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Sanctions spiral

Rayna Breuer / asbMarch 25, 2014

A new week of Ukraine crisis management has just begun and German companies are nervously following negotiations. Further sanctions against Russia could have serious consequences for foreign investors.

Street shot in Moscow showing curency exchange rate
Image: DW

US president Barack Obama has shown himself to be determined and energetic during his European trip. "We are united in imposing a cost on Russia for its actions so far," he said in Amsterdam after meeting with Dutch Prime Minister Mark Rutte.

According to Obama, the West will impose stronger economic sanctions against Russia. And he seems to be convinced that this approach will work. "Growing sanctions will bring significant consequences to the Russian economy," he said.

But European partners are more skeptical about Obama's plans. After all, they have far more to do with Russia than the United States and further sanctions could have a negative impact on their business. Whether it's the tourism industry in Greece and Cyprus or the financial market in London, Europeans seem a little more reserved when it comes to economic sanctions against Russia.

Barack Obama lands at the airport Amsterdam Schiphol
Barack Obama's trip to Europe has been dominated by the crisisImage: Reuters

When capital stops flowing

German companies fear that stronger punitive measures could result in higher costs. And listening to German business executives for the last couple of days, it seems there is much at stake for the German economy.

"We are already feeling the impact of the exchange rate of the ruble," Opel head Karl-Thomas Neumann told German car industry newspaper Automobilwoche. According to Neumann, Russia will have the largest automobile market in 2020.

And others are alarmed as well. "If you campaign for sanctions against Russia in the current debate then you play with fire," said Martin Sonnenschein, a central Europe consultant with management consultants A.T. Kearney. "The consequences for the German economy and society's prosperity would be fatal." According to Sonnenschein, investing in Russia now means taking big risks.

Throughout the Crimea crisis, the European economy has seemed to be walking on eggshells. For now at least, companies exporting to Russia or investing there have lowered their expectations. "2014 was supposed to be a really good investment year for German companies in Russia," said Volker Treier, Deputy General Manager at the German Chamber of Industry and Commerce (DIHK).

Portrait of Volker Treier
Volker Treier is worried about how even the threat of sanctions is affecting businessImage: DIHK

"But now investments are being postponed and some are being thrown in the trash. Capital is flooding out. And even German banks are now categorizing Russia as a risky business partner and giving out fewer credits." Preparing for the worst and hoping for the best seems to be the common approach of foreign companies in Russia.

Is fear of sanctions justified?

According to financial expert Jürgen Pfister, individual companies will be affected but the economy as a whole is not at risk. "The importance of foreign trade between Germany and Russia is actually too minor to let it become a problem," he said.

Russia only contributes 3.8 percent to Germany's total exports. In 2013, exports to Russia totaled only 38 billion euros ($52.5 billion) out of a total export amount of over one trillion euros. German investment in Russia is estimated at 1.8 percent of the country's total foreign investment.

Even though the numbers speak for themselves, Volker Treier is not as optimistic and is thinking about the possible consequences of further sanctions. According to him, Germany as a national economy would be able to handle further sanctions "but it will cause damage. In this country every third job depends on export. And if people are talking about sanctions, then this affects almost 400,000 jobs in Germany."

Moscow presents itself confident

So far Russia seems unimpressed with what the heads of states and governments of the G7 countries are planning in The Hague. Yuri Kovalchuk, chairman of Russian bank Rossiya, said on Sunday (23.03.2014) that the US sanctions have even brought him new patriotic Russian customers, including Russian President Vladimir Putin himself.

However, Russia is vulnerable. The country would be severely affected by trade restrictions with the west, according to Pfister. "All revenues from export come basically from sales to the West. If those were to be at risk, then the economic boom in Russia, which has already been weak in the past years, would be at risk as well," he said.

That's one of the reasons why Russia will have to think twice about if and for how long they can afford to turn off their gas deliveries. The EU commissioner for energy, Günther Oettinger, does not expect Russia to cut back its gas supply to Europe during the course of the crisis in Ukraine.

Portrait of Jürgen Pfister
Jürgen Pfister hopes that both sides remain calm

"I don't think the Russians are interested in that," he told German business news magazine Wirtschaftswoche in an interview published on Saturday. "Gazprom is interested in daily sales revenues," he said.

According to Oettinger, Russia needs not only the revenues but also investment from the EU. "It would be in Russia's interest that German cars are not only built in [the German cities of] Ingolstadt and Sindelfingen, but that new locations in Russia are created as well."

If both sides start piling up their threats, there will be more losers than winners in the end, which is why experts call for calm. "If Russia limits itself to annexing Crimea but agrees not to intervene further in Ukraine we should back away from tougher economic sanctions," said Pfister. That would be the pragmatic approach that would help stop the crisis from getting worse. The question is whether both sides will stick to this approach.