A Corporate Ostpolitik

By Ben Aris

From the Vltava to the Volga, Germany's relationship during the last century with Central and Eastern Europe was a tumultuous affair. But ties between Berlin and the countries to its east in the new millennium are proving to be a lot happier and mutually beneficial.

Western Europe is in the middle of doing an about face on Russia. While European politicians have spent most of the last decade looking down their nose at Russia and criticising it for its poor record on democracy, human rights and corporate governance, over the last year EU leaders have dashed to Moscow to schmooze with what will soon be the biggest consumer market on the continent.

Germany was the exception to this EU conceit. Former chancellor Gerhard Schroeder regarded Russia as a strategic partner from the start and Germany has long been Russia's best friend in the West. Schroeder's pay-off for this after leaving office was a cushy job running Gazprom's Nord Stream pipeline project, which runs directly from the huge Yamal gasfields in Russia's northeast to the German Baltic shore and should prove a boon for Germany, as it will help it become the lynchpin in a new strategic energy tie-up between east and west.

When Angela Merkel became chancellor in 2005, she pointedly gave Moscow the cold shoulder, choosing to visit Poland ahead of Russia. More recently, relations have improved as the chancellor follows Germany's leading companies to this increasingly important European market. "The image of Russia in Europe is often not very flattering and not very fair. In Germany, we have an old saying that goes like this: 'When Russia seems strong, it is not as strong as it seems. When Russia seems weak, it is not as weak as it seems'," wrote Wolfgang Clement, a former German economy minister, in an oped in the Moscow Times in October. "The relations between Germany, the European Union and Russia can be summed up in five words: We depend on one another."

France has belatedly started to see where Schroeder was coming from and over the last 18 months it has been impossible to attend one of the large Russian investment conferences without running into the French finance minister, the impressive Christine Lagarde, who was in Moscow again in October for VTB Bank's second investment summit. It seems that a new Berlin-Paris-Moscow axis is emerging in European politics that stands in stark contrast to the "us versus you" situation that Prime Minister Vladimir Putin outlined in a fiery speech in Munich in 2007, which in essence said Russia was about to give up on any form of partnership with Western Europe.

Lagarde's remarks to attendees at the VTB conference were music to Moscow’s ears. "There is a new monetary policy in the world... It is not unilateral, not bilateral, but multilateral - we need to be multilateral in all areas. It is not appropriate that China is never involved in currency discussions [at things like IMF meetings] or that [Russian Deputy Prime Minister and Finance Minister Alexei] Kudrin can only enter the room at certain sessions of the G7 and G8 session meetings."

The French are good at flirting, but the Germans work - and that is what really appeals to the Russians. Germany remains the world's trade weltmeister and vies with Turkey to be Russia's biggest trading partner, shipping there over €40bn of goods in just the first six months of this year.

The lacklustre German economy is doing better than most in Europe – its economy grew a miraculous 2.2% in the second quarter from the previous quarter - and that is partly because German exporters, already buoyed by demand in China, are profiting from a modest upswing in CEE as well this year. As emerging Europe's economies revive and banks slowly resume lending, business is picking up and feeding through to the German economy. Exports to the region from Germany rose 20% over the first half of this year, according to the East Committee, which promotes German industry across CEE and the former Soviet Union. "The majority of these countries have overcome the economic crisis, with the exception of Romania, Bulgaria and Croatia," says Klaus Mangold, who is chummy with Schroeder and has headed the East Committee for a decade.

In the first six months of this year, total trade between Germany and all the countries of CEE amounted to €102.9bn, up from €85.5bn a year earlier. Exports from Germany to Poland rose 19.3% to more than €31.4bn in the period. Exports to Russia also showed a strong turnaround, climbing 29%, but remaining in second place at €26bn, which is about 80% of what they were before the crisis, according to the Vienna Institute for International Economic Studies (WIIW).
Follow the growth

With a stagnant home market, German business has flocked to Russia. And most of those firms plan to expand over the next year as the economies of the leading industrialised nations continue to slow. "We have nearly regained the pre-crisis level, and German enterprises view the Russian market as dynamic and growing," German President Christian Wulff told the Russian press during his state visit to Moscow in the middle of October. "About 6,500 German companies are working in Russia, and many of them plan to enlarge their business."

While Russia's overall foreign direct investment (FDI) level is still some way below the pre-crisis peak of $75bn, Kudrin said at the VTB event that FDI should come in at $40bn this year. "We have a large amount of cumulative German investments in the Russian economy. This is almost $23bn. The growth in the first half-year equalled nearly $6bn," Prime Minister Vladimir Putin said following his meeting with the German president.

Anecdotal evidence suggests much of this incoming investment is from strategic investors - particularly retail companies – which are setting out their stalls to grab a share of a market that what was for a brief time in 2008 Europe's largest consumer market. The German DIY chain Obi opened its first stores in Moscow in 2003 and currently has 14 stores, but is expanding rapidly. The cash-and-carry discounter Metro has been in Russia for four years and quickly expanded with its electronic goods giant MediaMarkt. Another German giant Siemens is also deeply entrenched, with a stake in Russia’s leading engineering firm Power Machines. These are established players that have arrived in Russia under their own steam, attracted by the growing wealth of the Russian consumer. Now the government is pushing a new string of deals and also wants to clear the way for its small- and medium-sized enterprise to enter the market, the backbone of the German economy.

During his recent trip to Russia, German President Wulff met with the Ulyanovsk Region's government and said that Russian and German companies might cooperate to build Antonov's massive An-124 cargo plane. This joint venture has been kicked about by the German and Russian governments since Boris Yeltsin's day, but actually looks like it could happen now.

Moscow is expecting more European companies to come and invest in the next five years than any other city on the continent, according to a study released by real estate firm Cushman & Wakefield at the start of October. London, Paris and Frankfurt may be the top-three cities in which to do business in terms of volume, but Moscow wins in terms of getting new business, the survey found, overtaking last year's winner Warsaw: nearly 10% of the 500 European companies surveyed said they expect to bring their operations to Moscow soon.

Even so, Germans say they still find it hard to work in Russia, putting the miles of red tape as their chief moan. "The insufficient legal security and bureaucratic pitfalls scare off German companies sometimes and prevent them from doing more active business in Russia," Wulff said.
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