Global Economics

German Economy Attracts Russian Money


Thanks to Germany's political stability and lower wage inflation, Russian investment is rising, driven by smaller companies

A new generation of Russian businessmen has discovered Germany. Investments, joint ventures and takeovers from the East are on the rise. One reason: Wages in Moscow and St. Petersburg are too high.

It's not easy to find Igor Jourist. He lives in the somewhat run-down neighborhood of Hamm in the eastern part of Hamburg -- past a gas station, behind the nut importer and up the stairs to the third floor of an inconspicuous warehouse.

Yet despite the modest digs, Jourist has found success -- indeed, he is one of the most innovative Russian businessmen in Germany. The 37-year-old has founded two companies in Germany -- Jourist Verlags GmbH and Promt GmbH -- and has become the leading vendor of translation programs here. Indeed, his products rank first in rankings published by numerous professional journals. And each year, he has been able to increase his turnover by a solid 50 percent. "We're very pleased," the businessman says.

Jourist belongs to the growing number of young Russians who are trying their luck in Germany. Huge numbers of businessmen and women from Russia are setting up subsidiaries, branches and companies here; unnoticed by the public, they have created thousands of jobs.

Not with Kalashnikovs, but with Money

"The people who are arriving now have made their money honestly," Jourist says. "Not with oil or natural gas, but with new products."

Dubious billionaires, oligarchs and state-owned companies -- that is the West's standard image of the Russian economy. And European governments tend to be wary of those over-eager to invest. "We're not coming with Kalashnikovs, but with money," Russian President Vladimir Putin announced during his visit to Germany last year.

But while all eyes are on the gigantic multinationals, small and mid-sized companies from Moscow and St. Petersburg are delivering the goods. "Everyone can see that Gazprom advertises on the shirt of the Schalke soccer team," says Daniel Kast of consulting firm PricewaterhouseCoopers (PwC). "But virtually no one knows who else is here."

"German firms are right at the top of Russian companies' shopping list," says Klaus Mangold, the president of the Committee on Eastern European Economic Relations, a joint organization of the leading associations representing German business. Following the rapid growth of the past few years, the Russians aren't hurting for seed money, either. "The cash boxes are full," confirms Kast.

Small Businesses in Demand

Officially, about €800 million ($1 billion) worth of direct investments flowed from Russia to Germany last year. Experts, though, believe the real totals are much greater. Statisticians at the Bundesbank, Germany's central bank, only register sums that exceed a set amount. Moreover, many Russian investors are registered in Cyprus for tax reasons. "That's often the standard practice," Kast explains.

In addition, there are between two and three million Russians and Russian Germans living in Germany. There are no exact figures about their business activities, but even if only 5 percent of them were self-employed, this would correspond to more than 100,000 entrepreneurs with a Russian background.

There are still more German companies investing in Russia than vice versa. "But we are expecting the trend to reverse itself soon," says Kast. "The balance could be equal in just three to five years."

Examples of Russian interest in Germany are myriad -- from car producers wishing to improve quality and thus investing in German subcontractors, to banks that are looking to grow. German small businesses are especially in demand. "A typical approach consists in buying into business partners in the West," says Kast.

The Value of Political Stability

Dr. Scheller, a cosmetics company based in the southern German state of Baden-Württemberg, is one example. In 2004, the company reached a distribution agreement with Russian cosmetics company Kalina from Yekaterinburg. One year later, the Russians became majority owners of Dr. Scheller. Similarly, Dessau Fahrzeugtechnik, an auto parts supplier, and Franz Kleine, a manufacturer of harvesting equipment, are both now Russian-owned.

Indeed, Russian companies -- whether via joint ventures, takeovers, or new foundings -- are now present in almost every branch of the German economy. They include innovative software companies such as Abbyy (text recognition) and Kapersky (anti-virus programs) no less than straightforward food companies. Even German breweries have become attractive to Russian investors.

Of course profits in Germany are not as enticing as on Russia's growing market. While investors can achieve 20 percent annual return in Russia, they have to be content with a meager 5 percent in Germany. But Russian businessmen don't let that put them off. After all, Kast points out, the political stability in Germany is tremendously attractive.

And now, there is yet another argument in favor of investing in Germany: inflated wages in Moscow and St. Petersburg. Compared to them, Germany almost seems like a low-wage country -- at least in the eyes of highly specialized experts. "The wage increases in Germany are far more moderate than in Moscow," says Kast.

Igor Jourist has run up against the same problem. The software entrepreneur can simply no longer find qualified workers in the major Russian cities. "Programmers are bought up directly at the universities," he says. He adds that there is "really no difference any more" between wages in Russia and Germany.

The company's programmers still work in St. Petersburg. Jourist employs only seven people in Hamburg at the moment. But he plans to change that: Jourist already had his Tom-Tom-Translator, a small portable device for travelers, developed in Germany. Soon he wants to begin producing here too.

Polishing Up the Company Image

But Russian investors haven't always come by their money completely honestly. In the 1990s, they could "make their first million only with a flexible understanding of justice and the law," says Vladimir Papkov, head of Agentur Kronstadt, which consults Russian companies wanting to do business in Germany. Papkov has observed tremendous growth rates, especially in the transportation sector -- Russian-German trade in Hamburg's port alone grows by 30 percent each year.

In order to provide a forum for honest companies, Papkov and other, like-minded people have created the Russian-German Trade Guild in Hamburg. State-owned companies are not allowed to join and the members of the guild pledge to adhere to the principles of the free market economy and to honest business conduct. One year ago, the guild had 25 members. Now it already has 50. They represent "hundreds of jobs" in Hamburg alone, says Papkov.

"The dishonest character of the first period of capitalism in Russia must not be continued," the guild's founding charter states. As a business club of sorts, the guild wants to promote a "new, positive image of Russian-language business life."


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