Endangered Revenue

Ukraine Crisis Starts to Bite into German Profits

VW's Martin Winterkorn thanks a satisfied customer. Source: DPA
VW's Martin Winterkorn thanks a satisfied customer.
  • Why it matters

    Why it matters

    Entire German industries including cars, energy, arms, and healthcare are suffering as new projects and investments are put on ice amid tit-for-tat sanctions between the European Union and Russia.

  • Facts

    Facts

    • Since the fall of the Iron Curtain 25 years ago, the Russian market has played an ever-increasing role for German businesses.
    • The healthcare company Stada earned €113 million in Russia last year – 45 percent of its total profits.
    • In the first half of 2014, German business revenues from Russia dropped almost €3 billion compared to the previous year.
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    Audio

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The jubilation still seems so fresh. In July, German exports reached €101 billion ($130.5 billion). Never before had Germany shipped more than €100 billion in goods in a single month. It seemed as if last year’s export record of €1.1 trillion ($1.4 trillion) stood to be beaten in 2014.

Of German exports last year, Russia accounted for only a modest 3.3 percent. So the feeling was that Germany’s overall economy didn’t really need to fear great losses from retaliation by Russia President Vladimir Putin after the European Union slapped sanctions on Moscow for meddling in Ukraine.

But that’s only the view from above. At the cash registers of German businesses, there is much to fear – especially for companies like the wholesale retail giant, Metro, and Stada, which specializes in healthcare. Russia is their most important foreign market. According to the Swiss bank UBS, Stada earned €113 million ($146 million), before taxes and interest in Russia last year – 45 percent of its total profits.  In 2013, it reported 22 percent growth in Russia.

Stada makes pharmaceutical and generic products and is based in Bad Vilbel, just northeast of Frankfurt am Main. In spring, the company lowered its forecast for the year as tension mounted over fighting between Ukraine government forces and Russian-backed separatists. Investors reacted with shock. In just 10 months, the company’s market value had fallen by a half-billion euros, or about 25 percent.

German companies in Russia

Another German company, Bionorica, is watching and worrying. The company produces plant-based drugs and generated earnings in Russia last year of €78 million ($100 million) – 33.5 percent of its total sales. “Russia is and remains for us one of the most important trading partners,” said the head of the company, Michael Popp. “It would be helpful not to aggravate the situation through additional trade barriers.”

Like Stada and Bionorica, 6,400 German companies sell their products in Russia. Since the fall of the Iron Curtain 25 years ago, the Russian market has played an ever-increasing role for German businesses, especially for industries like consumer goods, cars and mechanical engineering. And their position has been in danger ever since the conflict in Ukraine flared.

Volkswagen stopped all production for two weeks at its Kaluga plant south of Moscow as the trade war escalated. The company cited a “highly uncertain situation” as the reason. By July, VW sales had dropped 16 percent in Russia compared with last year. Up to now, the company’s head, Martin Winterkorn, had called Russia VW’s “number-one growth market in Europe.”

The warning lights are flashing right now for German industry.

In the first half of 2014, the revenue that German companies earned in Russia dropped almost €3 billion ($3.9 billion) compared to the previous year. Exports shrank by 15.5 percent to €15 billion ($19.4 billion). Business for carmakers and parts suppliers collapsed by one-fourth; mechanical engineering by almost 20 percent.

“The warning lights are flashing right now for the German industry,” said economist Oliver Kolodseike of the financial information and services company, Markit. And any company that saw Russia as a future market is taking notice. For the SMS Group, about €1 billion ($1.3 billion) in Russian investments are bogged down. The construction and mechanical engineering company recently put plans for a metals plant in Russia on ice.

The agricultural machinery manufacturer, Claas, generates a fifth of its sales in Russia. Claas builds and sells threshing machines and tractors in the southern Russian city of Krasnodar. “The situation in Russia and Ukraine naturally has an impact on how business is developing this year,” said company spokesperson Theo Freye. But the company is banking on undiminished long-term success in both countries. “They’ll still be sowing and harvesting there as always,” said Mr. Freye.

Companies like Henkel, Adidas and MAN also report losses as a result of the Ukraine crisis. Russia is one of Adidas’ most important growth markets. First, the declining Russian ruble caused problems and now sluggish sales are hurting the company as Russia plunges into recession.

The German railway company, Deutsche Bahn, has five enterprises in Russia. The company’s head, Rüdiger Grube, estimates business volume with Russia at about €250 million ($323 million). With total sales of €1 billion ($1.3 billion) last year, Russia is Henkel’s fourth largest market.

The energy company Eon has invested some €6 billion ($7.75 billion), in the Russian electricity market since 2007. The share of the Russian power business in its operating profit in 2013 was about 7 percent. That collapsed in the first half-year by about one-fourth. The second half of 2014 does not promise any better. “We’re monitoring the Ukraine crisis with some concern,” the company’s top executive, Johannes Teyssen, wrote to his shareholders.

Retail company Metro is particularly susceptible to ups and downs in the Russian economy. With annual sales of €4.3 billion ($5.6 billion) and 20,000 employees, Russia is Metro’s most important foreign market. The company operates over 100 Media-Saturn consumer electronics stores and Cash & Carry self-service wholesale markets there.

Back in January, Metro was still planning to go public with its Russian subsidiary to reduce debts and expand into other markets with the money. For now, however, the conflict with Russia has pushed those plans far into the future.

This article was translated by David Andersen. Greg Ring also contributed. Ulf Sommer has been a Handelsblatt news and finance editor since 1996. To contact the author: sommer@handelsblatt.com

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