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The Myth of Special German Business Ties with Russia

Marcus Felsner
RUSI Newsbrief, 16 May 2016
Germany, Russia, Europe
The assumption that the EU is hamstrung in its dealings with Moscow because German business is beholden to Russian companies is false. There is no special German–Russian business link.

It is becoming something of an international obsession to view German businesses as a special breed with a unique relationship with Russia. There are several misconceptions behind this assumption. The British debate on how to position the UK both within a struggling EU and vis-à-vis an aggressive Russian leadership is adversely affected by these misconceptions.

First, there is no such thing as a German special approach to business with Russia because there is no longer such a thing as a German national economy. Since 1989, the vast majority of business organisations headquartered in Germany have more or less completely Europeanised their business models through an in-depth interconnection of production sites, supply chains and distribution channels across the EU. It follows that, by definition, a business organisation headquartered in Germany has the same view of investment in, or trade with, companies from third countries like Russia as it does with companies from France, the UK or Poland. German-headquartered companies are, by far, the biggest employer in Poland and it would be technically impossible to separate a German national economy from a Polish one today, which is one of the greatest achievements of the EU.

Also, today the vast majority of these business organisations are run by people who have spent all of their careers in a business world universally ruled by the WTO, by free trade and exports to, or investments in, 40 to 80 different countries around the globe, even for mid-sized companies. These business leaders do not share the experience of their fathers‘ generation, who were often told, and who liked to believe, that trade with the Soviet empire had a political role in securing world peace. This assumption was questionable evenin the old days of Ostpolitik, but now it is an entirely alien thought: the current generation of German business leaders certainly do not assume that their deals have had any function other than to generate maximum profits in third countries in order to protect their market position, jobs and innovative force – amongst other things – on their EU home market.

Second, the assumption that there is a special German–Russian business link is based on the misconception that bilateral business links are more important than EU-wide business links. The politically harmful aspect behind the Western discourse of a special German business link with Russia can be seen in the fact that it fits perfectly with the views of those who want to bring down the EU and the Euro-Atlantic concept of the West – a scenario that threatens liberal open society and promotes the reappearance in Europe of strong and weak nation states, spheres of influence and empires held together by deceit, threat, blackmail and brute force. Those who share this view make it a point to not even acknowledge the existence of the EU as a power factor. All their rhetoric is based on bilateralism: it is all Germany and Russia, Russia and Italy, Russia and France – and, by the way, all UK outers fall for the same foolish logic. They love the 'Normandy' format because, again, it is all 'Berlin' and 'Paris' and 'Moscow', like in the bad old days before the formation of the EU.

To fall for such a bilateralist concept is tantamount to giving away the very basis for the outstanding economic success of EU business organisations, especially since the European reunification after 1989. Even before this turning point, national capitals had long ceased to play a decisive role in addressing the major challenges for the political, economic and social protection of the open society in Europe and our European way of life, which is ultimately based on something as unemotional as a common market, rather than a common cultural identity. It has taken cruel wars and German crimes of unspeakable horror for the Europeans to understand that nation states and unilateral dependencies would never be able to protect a European way of life based on freedom, the rule of law and human rights. The replacement of bilateralism with EU political integration – the necessary regulatory correspondent to the EU's economic interlocking – has brought about the most liberal and prosperous Europe in 2000 years.

Third, it is a misconception that German-headquartered companies do substantially more business with Russian companies than they do with companies in other middle-income countries. This is simply not the case; in fact, German-headquartered companies do more business with much smaller countries in Eastern Europe, such as Poland and the Czech Republic, than they do with Russia.. Russia was, for many businesses from many countries, a high-risk market that gave high yields until 2012. It became clear around that time that the political leadership of the country had turned away from industrial modernisation and diversification. Instead, they favoured an unbalanced and unsustainable focus on oil and gas rent that gave away most of the incredible growth potential of the country – a potential that for many foreign businesses had been the only reason to invest in Russia in the first place.

Many German companies continue to be pleased with the results of their activities in Russia, even in today's undeniable economic decline. However, whilst in terms of its size Russia is by far the country with the biggest potential for future growth in Eastern Europe, today German investment and trade is bigger with the substantially smaller EU countries of Poland and even the Czech Republic.

It has been claimed that Western sanctions are to blame for the difficult market environment in Russia, but the evidence does not support this view. The German-Russian Chamber of Commerce, a body based on voluntary membership of both Russian and German business organisations and individuals, has updated a 2014 study about the economic effects of the sanctions. It should be pointed out that 66% of those who replied to the Chamber's questionnaire said that their business was negatively affected by the sanctions of either the West or Russia or both– not by the Western sanctions per se. However, when looking at the individual areas of the sanctions regime, only 48% confirmed that their business was affected by the financial sanctions, only 26% said that they were affected by the dual-use related sanctions, and only 25% could say that they were directly affected as a company. The overall higher score is therefore the result of a perceived impact on the business climate, not of direct consequences for individual German firms. According to the questionnaire, 75% of Russian and German business organisations are not affected at all by the Western sanctions directly in their own business.

None of the German-headquartered companies active in Russia are under any illusions as to the true reasons for the currently difficult market environment. Firstly, Russia suffers from an absence of public and private investment in infrastructure and insufficient investment in education. Secondly, since 2012 a severe credit crunch has affected Russian customers' ability to afford import technology; indeed, Chinese exports to Russia, entirely unaffected by any sanctions, went down by one third in that period. Thirdly, a lack of progress in productivity in Russia‘s industrial sectors is coupled with an insufficient advancement in reliable, law-abiding public administration; interference by the central government in Soviet-style management of industrial development is growing. None of these reasons have anything to do with the Western defensive actions to protect the sovereignty and integrity of Ukraine.

The final reason for the difficult market environment in Russia is related to the adverse consequences of a dramatic brain drain. As well as thousands of Russians, many expatriates, some of whom are German, have left the country because it is simply too difficult to build a career in an international group when you are posted to a low-performing subsidiary without any positive outlook. Moreover, many of those who have left, both Russians  and expatriates, are simply fleeing the nauseating propaganda of the omnipresent Russian media, which has become an insult to their intelligence, as well as the wonderful intellectual and cultural heritage of Russia itself.

To support  the claim that German companies do substantially more business with Russia than they do with other middle-income countries, it is often asserted that 6,000 German companies are invested in Russia. This is false. There used to be around 5,700 Russian legal entities that had some form of German capital included in their equity. That may or may not include subsidiaries of German industrial investors, but could also apply to several legal entities of the same group. For comparison, there are approximately 5,700 legal entities with German capital in Turkey – another very interesting market but certainly not categorically different from numerous other attractive investment destinations around the world in its importance for German companies.

German-headquartered businesses will, just like other European businesses, continue to be interested in expanding relations with Russian customers. This seems natural, since a nation of 140 million possible customers, great geographic proximity and unparalleled natural resources offers fascinating prospects for growth. However, expanding relations is contingent on Russia‘s political leadership acting in line with international law and certain minimal standards of reliability, and making the right choices in terms of its economic policies.

It is deeply depressing for all true friends of Russia to see that today the country is apparently moving further away from, rather than coming closer to, these choices. The overwhelming majority of German business people, just like those in other countries, want a peaceful, prosperous, stable Russia. At the same time, the overwhelming majority of German business people are intelligent enough to make a clear distinction between their desire for a successful Russia and their desire to protect their EU home market against any attempts to destabilise and ultimately destroy it. This latter desire trumps the former, protecting its EU home market is an absolute priority for any European business.

 The assumption that German businesses are a special breed with a unique relationship with Russia is false. The reality is that there is no longer such a thing as  `German business‘, just as there is no longer such a thing as `Polish business‘ or `British business‘; the vast majority of business organisations headquartered in EU countries have become almost completely Europeanised. It follows that talk of bilateral business links no longer makes any sense and, in any case, German-headquartered companies do not even do substantial amounts of business with Russian companies. The assumption that the EU is hamstrung in its dealings with Moscow because German business is beholden to Russian companies has adversely affected the debate in the UK about the EU. It is high time that this assumption be exposed for what it is: a false claim based on several misconceptions. 

Dr Marcus Felsner is the President of Osteuropaverein, the Eastern Europe Business Association of Germany, which operates in 29 countries across Central and Eastern Europe, South Eastern Europe, the Southern Caucasus and Central Asia. 

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