German Companies Committed to Russia, Even in Today's Crisis

Michael Harms, chairman of the Russian-German Chamber of Commerce, says German companies are not leaving the Russian market, but are hoping to survive the hard times and take advantage of new opportunities presented by the economic situation.

AHK

Michael Harms

How is Russia's economic crisis affecting your activities here? Have there been more meetings with officials? Have Chamber members experienced more problems?  

We do not have less work, indeed, quite the opposite. In fact, completely new problems have appeared. For example, the infamous import substitution process has become a problem for German businesses. In this difficult economic situation, firms are coming together and closing ranks in order to exchange opinions, provide mutual consultation and consult with the Chamber. We cannot complain about the lack of work. It must be said that German companies are not leaving Russia. Very few have. The majority of companies are still here. And yes, of course, we have more political work. On the one hand, there has been less political contact at the official level, and therefore much of what we are doing now to influence economic policy is new. On the other hand, Russian policymakers, both at the federal and regional level, are eager to be in contact. At the federal level, as a matter of priority, this relates to agencies engaged in economic regulation, such as the Ministry of Economic Development, the Ministry of Industry, the Federal Customs Service, the Federal Anti-Monopoly Service, and the Federal Service for Oversight of Consumer Protection and Welfare. At the regional level, engagement concerns governors, development agencies and deputy governors for economic development. The dialogues we have going at the moment are quite intense.

How are German companies coping with import substitution?

German companies are very serious about this issue. There was a trend towards import substitution in the past, before the sanctions and the political crisis. We have been intensively engaged in the localization of production for five years already, and for two years, a committee on localization has been working at the Chamber. Now, of course, everything has accelerated greatly. Legislative restrictions with a very strong political orientation have been added, along with industry-based planning for import substitution. I cannot say this is an entirely negative trend. Of course, we do not like purely protectionist actions. That being said, it is obvious that success in a market as large as Russia is only possible if you fully have a presence here. So, now we are seeing German companies saying, "OK, we knew we had to do this at some point, and now is not the worst time to deal with the issue."

Are there examples of German companies that have increased their level of localization in Russia over the past year?

Yes, there are such examples. Companies that opened here last year addressed the issue before the crisis. Now we are working with several firms that are considering projects to localize production with a similar goal to be present in the Russian market. In spring this year, a German factory opened in the Alabuga Special Economic Zone to supply ball valves for gas main pipelines to Gazprom. For a long time, firms have been getting this signal from Gazprom: 'if you want to be our supplier, it is time think about localization in Russia.'

In the automotive industry this process, unfortunately, has stalled. Suppliers had big plans to localize, but the market decline has been so great that all the projects previously discussed have been put on hold. It is unclear what will happen next.

Were German investors working in agriculture before the crisis? Are there any plans to participate in Russian import substitution?

Practically none. There is only one successful example, EkoNiva. The company is located in the Voronezh region, has a German owner, and is the largest milk producer in Russia. The company, though, opened well before the crisis. Actually, it's rather strange, and I am not sure why, but there is little German investment in the purely agricultural sector. There are many German firms in the food-manufacturing industry and in processing. Milk processors include Ermahnn and Hochland. The one problem is that there is not enough milk. The starting price for milk is very high — higher than in Western Europe. But they were complaining about this before the crisis. In general, investments in the food industry took place a while ago, in the first wave of 1990s investments. I do not see a new wave of investments in the food industry. In practice, the market is already divided up.

Have new German players entered the Russian market during the current crisis?

Yes, they have. They have been in the manufacturing industries, the food and pharmaceutical industries, mechanical engineering, electrical engineering, and the chemical industry — the classic German industries. In principle, though, the entrants cannot be considered entirely new. Russia has been developing for so long that hardly any firms in operation here have not done so before. Despite the sharp fall in the markets, enough companies still look at Russia and see opportunities for localization or some other niches. For example, if we take the transport and logistics sector, where German companies are very strong, many of these firms are speculating that if Russia turns east, they can come up with something to improve transport links between Russia and Asia. There are German companies that are building warehouses and actively developing electronic solutions for multimodal complexes. In short, in every crisis, companies find new possibilities.

Will we hear of any new large projects from the industries you listed in the foreseeable future?

Of course we hear of them. But of these, it is necessary to abandon expectations for grandiose projects. There is, for example, the construction of the third and fourth line of Nordstream. I do not know of any new projects of this kind. There will be medium-sized projects related to import substitution and other new business opportunities.

Many put their stakes on the World Cup in 2018 as a generator of orders and revenues for foreign companies. How do things stand now?

We have had a working group on this question at the Chamber already for a long time. We will see how the situation develops. I think the high hopes that everything here will be as it was in Sochi [for the 2014 Winter Olympic Games] should be set aside. Budgets have been greatly reduced, and [the government] is basically trying to build up domestic business. To be sure, German firms will receive orders in those areas where they are strong. However, I doubt this will result in big projects.

Why are the famous German discounters, Lidl and Aldi, not part of the Russian market? It seems there would be an opening for them in this economic crisis.

I do not know why Lidl and Aldi are not here. There is one quite well known German discounter that has been researching Russia for a long time and has long wanted to open here. Now, of course, is not the best time to enter the market, but the company is ready for an opening. I know another discounter from Lidl Group that also looked into Russia and had doubts. The main problem for them is land. For some reason, there are very few vacant lots, particularly in the Moscow region. Normally, discounters need large detached areas outside the city, where there is parking and regular access to public transportation. They literally searched for years for these sorts of areas here. From the standpoint of the discounters, they are still empty-handed. When you open the first store, you need to open at least 20 right after. This problem, of course, is primarily in the Moscow region. They all want to go to Moscow, and this is not possible.

How are German top managers coping with the crisis? There is the impression that expatriates are leaving here en masse. Are you noticing any difficulties in dealing with the Federal Migration Service, or any other negative signals?

No, absolutely not. The exodus of expatriates that was written about at the beginning of this year is a myth. We did not observe anything of the sort. Naturally, in a crisis, each firm optimizes their costs. There are firms that have reduced expat numbers or are not sending new ones. We have no general statistics, but it can be clearly seen at German international schools: Yes, the number of children has decreased somewhat, but not dramatically. There are firms that long before the crisis were arranging to work in Russia without expats, and then there are big corporations with 30–40 German staff.

Your Chamber is also called upon to help Russian businesses work in Germany. Are you noticing a growth of interest from Russian entrepreneurs in this at the moment?

Honestly, not really. Naturally, we can help. We organize business missions for different industry sectors and we provide information. Overall the situation has not changed much. We might see an interest in buying a certain business in Germany, but the motivation is more from the position of business diversification to provide greater reliability. Russian entrepreneurs are now asking how to increase exports to Germany, taking advantage of the weak ruble, but there is almost no real investment in the German economy.

What about Russian start-ups? Are they not asking for your help?

There are start-ups in the field of IT, but they work in very narrow and specific sectors and enter the German market themselves.

How are your relations with the customs service?

In general, we have always had a good working relationship with customs, and are in active contact with them. At present we have a customs group at the Chamber working very hard, because there is great interest [from Chamber members]. There are many questions on technical regulations, on sanctions against Ukraine — which have partly affected German companies — and on the new Customs Code. I cannot say that the situation has worsened. But I do not see any sort of big breakthrough. They are all pragmatic business-related questions; politics is not much involved here.

For many German companies working here, the current Russian crisis is not the first. What are your expectations? What prospects do you see for the Russian economy in the next year or two?

This is, of course, a well-worn truism, but the lack of predictability is the biggest problem in terms of German business. German firms rely on two assumptions. The first is that, yes, the Russian market is strategic for them. They will stay here and will fight for this market, because it is necessary to be present in it. The second assumption is that the current situation is not easy, and it will remain difficult for some time. We have a saying — "to overwinter." That is, to optimize costs, such as adapting business strategies to exploit new opportunities. But then today everyone is. In many areas — such as engineering and industries that focus on the end user — the market has fallen dramatically. In July, we conducted a survey of Chamber members on the situation in the Russian market (see chart, page 4). They are the worst results for the entire 10 years that the survey has been conducted. So, unfortunately, we can't say that the situation is too rosy. 


Russia - Germany 2015
Russia - Germany 2015
Despite the difficult political climate and economic downturn, German companies remain committed to Russia. Read about the challenges facing them, as well as success stories in this supplement.
/upload/005/RuGer_eng_2015_NEW.pdf
PDF Download PDF Version