Germany-Ukraine-Russia: the situation before the St. Petersburg Economic Forum

On June 16-18, St. Petersburg will host an economic forum, where one of the guests will be President of the European Commission Jean-Claude Juncker. During the forum, Juncker is planning to meet with Russian President Vladimir Putin, with the key topic of their talks to be the West-Russia sanctions war. In late June, the EU is going to prolong its sanctions. So, the next chance for opponents to dispute them will be the EU Summit in Dec 2016.

Germany and its ruling CDU party have a decisive say in the EU’s sanction policy. Their key claim is that Russia should implement the Minsk agreements. On the other hand, some German businessmen are quite optimistic about the future of their trade and economic contacts with Russia. Among the guests of the St. Petersburg Forum will be CEO of Siemens Joe Kaeser, CEO of Linde Wolfgang Buechele and CEO of Uniper Klaus Schaefer. On June 14, 2016, Handelsblatt reported that after two decades of hesitation, Daimler AG has decided to open a car plant in Russia.

The key problem for Daimler in Russia until now was the presence of BMW. Now the company is going to produce as many as 30,000 premium cars a year and to gain a niche in the Russian market. In terms of technology, it would be better for Russia to cooperate with Daimler Trucks or Mitsubishi’s Fuso Truck and Bus Corporation. But we have what we have.

On June 9, Ost-Ausschuss, a committee representing the interests of German firms in former Soviet republics and Eastern Europe, organized a press conference in Berlin. Ost-Ausschuss is one of the key opponents of the sanctions. In Feb 2016, it expressed hope that this summer the sanctions will be lifted.

The key topic of the press conference was how to stop the sanctions and to restore EU-Russian contacts. The key speaker was the newly appointed chairman of the committee, CEO of Linde Wolfgang Buechele. Linde AG is one of the world’s leading industrial gas producers, with subsidiaries in Russia and Kazakhstan. In Apr 2016, Buechele visited Russia and met with Russian President Vladimir Putin. Putin thanked Ost-Ausschuss for its efforts to keep the Russian-German relations alive. In late Oct 2015, the committee and the Russian Union of Industrialists and Entrepreneurs established a German-Russian business platform. In Apr 2016, Tagesspiegel admitted that despite tense official relations with Russia, lots of German politicians and businessmen have been visiting that country of late with a view to restore trade and economic contacts.

On June 9, Buechele expressed support for the German foreign minister’s initiative to lift the sanctions stage by stage following Russia’s efforts to implement the Minsk agreements.

Although objecting to the sanction as such, this time Ost-Ausschuss was forced to accept that in the case of the Donbass conflict politics should be given priority over economics. So, now the committee is not as uncompromising as it was before and has to admit that its hopes for all sanctions to be lifted were too ambitious.

Now Buechele suggests just removing some Russian officials from the sanctions list and is critical of the Russians’ decision to prolong their agricultural countersanctions till the end of 2017.

During his press conference, Buechele said that in 2013-2015 EU-Russian trade dropped from 326 billion EUR to 209 billion EUR, while German exports to Russia shrank by 40% from 36 billion EUR to 21 billion EUR and are expected to shrink by 10% more this year.

The only problem here is that Buechele’s report does not specify what impacts the mutual sanctions have had on trade and investments and the fall in fuel prices has had any role here. All Buechele said was that the first drop in Russian-German trade was registered in 2012, two years before the sanctions.

According to Ost-Ausschuss, the key cause of the drop is low oil prices and low RUR rate. High interest rates make it hard for Russian firms to borrow money and to buy equipment in Germany.

Ost-Ausschuss expects that next year the decline will be followed by a growth unless oil prices go back down to $30.

Lower fuel prices have affected both sides as lower fuel revenues in Russia have resulted in lower imports from the EU and its industrial locomotive, Germany.

Concerning the sanctions, Buechele said that there is no progress in the Minsk process. He noted that no more war and stability are the key prerequisites for the presence of German business in Ukraine. In this context, Buechele urged the Ukrainian authorities to ensure social stability. If they do this, they will get stable subsidies from the EU. For example, the Poles get as much as 12 billion EUR a year.

Concerning the association process, Buechele said that none of three post-Soviet republics wishing to associate with Europe (Ukraine, Georgia and Moldova) have managed to enlarge their exports to Europe so far. And not only haven’t they gained anything in Europe but they are also losing their footholds in Eurasia and Russia. Despite preferences, in 2015 Ukraine’s exports to the EU dropped by 7%, while its trade with the EU has shrunk from 38 billion EUR to 26 billion EUR since 2013.

The key problem here is that Ukrainian products do not comply with European requirements. So, Buechele advises the Ukrainians not to lose the Russian market and to restore their economic ties with the Russians.

Buechele’s key proposal is a common economic area from Lisbon to Vladivostok. This is expected to revive the Russian-Ukrainian trade. For German investors Ukraine will become attractive only when the eastern market is open again, that is, they want their investments in Ukraine to contact the markets of Russia and the Eurasian Economic Union. What Buechele suggests is that Russia and Ukraine restore their trade and give their revenues to Germany. The latter will get a free trade regime over an area from Lisbon to Vladivostok. This is exactly what they in Moscow were afraid of in the autumn 2013, when Ukraine was planning to sign an association agreement with the EU. The only good thing here is that Buechele means economics only.

How serious Buechele’s project is? Die Welt, Die Zeit и Frankfurter Rundschau ignored his press conference but Ambassador of Ukraine to Germany Andriy Melnyk hurried to protest. “We were surprised and disappointed to hear time Ost-Ausschuss’s last calls concerning Ukraine.” In an interview to Handelsblatt, he said that such calls are counterproductive as they may encourage the Russians to be even more aggressive. According to Melnyk, it would be hypocrisy and cynicism on Germany’s part to act like this. Melnyk’s key argument here is that the sanctions are not a burden for Germany as its exports to Russia make up just 1.8% of its total exports. And, of course, he did not mention the role of Russian gas in the German economy.

Despite the sanctions, in 2015 German exports grew by 6.4% to 1.196 trillion EUR. As compared to this figure, Russia’s 21 billion EUR exports look really miserable. Last year, demand for German products in Europe was on the rise due mostly to low energy prices. In 2015, German exports to the EU grew by 7.3% but in Eurozone the growth was just 5.8%, while in non-Eurozone Poland and the UK it was 9.8%. This proves that Europe continues suffering from the Euro crisis.

In the meantime, in 2015, German exports outside the EU, where the key partners are the United States and China, dropped by 0.7%. According to Chairman of DIHK Volker Treier, Europe is not enough for German exports to work at a full capacity. Here Germany needs developing markets, including Russia. But the last one is so small that the Germans are ready to sacrifice it for the sake of their political interests. This is why their key precondition for restored contacts is that the Russians should make concessions on Donbass and should recognize Ukraine’s European association. And this is how things are before the St. Petersburg Economic Forum.

EADaily Analysis