Global Economics

Russia Sanctions Could Put Germany Inc. on the Front Lines of Trade War


Chancellor Merkel listening to debate about the Ukrainian crisis at the Bundestag in Berlin

Photograph by Markus Schreiber/AP Photo

Chancellor Merkel listening to debate about the Ukrainian crisis at the Bundestag in Berlin

(Corrects think tank's name in fourth paragraph.)

German Chancellor Angela Merkel hasn’t minced words. Unless Vladimir Putin steps back from Ukraine, she’s prepared to back European sanctions that would cause “massive economic and political harm” to Russia. What about the harm Germany would suffer if the showdown escalates into economic warfare?

Among European Union nations, Germany is by far Russia’s most active trading partner. It’s well-known that Germany depends heavily on Russian oil and gas, which accounts for the bulk of the €39.8 billion ($55.4 billion) it imported from the giant to the east in 2012. What may be more surprising is that Germany sells Russia almost as much as it buys, with exports totaling €37.9 billion in 2012—accounting for 31 percent of all European exports to Russia.

Some 6,000 German companies are active in Russia, selling everything from pharmaceuticals to cars and machine tools. German companies also have invested heavily in Russian manufacturing, according to a report today in the magazine Spiegel. Knauf, a German building-materials maker, employs more than 5,000 people in its Russian plants, the article says. Such businesses would be on the front lines of a trade war with Russia.

For Germany Inc., the greatest fear may not be what Europe might do, but how Moscow might retaliate, says Roland Freudenstein, deputy director of the Wilfried Martens Centre for European Studies, a Brussels-based think tank. A key worry is that Russia might approve legislation, already under discussion in the parliament, to nationalize foreign assets in the country. “German business people are extremely afraid of this,” Freudenstein says. “Some people have postponed investments and business trips.”

Germany’s state-owned KfW development bank last week abruptly postponed the signing of a deal with Russia’s Vnesheconombank in which the Germans were to have invested €200 million with the aim of expanding opportunities in Russia for Germany’s midsized companies. A KfW spokeswoman contacted by Bloomberg Businessweek said she was unable to comment on the situation.

So far, German business leaders are standing firm with Merkel. Ulrich Grillo, president of the powerful BDI industry federation, said on March 14 that he “fully” supports the chancellor in the Ukraine crisis. “Sanctions would certainly impact these relationships” with Russia, he said. “But international law, for me, stands above all.”

For now, the sanctions put in place by the EU involve asset freezes and visa bans on 21 Russians and Crimeans. The U.S. has imposed similar penalties on 11 individuals. Those measures are the second step in a three-stage sanctions process laid out by the EU. The next step would involve unspecified measures that the EU has said would have “additional and far-reaching consequences.”

Opinion polls suggest that the German public has little appetite for tough sanctions. A March 13 survey by the Forsa polling group for the German-Russian Chamber of Foreign Trade found that only 24 percent thought sanctions would help resolve the Crimea crisis.

German trade with Russia, though substantial, is only a small part of Germany’s overall exports. The country posted an estimated $260 billion trade surplus last year.

Even so, some 300,000 German jobs “depend on economic exchange with Russia,” Eckhard Cordes, who heads an association of companies doing business in Eastern Europe, told the newspaper Bild in a March 6 interview. “Russia needs a strong Europe and the other way around,” said Cordes, a former chief executive of the Metro (MEO:GR) retail group that has been a major investor in Russia. “I trust that this knowledge will prevail in the end, to calm things down.”

Matlack is a Paris correspondent for Bloomberg Businessweek.

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