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In reversal, Germany cools to Russian investment

A giant sign for OAO Gazprom stands above a building in Moscow, Russia
Andrey Rudakov | Bloomberg | Getty Images
A giant sign for OAO Gazprom stands above a building in Moscow, Russia

Few countries have invested more heavily in Russia than Germany has, rushing in to exploit new trade opportunities that opened up after the Cold War ended. More than 6,000 German companies set up operations there, and Russia became a major customer for German cars, pharmaceuticals and machinery.

But now the rush is going in reverse. The announcement last week by the German chemical giant BASF that it had canceled a planned deal with Gazprom, the Russian energy giant, involving natural gas extraction and distribution, was the latest example of how German companies are delaying projects and investment.

Opel, the car-making unit of GM based in Germany, has laid off workers at its plant in St. Petersburg; Volkswagen shut down an auto plant in Kaluga intermittently because of poor demand; and Fresenius, a health care company, canceled a joint venture with Russian partners.

More than a third of German companies with operations in Russia are likely to cancel investment projects, though only a small number of German companies have abandoned Russia completely, according to a survey this month by the German-Russian Chamber of Commerce.

The conflict in Ukraine has rattled Germany's leaders as perhaps no others outside Russia. It is not just business that has been put on hold: Countless forums for partnership like major political gatherings have been trimmed back or put on ice. Although Germany's politicians continue to lead diplomatic attempts to ease the Ukraine crisis, trust in Moscow has evaporated. Everyone knows that it will take a long time to repair a rift that has revived fears of a new division of Europe — roughly, pitting Russia against the European Union — and markedly reduced commerce once considered a reliable source of growth.

The impact on Russia is broader, because it is much more dependent on German goods and investment than vice versa. Russia is hobbled by economic sanctions for its intervention in Ukraine, the devalued ruble and a severe drop in the price of oil, its main export. Russia is expected to suffer a steep recession next year, while Germany is forecast to grow 1 percent.

But Russia's problems have helped slow Germany's momentum. Exports to Russia fell 22 percent through October compared with the same period a year earlier. Ten percent of all German companies export to Russia, and the lost sales are another setback at a time when Germany is struggling to improve economic growth.

The uncertainty hanging over Germany's strong business ties with Russia, which are more than double the value of Russian trade with the United States, is in marked contrast to the optimism and relative stability of recent years. And it has been reflected in increasingly acrimonious exchanges in Germany's political, diplomatic and intellectual elite over how to shape relations with Moscow.

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Last weekend, the two most prominent Social Democrats in Chancellor Angela Merkel's grand coalition government of center right and center left — the party leader, Sigmar Gabriel, and the foreign minister, Frank-Walter Steinmeier — voiced concern that sanctions might hobble the

Ms. Merkel, clearly frustrated with the behavior of President Vladimir V. Putin of Russia, has so far taken a harder line. But the potential for conflict within Ms. Merkel's government complicates her efforts to use Germany's close ties with Russia as leverage to fashion a solution to the crisis in Ukraine.

Business groups, normally strong backers of Ms. Merkel's Christian Democrats, have agreed with the Social Democrats on Russia and warned against using economic means to put pressure on Mr. Putin.

"Sanctions are not the proper means to resolve this political crisis," Eckhard Cordes, a former Daimler executive who is chairman of the Committee on Eastern European Economic Relations, which represents companies doing business in the former Soviet bloc, said in an email. "The West cannot have an interest in destabilizing the Russian economy or Russian politics."

But sanctions are hardly the only factor destabilizing the Russian economy. Well before Russia annexed Crimea, German businesses had become disenchanted with what they saw as increased hostility to foreign investors.

Allianz, Germany's largest insurance company, stopped selling auto policies in Russia last year after a change in Russian law that allowed disgruntled customers to sue in local courts. The courts sometimes issued judgments without even notifying insurers that there was a complaint. Allianz, based in Munich, continues to sell life insurance and other policies in Russia.

The business climate in Russia has continued to deteriorate, at least in the eyes of German investors. Fresenius, a health care company listed on Germany's blue chip DAX 30 index, canceled a planned pharmaceutical joint venture with a Russian partner last month, citing "changing political and regulatory circumstances."

Shares of Stada, a maker of generic drugs based in Bad Vilbel, near Frankfurt, have fallen by more than a quarter since June, in part because of a 19 percent decline in sales in Russia, one of the company's most important markets.

Everyone "is moving in very low gear," said a businessman who has had dealings with Russia for the past decade. Like many people operating in Russia, he did not want to be quoted by name for fear of upsetting already delicate ties.

"The Germans want to be there," the man said. But "they're afraid of what the volatile Russian market is going to do."

The number of German companies abandoning Russia remains small, about 3 percent of the total, according to the German-Russian Chamber of Commerce. Most companies hope that the Ukraine crisis will blow over, and they will be able to return to business as usual.

A few companies continue to invest. Schaeffler, a German maker of ball bearings and other components used by the auto industry, opened a factory in October, its first in Russia, in Ulyanovsk, about 550 miles east of Moscow.

But 41 percent of German companies in Russia have slowed investment there, according to the survey of 200 firms by the chamber of commerce, while 36 percent said they would cancel projects unless conditions improved. And 28 percent said they planned to dismiss Russian workers.

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The Russian market has turned sour for German automakers. Opel said in September it would cut production at its main factory in St. Petersburg, where it makes Opel Astra and Chevrolet Cruze cars, eliminating a shift and 500 out of 1,600 jobs.

Volkswagen halted production for 15 days at a plant in Kaluga in recent months, in addition to the usual Christmas and New Year's shutdown. The company said in a statement it remained committed to Russia but was "watching the market with concern."

Including other companies like BMW, Mercedes and Ford of Europe, which is based in Cologne, German automakers will lose 15 billion euros, or about $18.3 billion, in Russian sales and €600 million in profit through 2017, according to estimates by Ferdinand Dudenhöffer, a professor at the University of Duisburg-Essen.

Other industries are also suffering. Metro, a German retailer, postponed a listing of its Russian unit on the London stock exchange, which would have raised cash for more expansion in the country. Otto, a catalog retailer and online rival to Amazon, has been forced to raise prices for Russian customers to compensate for the plunge in the ruble, which has recovered somewhat during the last week but is still down 30 percent since June.

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The economic fallout has had political repercussions in Germany, where memories linger of the carnage that the Nazis and Soviets inflicted on each other during World War II. Fear of renewed tension or even conflict is palpable, and understanding for Mr. Putin is greater than in the United States.

Political tensions are likely to intensify as sanctions against Russia come up for renewal in March, a year after Moscow annexed Crimea.

"Anyone who believes that forcing Russia economically to its knees will lead to more security in Europe is wrong," Mr. Steinmeier, the foreign minister, told the weekly news magazine Der Spiegel. Having Russia's economy in chaos "cannot be in our interest," he added.

Mr. Gabriel, the leader of the Social Democrats, said pointedly that calls for intensifying sanctions were wrong.

Gerhard Schröder, Ms. Merkel's predecessor as chancellor and an avowed friend of Mr. Putin, was among 60 prominent signatories of an appeal entitled, "Again War in Europe?/Not in Our Name."

That appeal drew a blistering response from Bert Hoppe, a writer from former East Germany, who accused the signatories of paying scant attention to Ukraine's desire for independence and acknowledging only Russia as the architect of Nazi defeat and later reconciliation with Germany.

These are well-worn arguments. That they have resurfaced will not make it easier to re-establish the close ties that many Germans and Russians had taken for granted in the 25 years since the Berlin Wall fell.