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Main | Archive | Issue 2/2008

Prospects and Trends of German-Russian Economic Relations
Column: Under The Sign Of Mercury

Michael Harms, Head of the German Business Representative Office in the Russian Federation, shared his views on the prospects of economic ties between Germany and Russia with Diplomat.

Russia is interested in German investments.. Looking at the future of Germany-Russia economic cooperation, we have every reason for optimism. This optimism is not based on the momentary market situation, though, but on the strategic and long-term coincidence of our economic interests. During The St. Petersburg Dialog, President Vladimir Putin yet again urged the German economy to step up investments. The German side wants red tape and the number of omnivorous bureaucrats to be cut. Objectively, the picture of German-Russian economic ties looks just splendid. Germany still remains Russias economic partner No. 1. In the first half of 2007 alone, German exports to Russia increased by 33.2 percent to 12.8 billion. Germany is one of the biggest investors ranking fifth with approximately 13 billion in accumulated and nearly 3.6 billion in direct investment. If we take investments of Cyprus, Holland and Luxembourg (ranking first to third), these mainly represent repatriated capital.

An exceptionally strong branch diversity in Russia is a crucial incentive for the German economy and simultaneously the principal advantage for the German economy. The gamut of our interaction ranges from foodstuff producers, publishing houses, banks, insurance companies and law firms to retailers, IT companies, clothing manufacturers; from major energy and car making corporations, machine-tool and equipment manufacturers, construction companies and suppliers of building materials down to numerous chemical and logistics companies, consultancy firms, and providers of services.

Mechanical engineering exemplifies the activity of the German economy. In the first half of 2007, machine tools and industrial equipment worth 3.3 billion (36.4 percent) and cars and spare parts to them worth 2.4 billion (+ 70 percent) were supplied to Russia. The creation of 35,000 new jobs in Germany was a direct result of the market situation. The manufacturers of machine tools and industrial equipment accounting for 80 percent of exports graphically refute thereby the wide-spread thesis that the export-oriented enterprises are increasingly shifting jobs abroad thus cutting jobs in Germany itself.

Over the last few years, the Russian economy has consolidated to such extent that it provided prerequisites for serious development in the immediate future. The industrial manufacturing sector that earlier was a sore spot of the overall economic development has nearly doubled its output the last two years. Nevertheless, euro investments, expressed in two-digital figures of billions, to be put in the development of infrastructure, production facilities, and capacity extension will be required in the next decade. Speaking about the immense potential of the Russian market, Germans mean their own involvement in tapping this potential. Investments, primarily, those of German middle-size investors, clearly point to two principal trends in Russia. Firstly, it is the current economic upsurge coupled with growing opportunities for foreign manufacturers and investors and the services sector are guaranteed over the middle and long term. And, secondly, the legislative decisions made the last few years inspired investors confidence in the Russian market and the safety of their investments.

The economy is very much like psychology. This is borne out on stock exchanges practically on a daily basis. An entrepreneur or manager must be emotionally confident in the market he wants to enter. This change has occurred in Russia with the start of a new millennium. Russia still remains a complicated market that can only be conquered with patience, understanding and flexibility. By the way, Russian capital has also been flowing to the Russian economy--not only to offshore areas--for some time now. The ongoing positive reforms in protecting property rights as well changes in financial, fiscal and currency legislation have already provided and keep providing prerequisites for confidence and, consequently, for a quick influx of foreign investments (on average, by 40 percent in 2007 versus 2006). Direct investment has grown by nearly 50 percent. All told, investments worth $60 billion have come to Russia until now. The establishment of a Stabilization Fund and Development Bank helped improve the situation in the banking and financial sectors.

Even though German investments grew less dynamically as compared to the overall influx of investments in Russia, the German figures primarily represent investments in the means of production and advance investments. Quite a short while ago, for instance, DHL, a daughter of Deutsche Post, announced its intention to invest 250 million in Russia by 2010, and E.ON Ruhrgas announced the acquisition of a controlling stake of the OGK-4 energy company for 4.1 billion. All these are investments that can only pay back over a longer-term. Other German companies also pin their hopes on constancy rather than quick earnings. This applies, for instance, to the companies Knauf, Dyckerhoff, Xella-Aeroblock (building materials manufacturers), Metro (Cash&Carry, MediaMarkt, REAL: foodstuff and non-foodstuff goods), VEKA, Profine, REHAU (window sections), BSH Bosch Siemens Haushaltsgeräte, Henkel, Stada, Volkswagen, Ehrmann, Campina, Hochland, ZF Friedrichshafen, Knorr Bremse, and so on. The list of German companies investing in Russia and increasingly setting up production units can be continued indefinitely.

Even if the German strategies regarding the use of fixed assets are conservative and their strategies concerning the development of companies are not as attractive as huge private investments from other countries are, it is exactly the variety of branches in which investments are made that is one of the decisive competitive advantages. The nearly 4,600 German companies operating in Russia represent all branches of the economy and handicrafts. In this way, we are not only the biggest business community in Russia that is widely present in 63 of the 86 RF entities, but we also account for slightly less that 10 percent of the total imports to the Russian Federation.

The macroeconomic situation in Russia favors a still bigger boost of German-Russian partnership. The export of raw materials and mineral resources provides financial earnings that enable the countrys economic and social development. Last year alone, the foreign trade proficit amounted to $165 billion. The state coffers are filled fairly well. As of October 1, 2007, the Stabilization Fund had $141 billion, while the gold and foreign currency reserves amounted to $425 billion. The government invests huge sums of money in individual branches and socially relevant economy areas. On the other hand, the powerful domestic markets considerably accelerate development. In the past year alone, the level of real labor wages rose by almost 13 percent. The purchasing behavior of the population here is markedly less restrained than in Germany. Russian citizens spend 70 percent of their income on consumer goods.

Naturally enough, the German manufacturers and exporters profit from it. The German economy in Russia is well represented in both the short, middle, and long term. The growing diversification of the business areas of our firms is a serious advantage over our competitors. German goods, financial and consultancy services are in great demand here.

My forecast is as follows: Russia will remain if not a major, then at least a decisive market for Germany.

-, 2006