Germany on Russia: Forgive and Forget

Its economy is becoming increasingly dependent on Russia

Daimler says Russia helped Mercedes earn a 1% increase in operating profits Alexander Gronsky/Agency.Photographer.Ru

by Jack Ewing

FRANKFURT, GERMANY German Chancellor Angela Merkel isn't known as a great fan of Russia's government, but her tone was remarkably mild when she met President Dmitry Medvedev in St. Petersburg on Oct. 2. She called Russia's incursion into Georgia in August "not appropriate," but otherwise avoided the subject and even enjoyed a lengthy dinner with Medvedev aboard a restaurant ship on the Neva River.

The swift return to cordial relations was recognition of just how intertwined the German and Russian economies have become. Manufacturing everything from luxury autos to machinery to food, some 4,600 German companies are active in Russia and 70,000 German jobs depend on business with the country. Germany is also Russia's largest trading partner, with $45 billion in two-way trade during the first six months of this year. Little wonder that the 25 German businesspeople who joined Merkel in St. Petersburg seemed anxious to forgive the events in Georgia and get back to doing deals with Russian partners. The biggest deal: an agreement allowing energy supplier E.ON to acquire 25% of a huge Siberian natural gas field owned by state-controlled Gazprom. The Dusseldorf-based utility traded control of a 3% stake in Gazprom valued at $5.4 billion, ending years of stalemated negotiations.

Merkel's rhetoric on Russia is generally harsher than that of her Social Democratic predecessor, Gerhard Schröder, a pal of Prime Minister Vladimir Putin who now works for Gazprom. But Germany's business lobby makes sure that Merkel never forgets how much their companies depend on the former Soviet state. "Whatever we can do to advise our government, we are doing," says Klaus Mangold, a former Daimler executive who leads the East European committee of the German Federation of Industries. In fact, Merkel rarely says anything that would damage German-Russian economic ties. "The economic cooperation is advantageous for both sides," she told an audience that included Medvedev in St. Petersburg. Russia is also a crucial energy supplier: Germany buys 36% of its gas and 32% of its oil from the country.

As trade with Europe and the U.S. has flattened, exploding Russian demand has helped insulate Germany from global economic turmoil. Russian trade is particularly important for sectors such as the German machinery industry, which has boosted exports to Russia fivefold since 2000, to $8.8 billion last year. In the first seven months of 2008, machinery sales to Russia hit $6.4 billion, a 29% increase vs. the same period a year earlier. By contrast, machinery exports to the U.S.—which has a much larger economy than Russia—were stagnant at $9.9 billion in the first seven months. "Russia has more than made up for the U.S.," says Ralph Wiechers, chief economist for the German Engineering Federation.

A CHANGE IN PACE

So far, German businesspeople say, growth in business from Russia seems to be cooling but remains high. "It isn't yet exhausted, but it won't continue at the same pace," says Andreas Hartleif, CEO of VEKA, a German maker of plastic window and sliding door frames that has factories in Moscow and Novosibirsk. Not all German exporters are so laid back. Russia is important for German carmakers trying to make up for slower U.S. sales, which the weak dollar has hammered. Not only are Russia's nouveau riche keen to get behind the wheel of a Mercedes or a Porsche, but they are willing to pay for costly options. Daimler cited Russia as one reason its Mercedes car division eked out a 1% increase in operating profit in the second quarter. Says BMW brand chief Friedrich Eichiner: "We sell 10 times as many cars in the U.S., but Russia is very profitable."

Even though Russia accounts for only about 3% of German exports, for many companies it is one of the few growth markets left. Says Gerd Hassel, economist at BHF-Bank in Frankfurt: "An economic slowdown in Russia would be very decisive for the German economy."

Ewing is BusinessWeek's European regional editor.