SANCTION WOES

Germans Losing Confidence in Russia

VW in Russia bloomberg
Volkswagen is still producing in Russia - but sanctions are hitting German companies hard.
  • Why it matters

    Why it matters

    German firms operating in Russia have been hit by the decline in the ruble, falling prices for raw materials as well as sanctions.

  • Facts

    Facts

    • The German Chambers of Commerce and Industry in Russia surveyed 158 firms employing 67,000 people in Russia.
    • Overall, they predict subdued economic development in Russia until 2017 as economic sanctions continue to bite.
    • Despite the challenges, only a fraction of the 6,000 German companies active in Russia want to exit, according to the survey.
  • Audio

    Audio

  • Pdf

German companies want to keep doing business in Russia, even though they think its economy has fallen to its worst level since the fall of the Iron Curtain, a survey shows.

Not one of 158 companies called the Russian economic situation good, and 80 percent said prospects were definitely bad, according to a survey by the Russian chapter of the German Chambers of Commerce and Industry. More than half expect their business to decline.

Overall, the companies, which employ some 67,000 people in Russia, predict subdued economic development until 2017. However, as many as 20 percent expect growth between now and then.

Not all the companies have blamed the economic sanctions, which the West imposed last year because of Russia’s annexation of Crimea and support of separatists in eastern Ukraine. Russia has since retaliated with its own sanctions.

Chamber of Commerce president Rainer Seele noted many reported the economic situation weakened before the sanctions even came into effect: “Economic development has been bad since 2013,” he said.

He blamed falling world market prices for raw materials, as well as insufficient structural reforms. “The sanctions are not the cause, but they have an exacerbating effect,” said Mr. Seele.

Despite the bad situation, very few of the 6,000 German companies that are active in Russia want to give up business there.

Three-quarters of companies said sanctions on Russia have been politically ineffective. Company bosses think that financial market sanctions have been particularly damaging: Half said they are affected by these. The next biggest complaint was of sanctions against dual-use goods.

The machine construction sector is especially affected by the latter, because its tool machinery can be used to make goods with both civilian and military applications.

The food sector, agriculture and oil industry suppliers also suffer from sanctions, according to the survey.

And this week Russia fired another shot in the sanctions showdown when its consumer protection authority banned the sale of detergents made in the West.

Among the companies hit is Germany’s Henkel, which makes laundry and cleaning products, as well as Procter & Gamble, Colgate-Palmolive and Clorox. Russian officials said their detergents did not meet health standards.

Henkel, a multinational based in Düsseldorf, has done business in Russia since 1991. Today it is the company’s fourth largest sales market.

russia
The plunging ruble has led to tough times in Russia. Source: Bloomberg

 

In addition to the detergent ban, Russian health officials made a surprise inspection at the Henkel factory in the Perm region, according to the Reuters news agency. The Russian consumer protection authority said it was testing the detergents and cleaning products of manufacturers, but gave no details.

“All detergents and cleaning products that we deliver to the Russian market have received the state registration certificate from the relevant authority,” said a Henkel spokesperson. Company officials say they want to talk with Russian authorities “so we can understand what’s behind these measures.”

Despite the bad situation, very few of the 6,000 German companies that are active in Russia want to give up business there, according to the survey.

In the long term, the Russian market remains strategically important, said Mr. Seele. Investments of €900 million ($1 billion) are planned.

Many companies even plan to move more of their production for the Russian market to sites within the country. That would minimize the currency risk: Russians are more able to afford goods produced within the country, using the ruble, than those stemming from more expensive euro-zone countries.

German Business in Russia-02
     

 

Siemens, for example, produces gas turbines and Knorr produces brakes in St. Petersburg. Claas manufactures agricultural machinery in Krasnodar and Volkswagen is banking on its factory in Nizhny Novgorod.

The companies say that as manufacturers in Russia they have access to funding opportunities and have equal participation in bidding. However, whenever the central state is the client, “protectionist tendencies” can be an advantage for purely Russian companies. Regionally though, there are regular programs to attract investors.

The bottom line: Most companies believe German businesses are losing market share in Russia – often to Chinese companies. But recently some Russian firms have shown a preference for doing business with Europeans.

The reasons, Mr. Seele said, are superior quality and better relations on a personal level. No doubt many are hoping this will outlast the current sanctions.

 

Donata Riedel covers economic policy for Handelsblatt in Berlin. To contact the author: riedel@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!