Germany Inc. on Edge as EU Steps Up Response to Crimea
March 24, 2014
A customer moves two heavily loaded shopping carts past the check out tills of a Metro AG Cash & Carry supermarket store in Moscow. Among the large countries that use the euro, Germany sends the highest proportion of its exports to Russia, about 3.3 percent, Morgan Stanley analysts said in a March 20 research note. Photographer: Andrey Rudakov/Bloomberg
As the European Union steps up its response to Russian president Vladimir Putin’s annexation of Crimea, German companies are urging caution lest sanctions harm their business ties -- and Europe’s shaky economic recovery.
The EU’s biggest economy has a lot riding on Russia. Volkswagen AG (VOW), Siemens AG (SIE), and HeidelbergCement AG are among the largest foreign investors there, the economic linchpin of a relationship nurtured by successive Berlin governments. Retailer Metro AG sells groceries to Russians, Adidas AG clothes the national soccer team, and Deutsche Lufthansa AG (LHA) flies to more Russian cities than any other western European carrier.
U.S. President Barack Obama in Amsterdam today warned of “significant consequences” for Russia’s economy if tensions don’t subside. Western officials have expressed concern about Russian troop movements near the Ukrainian border, which could worsen the crisis, U.K. Foreign Secretary William Hague wrote in The Sunday Telegraph yesterday. The EU on March 21 expanded the list of people subject to visa bans and asset freezes in response to Russia’s annexation of the Crimea to 51 individuals.
There will likely be opposition to tightening the screws too much. Gernot Erler, German Chancellor Angela Merkel’s coordinator for relations with Russia, told Bloomberg News last week that harsh sanctions would be counterproductive and unlikely to convince Putin to change course.
“We hope that politicians really think about the impact sanctions will have,” said Ulrich Ackermann, chief international economist at the VDMA, an association of 3,100 German machine makers, including Siemens and VW. “It’s important that they weigh what the effect will be not only on the country you want to hit, but also on the country that’s imposing the sanctions.”
Concrete Evidence
Among the large countries that use the euro, Germany sends the highest proportion of its exports to Russia, about 3.3 percent, Olivier Bizimana, a Morgan Stanley economist based in London, said in a March 20 research note. Bilateral trade between the two countries hit 77 billion euros ($106 billion) last year, and German investment in Russia totals 20 billion euros, according to the German Association of Chambers of Industry and Commerce.
Those close ties distinguish Germany from its European partners and especially the U.S., said Bernd Scheifele, Chief Executive Officer of concrete producer HeidelbergCement AG. (HEI)
“The greatest risk is if the Americans play power games -- since they have very limited trade with Russia they could very well do so,” Scheifele told reporters on March 19. “If the Russian state has no money, then all infrastructure and construction projects come to a standstill.”
Cold-War Rerun
Heidelberg, the world’s third-largest cement supplier, had about 500 million euros in revenue from Russia and Ukraine in 2013, with 21 facilities in the two countries. Scheifele warned that while the first two months of the year were in line with the company’s expectations in Russia, an economic crisis could quickly change that.
Deutsche Bank AG co-CEO Juergen Fitschen said in an interview last week with Die Zeit that a “rerun of the Cold War should be avoided at all costs.” The bank has advised on a greater volume of takeovers involving Russian companies than any other foreign firm in the last two years, working on $74 billion in transactions, according to data compiled by Bloomberg.
Economic links mean that “in western Europe, Germany is the most exposed to the trade risk” of a Russian crisis, Deutsche Bank economists led by Gilles Moec wrote in a report last week. Germany’s gross domestic product could fall by 0.5 percentage points if Russia’s economy were to contract by 8.6 percent, they said -- a decline that’s “obviously quite extreme, but not unprecedented” in Russia’s volatile post-Soviet history.
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