30 Jan 2019

Wolfgang Büchele: Trade, trust between German and Russian partners is growing but new U.S. sanctions could hinder further progress

Chairman of the German Committee on East European Economic Relations Wolfgang Büchele has given an interview to Interfax in which he speaks about the activity of German companies in Russia.

Question: Mr. Büchele, how does German business feel in Russia? What is the atmosphere among the entrepreneurs?

Answer: Currently German entrepreneurs are continuously investing in Russia and are trying very hard to develop this business further. However, there is a certain concern about potential American sanctions, because no one really knows what kind of sanctions maybe come and how they might influence business prospects and business activities in Russia.

Q.: Talking about these potential U.S. sanctions, in your assessment, if these sanctions are imposed against Russia, will German business save an interest in Russian market or will leave it in a massive scale?

A.: No one is interested in leaving Russia. The interest is very clear and the commitment of German business has lasted even for the whole time since 2014, when the first EU sanctions were imposed. But the crisis on Ukraine unfortunately is still not solved and the relationship between Russia and the U.S. gets worse for a number of reasons. There is an ongoing debate in Washington on further economic sanctions. The question will be: what are the Americans doing? It is rather unpredictable for us what is going to happen.

Q.: From year to year we can see a decline in the number of German companies working in Russia. What is your prediction for this year?

A.: Five years ago around 6,000 companies with German capital were active on the Russian market. Until 2018 we had a decline to 4,700 companies. But the main, the crucial players are still there. From that point of view there might be some more drop-offs, but I am not personally expecting that a significant number of companies is going to leave the country.

Q.: Do you feel any distrust from German companies in Russia after the case of Siemens, when its turbines were supplied to Crimea?

A.: I think the subject Crimea is very clear: German companies cannot and will not support business in Crimea. That is prohibited by the EU for the time being. Siemens delivered turbines under these preconditions to Russia and it definitely was not helpful that this preconditions had been violated by Russian partners. But I think that in the meantime everyone has learned the lesson and I don‘t think this will be an issue going forward. We are beyond that.

Q.: We can see that goods exchange between our countries in 2018 is growing slower. Russian exports to Germany grew about 15%, while German exports roughly stayed at the same level as in 2017. What is your expectation for 2019?

A.: There are two parameters which are relevant. One question is what the oil price is going to do, because that to a certain extent has influence on budgets in Russia. The other question is what the exchange rate of the ruble is going to do. If the ruble stays weak compared with dollar or euro, German goods in Russia are more expensive and not so attractive.

Q.: How do you see the situation with investments? What is more likely for this year, decrease or increase?

A.: There is a vital interest to use Russia as a manufacturing base and start to export, that is why I am expecting that foreign direct investments of German companies in Russia will continue to increase. Because of the low exchange rate and lower costs in Russia, the companies are still interested in local production. But that also depends on possible U.S. sanctions. As long as there is the real danger of new sanctions for example in the financial or the energy sector, there is a big amount of skepticism among foreign investors.

Q.: Returning to the sanctions issue. EU sanctions were imposed against Russia and after that, Russia introduced its embargo on agricultural products. How big was German damage from these restrictions? Do you see any possibility of partial withdrawal of these sanctions?

A.: The impact of the EU sanctions was largely visible in the years from 2014 to 2016. Today most of the German companies know how to deal with EU sanctions. The year of 2017 clearly showed that we are beyond the major impact – we are still not back to the old levels, when it comes to the trade relations, but trade is improving and trust between German and Russian partners is recovering. However, new U.S. sanctions could hinder further progress.

Q.: U.S. authorities said that Washington can impose sanctions on German companies, involved in the Nord Stream 2 project. Can this project be implemented under these circumstances when U.S. is so strongly against this pipeline?

A.: You might be aware that our Minister of Foreign Affairs Heiko Maas and our Minister of Economy and Energy Peter Altmaier are strongly backing the project Nord Stream 2. They are convinced that we have a growing demand of gas in the EU and that we will need both - the implementation of Nord Stream 2 and also transit of gas via Ukraine. We are convinced that we will find ways to resolve this issue. It is very difficult to predict what the Americans will do. I would not like to speculate, but it is obvious that we have a very strong support from leading German politicians for the project.

Q.: Do you assess Ukraine as a reliable transit country?

A.: The Ukrainian pipeline network needs to be modernized, that is something that should be on the agenda of the EU, but also of Russia. Destabilizing Ukraine is not helping anybody. Also from a technical point of view a certain volume of gas has to be transferred through Ukraine to run the pipeline system and the infrastructure. A certain transit volume needs to be secured also in the future. However the contract between Russia and Ukraine on transit of gas will already end in December 2019. We need a solution very soon. Otherwise we will see turbulences on the European gas market.

Q.: I suppose you know that Russia took course on de-dollarization and will try to use mainly native currency or euro for its international deals. What do you think about such policy?

A.: This is an approach which also the German government and the EU Commission proposed. To use more euro for business exchange rather than U.S. dollars would make us more independent and less vulnerable to U.S. sanctions. But it will take time to develop an independent financial system. It is not a short-term solution.

Q.: Germany and Russia are members of Iran nuclear deal. The same time Germany with other European members is trying to create special mechanism for protection of European companies from U.S. sanctions (Special Purpose Vehicle, SPV). Is it important to include Russia into this mechanism?

A.: First of all, I think that Russia should be a part of every mechanism, that helps to stabilize Europe. The challenge with Iran is more difficult to be resolved: You might be aware that the EU has imposed an act which prevents European companies from adhering to the Iran sanctions. But the American sanctions are pretty straight-forward and very clear. At the end of the day it is a company‘s decision whether to do business with Iran or not. European companies will have to decide what is more important for them: business in Iran or the U.S. market.

Q.: Do you see necessity for Russian return to G7 from economic perspective?

A.: Of course! We as a committee have made it very clear, that we think it is very important to use every format for dialogue with Russia as possible to reduce tensions and to find solutions on the conflicts we have. We need not only bilateral formats, but also international platforms like G7.

Q.: What is about OECD? Russia was going to become a member of it before the Ukrainian crisis, but then the process was frozen. Is it a time to unfreeze it?

A.: Be it for OECD membership or G7 - in order to get into a process where western sanctions against Russia will at least partially be lifted, we need real and visible progress according to the Minsk Agreement. First of all, we need a stable ceasefire in Eastern Ukraine. Russia as a mayor power can and should contribute more to reach that goal and find solutions to end the war in Ukraine. Without progress in the peace process I don’t see any chance that somebody in the EU is ready to start lifting sanctions on Russia.