism from her own economy minister and officials involved in administrating the crippled car maker.

 

This also despite the fact that the real strategic investor in the Opel case, as well as in similar deals in the pipeline for Germany’s Infineon chipmaker and Wadan shipyards, is evidently the Kremlin, through proxies such as state-owned Sberbank or other state-linked companies. This both politicizes the deals and makes them quite opaque, since it is unclear what economic entity will end up with the stake. “Our medium-term view is that Sberbank may well be a conduit for the transaction and a more logical Russian state or industrial entity will eventually be passed the stake,” says banking analyst David Nangle from Renaissance Capital, referring to the Opel case.

 

On the other hand, it is very clear what the Kremlin wants from the deals: “If the import of technologies does not take place, it will mean that (the deal) was just a waste of time,” Sberbank CEO German Gref was quoted saying to journalists on Friday.

 

The German government’s willingness to support such deals – with the nod from Obama – may point to a European dimension to reset, looking to integrate Russia economically despite the risks, rather than keep it at arm’s length.

 

Ships and chips

 

Two other deals similar to the Opel rescued have been broached by the Russians during the summer. Both involve opaque, Kremlin-linked structures bailing out struggling German companies that despite their losses have technologies the Russians want.

 

On Friday, September 18, media reported that Russia’s largest telecommunications holding AFK Sistema is negotiating to purchase a share in Infineon, the largest German microchip producer. According to Kommersant business daily, the deal currently under discussion is for Sistema to acquire 15-20% of the company for EUR 1bn, with the purchase funded by Russian state corporation Bank for Development (VEB). Sistema is a private company (although historically linked to Moscow city government).  However, following a succession of deals where the Kremlin has helped Sistema, “this [deal] could be an anticipated reciprocal ‘favour’”, says telecoms analyst Ivan Kim of investment bank UralSib. Sistema owns Russia’s largest chip producer, Sinterra.

 

And in a smaller, but similar deal, former Russian energy minister, Igor Yussufov, current member of the Gazprom board of governors, is set to acquire Germany’s bankrupt Wadan shipyards, based in Wismar and Rostock.

 

It is widely believed Yussufov is acting on behalf of Russian state-linked strategic investors, including state-owned gas giant Gazprom, and the state-owned United Ship-building Corporation. The financially stricken Wadan shipyards possess unique ice-breaking technologies that Russia needs to retool its naval shipyards to build transport vessels for energy projects in the Arctic. Again this deal has been welcomed by Merkel and the German government, despite the opaqueness about who is actually buying these asets.

 

Thus the German government seems to look positively on the Kremlin’s shopping around for technologies to modernize the Russian economy. For Vladimir Putin, and his colleague as head of state engineering and defence corporation Russian Technologies Sergei Chemezov, who according to Putin biographer Alexander Rahr were both involved in industrial espionage on Germany during Soviet times, Russian access to German technologies is a dream come true.

 

Do these deals mark an economic, European dimension to reset? On Friday, September 18, Putin called on Obama to follow up on cancellation of missile shield plans by supporting Russia’s bid to join the WTO – the longest bid in the history of the organization, with Russia the largest economy to remain outside the WTO. Former German chancellor Gerhard Schroeder has stated openly that the US has been blocking Russia’s WTO accession for political reasons. Obama’s position on Russia’s WTO bid might show whether reset can develop an economic dimension. US reset on Russia’s WTO bid will also have knock-on effects for Russian-Europe ties, since the signing of a new Russian-EU partnership agreement is largely dependent on Russia’s achieving WTO membership.