Global Economics

Russians Snapping Up German Companies


Moscow investors, rolling in profits from natural resources, are looking to Germany for opportunities

Harald Ruschel, a member of the works council at the Aker shipyard in the northern German Baltic seaport of Rostock-Warnemünde, had expected everything from tears to catcalls and booing. But what he didn't expect was that the 450 early-shift workers, who had convened in a shipyard building last Wednesday, would applaud when Aker CEO Tom Einertsen addressed them -- especially given the news he was delivering.

Einertsen told the employees that Aker Yards, a Norwegian company, had sold a majority stake in two northern German shipyards -- the one in Warnemünde and another in nearby Wismar -- to Russian investors, specifically, to a fund called FLC West. The gentlemen from Moscow, Einertsen told his employees, had promised not to make any changes to staffing, compensation and social benefits.

"It's hard to believe that it went so well," says Ruschel, commenting on his fellow workers' obvious sense of relief. They have seen many owners come and go since German reunification, and their expectations have often been disappointed.

But this time the workers can feel somewhat at ease about the future. The order books are filled for years to come, which explains why the shipyard is the scene of three daily shifts of around-the-clock welding, drilling and hammering. Workers at the dock are currently in the process of mounting the superstructure elements onto the stern of a freighter. Once the midship section and the bow have been assembled, the resulting ship will be 170 meters (558 feet) long and have the capacity to hold 1,700 containers. Shipbuilders are vying for opportunities to build these container ships for the globalized world.

Demand for the vessels is so high that Russian investors, no longer satisfied with simply buying ships, decided to acquire the entire shipyard instead. They were even willing to pay the stiff price of roughly 292 million ($461 million) for the two locations in Warnemünde and Wismar. But money appears to be no object for the Russians.

Russian investors have been traveling through Germany for months, buying up companies, eyeing almost every industry. They have bought shares in everything from cosmetics companies to fashion houses, construction companies and tourism groups. The Russian financial institution Sberbank is even said to have recently looked into buying parts of Germany's venerable Dresdner Bank that are up for sale. The shipyard deal is only the most recent example of a shopping spree that has taken Russian investors on a journey through the German corporate landscape. With almost nothing left worth buying at home, they are taking their rubles westward, especially to Germany.

The number of cases in which Russian companies have acquired stakes in foreign companies has increased substantially since 2001, while investment volume has skyrocketed, from $500 million (316 million) in 2001 to about $24 billion (15 billion) in 2007.

Cash-Rich and Bursting with Vitality

It is still the case that more German companies are investing in Russia than Russian companies in Germany. Automakers like Volkswagen and BMW, eager to profit from the booming Russian automobile market, are building assembly plants in Kaluga and Kaliningrad. But the flow of investment is likely to reverse direction soon, or at least balance itself out. Hardly anyone would have believed this possible just a few years ago.

Russia was a giant, chronically debt-ridden country, plagued by an ailing currency. It was more of a Third World country than an industrialized nation, constantly dependent on the West's loans and loan guarantees. But those days now seem to have been relegated to the distant past.

Nowadays the country conducts itself like a global economic power, cash-rich and bursting with vitality. Its corporate leaders are enterprising, self-confident and, most of all, wealthy. They own something that the rest of the world wants and for which it is willing to pay handsomely.

No other country has benefited as much from soaring prices in the commodities markets. Russia is the world's top exporter of natural gas, and it is second only to Saudi Arabia among the world's biggest oil producers. And the business of producing industrial metals like steel and nickel has given rise to enormous conglomerates run by fabulously rich oligarchs.

Moscow, with its stabilization fund and the world's third-largest foreign currency reserves, now has roughly 420 billion ($664 billion) in its coffers. The national budget has been in surplus for years. "The money is there, and they have to invest it somewhere," Hans-Henning Schröder, an expert on Russia with the Berlin-based German Institute for International and Security Affairs, says laconically. Many nations are currently struggling with the same luxury.

Once-poor countries like China, India and Russia are transferring billions into industrialized nations, undeterred by the global credit crisis. Massive amounts of money are being floated around throughout the world on a quest for investment opportunities. Investment banks, spotting an opportunity, have quickly stepped in to offer their nouveau riche customers their brokering services, expanding their branches in Moscow and St. Petersburg and searching the globe for takeover candidates for their deep-pocketed clients. And they are increasingly turning up attractive opportunities in Germany.

Kalina, a cosmetics manufacturer from Yekaterinenburg, began the surge into Germany three years ago, when it acquired a majority stake in Dr. Scheller Cosmetics, an ailing body care specialist headquartered in Eislingen, near Stuttgart. From then on, the Russians were unstoppable, embarking on a wave of acquisitions that has swallowed up companies of all sizes.

They range from the planned purchase of a small airport in Strausberg, near Berlin, for 4.6 million (7.3 million) by a group of Moscow investors to businessman Andrei Melnichenko's investment in K+S, a fertilizer company based in the central German city of Kassel to aluminum baron Oleg Deripaska's acquisition of a 10-percent stake in Hochtief, a construction firm based in the western city of Essen.

Large amounts of foreign cash have even flooded into companies listed on Germany's DAX stock index. In November, Russian steel industrialist Alexei Mordashov acquired a 5-percent stake in German travel and tourism giant TUI, enough to allow him to exert noticeable influence on corporate strategy. Mordashov supports the planned spin-off of TUI's shipping subsidiary Hapag-Lloyd and a stronger emphasis on the travel business.

Part 2: Pursuing a Classic Predatory Pattern

His fellow Russian Rustam Aksenenko, a major shareholder in the Escada fashion house, is anything but a silent partner. He owns close to 27 percent of the business and is a member of its supervisory board. Aksenenko played a key role in the ouster of the company's former chairman, Frank Rheinboldt, and the appointment of his successor. Now he is dueling with private equity firm Apax Partners, another potential major investor, over the Munich-based luxury fashion group's future direction.

In the cases of both Escada and TUI, the buyers have pursued the classic predatory pattern: They acquire shares in well-known, but slightly damaged corporations, restructure them and hope that their efforts will pay off. In other words, they want to see returns on their investments. But the Baltic Sea shipyards are a different story altogether.

In this case, the investors are primarily interested in acquiring know-how. Russian investor FLC West plans to have the Warnemünde and Wismar shipyards build special vessels to be used in oil and gas production in the Arctic. A visit to the shipyard grounds reveals why the Russians are so enthusiastic.

A white ship tower and bridge is already in place there, ready to be mounted onto a freighter with icebreaking capabilities. This tower is unusual because it provides an equally commanding view of both the bow and stern of a ship. If the ship gets stuck in an ice floe, the captain can drive it into reverse, rotate the vessel and break through the wall of ice with the ship's reinforced stern. This is a special ship, designed to operate in the Arctic Ocean, which Aker has developed for Russian metal producing giant Norilsk Nickel.

The Political Dimension

Russian shipyards lack the expertise to develop these complex marvels of nautical engineering. "Russia has no competent shipbuilding industry," says Einar Brønlund, President of Aker Yards Germany, adding that the differences in levels of knowledge are substantial. High-tech Germany is becoming a quasi-extended workbench for wealthy Russia.

This also lends a political dimension to the shipyard deal. Behind the three letters FLC, an acronym for "Financial Leasing Company," stands the Russian state. The company -- 43.7 percent state-owned and 40.6 percent owned by the government holding company OAK (United Aircraft Corporation) -- was established two years ago by President Vladimir Putin. He had hoped that it would provide Russia with an entry into the world league dominated by Airbus and Boeing, but in this respect it has been so far unsuccessful.

OAK paid insufficient attention to the mass production of aircraft, says banker and aviation executive Alexander Lebedev. "And now they're even buying shipyards," he says incredulously. In describing the German shipyard deal, RBK Daily, a business newspaper, writes derisively: "Ships Are Learning to Fly."

But Moscow is unimpressed by such criticism. The opportunity to get into the shipbuilding business was apparently so attractive that OAK's owners promptly expanded its field of business. Meanwhile, the financial investment firm FLC functions as a purse for the state, providing the necessary capital for foreign acquisitions in strategically important sectors.

Putin decided some time ago that his country's future lay in "going West." "We are not arriving with Kalashnikovs," he said during a visit to Germany two years ago, "but with money." His successor Dmitry Medvedev, who takes office in May, has already announced that he plans to continue the same course.

For Medvedev, it is the "government's obligation" to support Russian companies "in the global competition, especially in the fields of high technology and energy." KM, a popular Internet portal, summarized the president-elect's strategy: "Medvedev is calling upon Russians to buy the West."

Many find such ambitions disturbing. The Germans, too, feel a vague sense of unease toward the new financiers from the East, a feeling fueled by the dubious ways many oligarchs made their money in the 1990s. Russia is still considered one of the most corrupt countries in the world, ranking 143rd out of 179 nations in Transparency International's 2007 Corruption Perceptions Index. There is considerable fear that Moscow could misuse its foreign holdings to further its political interests.

The Kremlin has demonstrated often enough that it is not squeamish. For example, the state-controlled energy giant Gazprom cut off gas supplies to Ukraine and Belarus, causing widespread problems throughout much of Central Europe. And the Russian intelligence agency came up with fabricated reasons to conduct a recent raid of the headquarters of the oil company BP-TNK, forcing 148 employees to leave the country because of alleged visa problems.

When it comes to the key energy sector, Moscow shows no mercy and is guided by national interests. On the other hand, this is precisely the area in which the German government is becoming less open to the world.

With its current amendment to the German Foreign Trade Act, Berlin hopes to make it more difficult for foreign investors to gain access to strategically sensitive industries. The main purpose of the new legislation is to protect energy utilities like E.ON or RWE from foreign influence. The problem is, what defines a sensitive industry? Could the shipbuilding industry have strategic importance? And are only government funds suspicious, or should private investors also be included?

The Russian investments in Germany raise a host a sensitive issues, and the Warnemünde deal will certainly not be the last trans-Eurasian acquisition. The financial crisis is depressing the value of Western corporations, some of which have become bargains. High commodities prices, in turn, provide Russian companies with a guaranteed cash flow to pay for such investments.

Swedish economist Anders Aslund, one of the masterminds of the 1990s economic reforms in Russia, is convinced that the wave of acquisitions has only just begun. "The Russian government and Russian entrepreneurs," he predicts, "will buy up Western companies on a grand scale."

Translated from the German by Christopher Sultan


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