Sanctions Breach

From Munich to Crimea

  • Why it matters

    Why it matters

    Siemens maintains its innocence in the current Crimean scandal, trying to protect a reputation its worked on hard since a major corruption scandal a decade ago.

  • Facts

    Facts

    • Four gas turbines Siemens claims it delivered to southern Russia ended up in sanctions-bound Crimea.
    • In reaction, Siemens announced to halt energy equipment deliveries to state-controlled customers in Russia.
    • Russia annexed Crimea in 2014, and has been hit hard by EU sanctions that followed.
  • Audio

    Audio

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85987698 Siemens HQ AP
How exactly did those turbines get from Siemens to Crimea? Source: AP

Walk around the executive floors of Siemens’ headquarters in Munich and there’s only one thing you’ll here. “Crimea, Crimea, Crimea,” said one manager. That’s because the German industrial giant is struggling to contain a scandal surrounding four of its turbines being illegally transported to sanctions-bound Crimea, a revelation that harms its overall reputation but also its important billion-euro business links in Russia.

The firm considers itself a victim of criminal actions on the part of its Russian partners, who unlawfully and in breach of contract moved the gas turbines from southern Russia to Crimea, which European firms are banned from doing business with since Russia’s 2014 annexation of the peninsula from Ukraine.

Siemens announced Friday that it will freeze the delivery of power equipment to state-controlled companies in Russia. A new guideline will mandate that the German firm keeps control over the equipment until it is actually installed at its destination. The company also said it will sell its minority stake in service provider Interautomatika, which is accused of aiding installation of the turbines in Crimea.

Yet a source told Handelsblatt that management is considering taking action on its part as well. Critics in the company claim the head of Russian business at Siemens, Dietrich Möller, took too long to investigate allegations first revealed by the news agency Reuters earlier this month. “We should have been more alarmed,” one insider said.

Insiders said they doubt management would have risked the company’s reputation over a €100-million contract in Russia.

Russian officials have denied the allegations and maintain that the turbines in question are of Russian origin. Yet officials over the weekend hinted at potential retaliation for Siemens’ new restrictions on its energy business in Russia.

Vladimir Gutenev, deputy head of the Russian parliament’s lower house committee on economic policy, said Siemens’ decision could be an opportunity for “import substitution,” a policy the country has used to boost domestic producers in the wake of Western sanctions over Crimea. Sergei Shatirov, deputy head of the upper house committee on economic policy, said Siemens could lose a lot. After all, he added, the company has been active in Russia for decades.

Siemens last year had sales of about €1.2 billion ($1.4 billion) in the country, around 2 percent of its total global sales. Industry insiders said they expect Siemens will be willing to shoulder losses in order to protect its reputation. The firm has been eager to rebuild its image after a 2006 corruption scandal that cost it a then-record breaking fine of $1.6 billion dollars.

Company officials also don’t believe anyone at Siemens was complicit in the actions. Insiders said they doubt management would have risked the company’s reputation over a €100-million contract in Russia. “There was a lot of criminal energy on the Russian side,” one source said.

Siemens insists that, according to the contracts, the turbines should have been used in Taman in southern Russia. Several media outlets reported that even Russian President Vladimir Putin assured the German government that none of the equipment supplied would end up in Crimea.

An insider said that there were even fences and signposting at the site in Taman, adding that the Russian government listed the Taman project in all its official energy plans. The source said no one could have known that the turbines would end up in Crimea.

In an official statement, Siemens said the moving of energy equipment to the Black Sea peninsula “constitutes a blatant breach of Siemens’ delivery contracts, trust and EU regulations,” adding that all necessary precautions were taken to prevent this.

Whether or not the current rift will actually cause Siemens to retreat more broadly from the Russian market is not clear. Ivan Andriyevsky, deputy leader of the Russian Union of Engineers, said: “Siemens probably will only halt deliveries temporarily until the incident is investigated.” He added that it’s unlikely the German company will leave an important market like Russia permanently.

André Ballin has been writing for Handelsblatt from Moscow, Russia since 2015. Axel Höpner is head of the Handelsblatt office in Munich, focusing on the state of Bavaria’s companies, including Allianz and Siemens. To contact the authors: ballin@handelsblatt.com; hoepner@handelsblatt.com

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