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Cablegate: German-Russian Business: Riding the Bear

VZCZCXRO0435
PP RUEHIK
DE RUEHRL #1602/01 3521359
ZNR UUUUU ZZH
P 181359Z DEC 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 6097
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHMO/AMEMBASSY MOSCOW PRIORITY 2121
RHEHNSC/NSC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BERLIN 001602

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV PREL GM RS
SUBJECT: GERMAN-RUSSIAN BUSINESS: RIDING THE BEAR

Ref: A) Moscow 2732 B) 08 Berlin 1208

BERLIN 00001602 001.2 OF 002


1. (U) SUMMARY: German firms are riding the Russian bear,
but nobody wants to get off. Meanwhile, Russian firms are
increasingly investing in Germany to gain access to German
technology. Germany accepts this, even in seemingly
sensitive sectors, as helpful to economic recovery. Germans
see Russian investment as a quid pro quo to facilitate
access to Russia's vast market and remain largely committed
to Russia's longer term future. To help cushion the
economic downturn, German exporters to Russia are benefiting
from expanded German government export guarantees, a clear
sign that the new government will likely continue to nurture
German/Russian trade. On the energy front, a high degree of
interdependence remains a core reality, with price stability
rather than gas cut-offs being the focus of concern. As
2010 approaches, German business and government are
increasingly anxious about Russia's customs union with
Belarus and Kazakhstan and point to a Russian tariff and
customs collection regime that seems primarily centered on
generating government revenue and bribes. Despite its
strong and unwavering commitment to Russia, German industry
perceives Russia as anything but a normal business partner.
END SUMMARY.

German Investment in Russia: Hanging Tough
------------------------------------------

2. (U) Investing in Russia is difficult even in good times,
but German business has no intention to cut and run.
Germany estimates its investment stock in Russia at 17
billion euros as of 2008 -- quite small (2 percent) measured
against Germany's world-wide FDI of 880 billion euros, but
comparable to Germany's FDI to China (also 2% of total FDI).
Estimates of the number of German firms operating in Russia
vary from four to six thousand, but everyone agrees that few
German companies have left the Russian market despite the
financial crisis, although some have reduced staff.
Volkswagen, Germany's biggest industrial investor in Russia,
announced in November that it will expand its production
facilities in Kaluga, 170 km southwest of Moscow, despite
the economic downturn and major German retailers such as
Metro and Media Markt recently expanded into Russia.
Regional differences remain, however. Both the Ostausschuss
der deutschen Wirtschaft (German Committee on Eastern
European Economic Relations or OA) and the German Economics
Ministry say the investment climate in Russia, while
improving, is still not satisfactory and varies widely by
region.

Russian Investment in Germany: Strategic
----------------------------------------

3. (U) Since the onset of the financial crisis, the German
public's fear of foreign investors buying up German
companies has given way to a greater willingness to attract
foreign investors, including investors from Russia. Only a
year ago Germany passed a law, often called the "Gazprom
Law." Its aim was to establish a government screening
process aimed in part at preventing Russian state-owned
enterprises from taking over German companies in strategic
sectors. At the time there were persistent worries that
Russian firms would exploit intellectual property to create
competing products.

4. (U) Now, however, Russian firms are making significant
investments in strategic German sectors with virtually no
signs of public concern. In August of 2009, Russian
businessman Igor Yusufov bought the Wadan shipyards in
Wismar und Warnemuende in a multi-billion-euro deal. In an
October 2009 meeting between German Chancellor Merkel and
Russian President Medvedev, both leaders expressed public
support for the deal. Russian firms are also considering
investment in German microchip producers Infineon and
Qimonda. One major Russian investment, however, was
thwarted this year when GM rejected plans by a Canadian-
Russian consortium led by Magna to buy a majority stake in
Opel. GM's decision shocked both the German and Russian
governments, not least as both sides wanted to use it as a
basis for cementing ties in other sectors (ref A).

5. (U) Russian firms' investments tend to be strategic as
well as commercial. They already hold significant stakes in
the travel company TUI, construction firms Hochtief and
Strabag, and in mining firm Kali+Salz. Russian Embassy
Commercial Officer Dr. Bondarev points out that Russian
firms invest in Germany for many of the same reasons as
companies from other countries: diversification, strategic

BERLIN 00001602 002.2 OF 002


access to the German and EU market and hopes for a good
return. While Germany is regarded by Russian firms as a
highly competitive and challenging market, it offers the
kind of predictable investment environment many Russians
find attractive.

Fall in Trade Propped Up by Export Credits
------------------------------------------

6. (U) Germany's exports to Russia have been sorely
affected by the economic crisis. In the first eight months
of 2009, two-way trade fell by 60% compared to the same
period in 2008. The German government's export credit
entity KfW stepped in to support trade flows through loan
agreements with six Russian banks to help finance purchase
of German exports by small and medium-sized Russian firms.
The German government is currently considering further
expansion of the export credit program. Russia's exports to
Germany mostly consist of oil and gas, and these have been
relatively less affected. Russia currently runs a trade
surplus with Germany of 3.5 billion euros.

Energy Relations: Mutually Dependent
------------------------------------

7. (U) Russia is Germany's principal energy supplier and
depends heavily on energy revenues from Germany. Germany
purchases 34 percent of its oil and 45 percent of its
natural gas from Russia. Russia sells 80% of its gas to
Europe, its greatest source of income. This is part of an
overall pattern of mutual energy dependency, which Dr.
Kristin Westphal, an expert on the Russian energy sector at
the German Institute for International and Security Affairs
(SWP) characterized as "intervulnerability." Putting it more
bluntly, Andreas Metz of the OA said, "we have no energy,
but they have no money."

8. (U) Dr. Westphal characterized Russia as a "less
reliable energy supplier than the Soviet Union." Fear of a
gas cut-off has been replaced by worries over possible price
extortion, as Russia could be tempted to abuse its dominant
position as Germany's chief energy supplier to increase
prices. Germany recognizes the need to diversity its energy
supply, but few concrete steps have been taken. The planned
North Stream pipeline, which would run under the Baltic Sea
and deliver gas directly from Russia to Germany, simplifies
Germany's receipt of Russian gas, but does nothing to
diversity supply and has aroused suspicion among Germany's
neighbors. Note: After the January gas crisis, MFA and
Chancellery officials talked openly of Gazprom no longer
having a "perfect track record" as a reliable business
partner. However, as the memory of the gas crisis faded,
officials quickly forgot their new criticism of Gazprom. End
Note.

Tariffs: Cash Cow, Customs Union
--------------------------------

9. (U) The Russian Government's tariff policies continue to
be a concern for German industry, as is its intention to
create a customs union with Belarus and Kazakhstan. Late
last year, Russia increased import duties for new cars from
25% to 35%, resulting in significantly higher prices for new
German cars exported to Russia, while duties on used cars
doubled. German interlocutors note that customs duties
still constitute a significant source of revenue for the
Russian government. Oliver Wieck of the Federation of
German Industries (BDI) said 40% of the Russian government's
non-energy revenues come from customs duties. A contact at
the Association of German Chambers of Industry and Commerce
(DIHK) reported that German freight trucks have to pay 2,000
euros just to drive into the inspection bay; no receipt is
given for the fee which presumably is pocketed.

Comment
-------

10. (SBU) The German-Russian economic relationship is
complementary, as each needs what the other has to offer.
The consensus in Germany's political and business
establishment strongly favors engaging with Russia. All
hope that Russia will one day develop into a more "normal"
business partner, but for now it remains anything but. End
comment.

MURPHY

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