Germany: Sanctions On Russia Bite Back

While most U.S. and most E.U. nations press for additional sanctions on Russia for its role in the Ukraine conflict, a distinctly conciliatory tone is being heard from Germany, where the sanctions are having a significant effect on the economy.



"The shine is off the German economy," warns Carsten Brezski, a senior economist at the banking group ING in Brussels. "And the sanctions against Russia have much to do with it." 



German Chancellor Angela Merkel, who was a fierce supporter of the sanctions, has backed off slightly in recent remarks. "The EU wishes to work with Russia, not to act against it," she said on Dec. 18.



German Foreign Minister Franz-Walter Steinmeier chimed in: "An economically isolated Russia, one that may face collapse, would not help improve security in Europe or in Ukraine, but would pose a danger to itself and others. One of the problems is that many people aren't having a dialogue. That's not true of the Germans."  



To this disharmony with other EU nations was added a choir of top German businessmen, all singing the same tune:  "Short-term turbulence should not affect our relationship with the country," said Siemens CEO Joe Kaeser, on a recent visit to Germany. Siemens has seen a 30 percent plunge in orders in Russia and recently dropped its bid to build trains for the Moscow subway.



Deutsche Post CEO Frank Appel harmonized: "Since we don't have major sources of raw materials in Europe, we will always be dependent on others. It seems questionable to me whether dependence on the Middle East or Venezuela would be better than that on Russia."



The reason for this conciliatory tune out of Germany is because the sanctions are costing German companies a large volume of business. A good example is a cancelled deal between German chemicals giant BASF and Russia's Gazprom worth $14.6 billion. Fallout from the Russian crisis continues to spread with the cancellation of a big gas deal with Germany.



BASF was to take shares in two Siberian gas extraction sites in exchange giving the Russian company full control of its gas storage and trading business.  



But huge amounts of money are at stake. German mechanical engineers earn about $10 billion in Russia every year. The German chemicals industry exports about $5 billion worth of product to the country. And German carmakers sell about 133,000 cars to Russia's new high-net-worth individuals annually.



But, recently, BMW said it would probably stop its deliveries to Moscow.



All of this has hit the German economy. "German exports to Russia are down 17 percent from January to September of this year. So we are skeptical about the value of the sanctions policy," complains Eckhard Cordes, chief of the German industry association Ost-Auschuss.



But the effect will have much worse consequences if sanctions are continued for a long period.



"By 2017, Russia will mainly import products from China, Germany and Ukraine, which together account for 42 percent of total imports of Russia. In volumes, the most important trade flows to Russia currently include industrial machinery from Germany, road vehicles & transport equipment from Germany, and textiles from China. In the coming years, these flows are expected to change with 8 percent, 12 percent and 12 percent per year, respectively," explains a recent report on the Russian economy from ING bank's TradeStudy researchers.



Clearly the importance of Russia as a market for Germany's export-based will become critical.



And the choir of Russian businessmen and politicians calling for "cooperation" with Russia on the Ukraine conflict is likely to become very loud and strident.



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