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Busting Russia's Boom

DW staff (cat)
December 22, 2008

The financial crisis has finally reached Russia’s shores and the credit crunch has stark implications for businesses in the country. German businesses there, too, have been hard hit.

DHL sign lit up on a road in front of the Kremlin
Many German companies have invested in the Russian market over the last few yearsImage: AP

German businesses working in Russia are starting to feel the pinch. Two thirds of the companies there are dealing with losses.

One of those companies, the Darmstadt-based firm Doehler, just opened their first juice concentrate factory outside of Moscow in September. Already, Chief Executive Oleg Meisinger is feeling the pain.

"We can't even get the raw ingredients delivered to us right now in order to develop it further," said Meisinger. "And the loans we give out to our customers aren't being paid back in time."

The boom times roll to a stop

Two construction workers walking on scaffolding outside a skyscraper
Construction on projects like the one at "Moscow City" are on holdImage: Picture-Alliance /dpa

Not much remains of the Russian market boom anymore. Many firms lack the capital for new investments. In the past, German corporations could produce a growth rate of up to 60 percent. In 2007 alone, Germany's exports to Russia increased by 20 percent to about 28 billion euros ($37 billion).

Now, though, Russia's banking system is one of the hardest hit by the banking crisis. The World Bank has slashed the country's expected growth rate during the coming year, halving it to just three percent. Sinking oil prices have likewise contracted the amount of money the Kremlin has to play with.

According to a study by the German-Russian Chamber of Commerce, two-thirds of German corporations are reporting negative consequences of the financial crisis. German firms operating within the country are having problems with their Russian partners who are cancelling orders and paying invoices late.

Projects already in the works have also been put on ice. Hardest hit of all are those in the construction, banking and trade industries. Even the prestigious "Moscow city" project, touted as Europe's largest building, is on hold until financing issues can be resolved.

"The companies have set their future plans, their personnel and their investment proposals on a very high level of growth," said Michael Harms, the organization's chairperson.

Klaus Mangold, President of the German Business Committee's Eastern Division also warned recently in an interview with the newspaper Die Welt that German exports to Russia could decrease.

Cooperation and stamina: the keys to success

Image of Russian rubles, both cash and coins, spread out on a table
Many in Russia are responding better to this crisis than 1998's crash of the rubleImage: picture-alliance/ dpa

While many in Russia can still recall the consequences of the ruble's crash in 1998, Russian companies are responding to this crisis differently. Today, they're working together with their partners to find a solution to their payment difficulties.

Harms agrees that this, along with a bit of stamina will help see these rocky times through. "During hard times, even when cooperation and communication with customers is difficult, the search for a common solution should not be impeded," he said. "That's one way that we can come through this crisis strengthened."

Still, companies are wary, as even strong firms can go bankrupt in times of crisis. That threat has the food-handling firm Doehler carefully verifying who their clients are.

"We've got a dilemma on our hands and we have to know which of our customers are going to remain solvent, which will remain," said Meisinger. "It's also a risk for us. If we can't deliver to our customers, they may not buy from us in the future."

Russian attractiveness has yet to fade

An engineer turning a wheel on a gas pipeline
Oil and natural gas reserves have made Russia wealthyImage: AP

For now, though, growth still remains. Even Doehler is expecting a 15 percent rate of growth. That depends, of course, on their Russian partners staying in the black, but Meisinger sees the new factory in Russia as one of the things that will help them through the crisis.

"We can use the financial advantages, like tariff exemptions or the use of local raw materials and pass those savings along to our customers."

For them, and for others, Russia remains an attractive market for German corporations despite all the difficulties. At least that's what the study by the German-Russian Chamber of Commerce said.

Still, the country has to make some changes to have investors believing in the country's future, Michael Harms said. "The required structural reforms have to take place in order to better the investment climate. Otherwise, Russia will continue to lose more investors."