The Boomerang Effect: Sanctions on Russia Hit German Economy Hard

By Matthias Schepp and Cornelia Schmergal

Companies like oil producer Rosneft -- here, a Rosneft drill site in eastern Siberia -- have been slapped with US sanctions. That has created problems for German companies. Zoom
REUTERS

Companies like oil producer Rosneft -- here, a Rosneft drill site in eastern Siberia -- have been slapped with US sanctions. That has created problems for German companies.

The United States and Europe last week announced the imposition of stronger sanctions against Russia in response to the ongoing crisis in Ukraine. German industry may be among the losers.

It wasn't that long ago that Kremlin officials could hardly avoid laughing when asked about the economic sanctions imposed on Russia by the West. As long as every NATO member state jealously sought to protect its own business interests, things "weren't all that bad," they gloated.

But since last week, their moods have darkened. For months, the European Union in particular had been reluctant to enact effective penalties against Moscow. Last Wednesday, though, the 28 EU heads of state and government cleared a psychological hurdle: For the first time, they opted go beyond sanctions targeting individual political leaders in Moscow, adding prohibitions against doing business with specific Russian companies that contribute to the destabilization of the situation in Ukraine. A concrete list is to be presented by the end of the month. European development banks have also been banned from providing loans to Russian companies.

The US, for its part, penalized a dozen leading Russian conglomerates, including oil giant Rosneft, natural gas producer Novatek, Gazprombank and the weapons manufacturer Kalashnikov. From now on, they are forbidden from borrowing money from American monetary institutions and from issuing medium- and long-term debt to investors with ties to the US.

For the companies involved, the penalties are a significant blow. It has become difficult to acquire capital in Russia itself, with both domestic and foreign investors withdrawing their money from the country in recent months. It is hardly surprising, then, that Russian Prime Minister Dmitry Medvedev spoke of a return to the Cold War and President Vladimir Putin warned that sanctions "usually have a boomerang effect."

Even prior to the sanctions, the Russian economy had been struggling. Now, though, the Ukraine crisis is beginning to make itself felt in Germany as well. German industry's Committee on Eastern European Economic Relations believes that the crisis could endanger up to 25,000 jobs in Germany. Were a broad recession to befall Russia, German growth could sink by 0.5 percent, according to a Deutsche Bank study.

Significant Risks

The most recent US sanctions, warns Eckhard Cordes, head of the Committee on Eastern European Economic Relations, have placed an additional strain "on the general investment climate." Particularly, he adds, because European companies have to conform to the American penalties.

By last Thursday, just a day after the US sanctions were announced, the German-Russian Foreign Trade Office in Moscow was besieged by phone calls from concerned German companies who do business with both the US and Russia. The German Chambers of Commerce and Industry estimate that up to a quarter of German companies that do business abroad could be affected. And the risks are significant, with large fines threatening those who violate the American sanctions, whether knowingly or not.

Stefan Fittkau, who heads the Moscow office of EagleBurgmann, the Bavaria-based industrial sealing specialists, says company sales have already plunged by 30 percent. "Orders have been cancelled or delayed -- or we simply don't receive them anymore," he says. Novatek, Russia's second largest natural gas company, for example, had hired EagleBurgmann to take care of seals at a vast liquefied natural gas facility on the Yamal Peninsula in Siberia. Now, though, doing business with Novatek is no longer allowed.

Radical Steps

The inclusion of Rosneft on the list also affects more than a dozen German companies: The construction firm Bilfinger maintains facilities for Rosneft, for example, while Siemens received a €90 million contract to supply turbines and generators. "In the end, both sides, the Russians and the Europeans, will lose," says Frank Schauff, head of the Association of European Businesses in Moscow.

Already, the uneasiness can be seen in the Ifo Business Climate Index. One in three of the companies surveyed at the end of June said it expected adverse effects. "Russian customers have begun looking for suppliers outside of Europe," says Ulrich Ackermann, a foreign trade expert with the German engineering association VDMA. "They are concerned that European companies, because of the threat of increased sanctions, won't be able to deliver."

Even prior to the latest sanctions, business has been slowing in almost all sectors. The Düsseldorf-based energy giant E.on, for example, recently built power stations in Russia worth €9 billion. Most of the generators are already online, but because the economy in Russia is suffering, the returns are much lower than forecast. Volkswagen is a further example. The carmaker's sales figures for 2014 are 10 percent lower than they were last year. Opel's figures dropped by 12 percent during the first five months of the year.

Already, Opel has been forced to take a radical step. In St. Petersburg, where the Astra is manufactured, the company shut down the assembly lines recently for several weeks.

Translated from the German by Charles Hawley

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1.
peskyvera 07/21/2014
Germany still hasn't realized that the US - you know, your 'dear friend', is trying to undermine the entire EU? The US was never in favor of the creation of the EU or the advent of the euro. But keep right on kissing the Yankee behind. Hope you have a good lip balm.
2.
robebaetz 07/21/2014
Merkel has tremendous respect in the US. The sanctions were not taken lightly at all. Particularly in the energy sector. Was it a coincidence Putin signed with China? Made nice to Cuba and turning to Brasil, and India. Putin is a very shred businessman. Sanctions are better than troops aren't they? As this plays out I watch to see if the US steps up to help the economic impact on the EU. Economic warfare is a better choice than shooting down EU citizens from the air.
3.
agajadhar 07/21/2014
The West should realise that Germany which was East and West before they became the New Germany depend on many Russians, or may I say Russia in its economy, with sanctions on Russia because of Eukraine will more effect on Germany than Russia, why should the other Europeans and the US place the Ukraine before Germany wen they know this problem. Anthony Gajadhar
4. Germany
patang 07/21/2014
Germans are perhaps the greatest people on God's earth. Brilliant hard working and prosperous. However you have to look at things at large. For almost 50 years the US put up a fight to save Europe for Russian domination, it worked the USSR broke up yet the mentality of the Russian rulers hasn't changed an iota they are a crude brutish people who want to railroad everything, case in point the shooting down of 4 aircraft within 2 months, no civilized people would do that. Tampering with evidence at the this tragic crash site not allowing people in to investigate, these are uncouth bunch of people, their history is full of brutality. The communist made it even worse.Mr. Stalin killed over 20 million of his own. Mr. Putin is no different, wants to bring back that old communist glory of gulags and one man rule and make Europe uncomfortable with gas supplies blackmail and massing his military might against Ukraine, annexing the Crimean peninsula, as the West watched. He will not stop there he will take back every country which was in the Soviet domain if you don't watch out. He is not a philosophic person rather a KGB operative, who will use force to get what he wants. So to lose some business is okay, you have plenty, rather than losing your freedom. Ukraine and Poland are ideal tank country, the Russian can be there in a flash they still have 12,000 tanks.So don't be fooled the are still mighty where as the West has downsized practically everything. Eventually they will try and gang up with China to defeat the West, they cannot match the freedom creativity that the West produces and that is their problem.They can produce world class hackers not software writers.
5.
jngure2000 07/21/2014
Here's what the EU will realize; when you put all your eggs into one basket - and that basket happens to be a criminal, rogue nation, it always end in tears. The assorted German companies named above should start looking at their long term prospects and slowly shift their business elsewhere. In fact, I'm quite surprised, because Germans are famed for their excellent,careful planning. How nobody saw this coming, I'll never understand.
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Graphic: Russia's struggling economy. Zoom
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Graphic: Russia's struggling economy.



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