Employees at a Volkswagen factory work on an assembly line in the city of Kaluga, 188 km (117 miles) southwest of Moscow, October 20, 2009. Volkswagen's subsidiary in Russia is launching full-cycle production of cars in the city of Kaluga, RIA Novosti news agency reported. REUTERS/Alexander Natruskin (RUSSIA BUSINESS TRANSPORT)
An assembly line at a Volkswagen factory in Kaluga, Russia

Russian president Vladimir Putin kept Joe Kaeser waiting for an hour before their meeting this week at his residence outside Moscow.

That gave Siemens’ chief executive a chance to ponder how he was going to explain to a German TV audience that evening why he called on Mr Putin even as the US and Europe were trying to further isolate Russia over its actions in Crimea.

“This visit was planned a long while ago and we don’t let short-term turbulences excessively govern our long-term planning,” he told broadcaster ZDF.

Nonetheless, the visit brought a warning from the US state department. “If individual companies are looking to do business in Russia, they need to take a very serious look right now at the sanctions we have in place and they need to think about the sanctions that might be coming.”

The German engineering company has pledged to invest €1bn in Russia and sells express trains, energy infrastructure and medical technology there.

Although Siemens’ boss gave every impression of conducting business as usual, German companies are deeply concerned about their business ties with Russia and most oppose economic sanctions.

German entities have invested roughly €20bn in Russia and some 6,200 companies – mostly small and medium-sized Mittelstand businesses – are active there. Last year trade between the two countries totalled more than €76bn.

These business links are a restraining hand on Berlin as it considers further action against Russia; Berlin is well aware that restrictions that hurt the Russian economy could also hurt Germany too. 

Elmar Degenhart, chief executive of parts supplier Continental which last year invested €240m in a Russian tyre plant, warned both sides against “playing with fire” and said a further escalation was not “in the interest of Russia or in particular of Europe”. 

Germans tend to be at ease with Russian clients, sharing a tacit but fragile understanding, born of a shared Cold War history. Russia supplies 35 per cent of German gas and 30 per cent of its oil. In return Germany delivers cars (Volkswagen, Opel, Daimler), consumer goods (Adidas, Metro), chemicals (BASF) and machinery (Siemens).

Russia was welcomed to Germany last year as the official partner country of the Hannover fair – the world’s biggest industrial convention. The only worry for German executives on that occasion was when topless Femen protesters accosted a nonplussed Vladimir Putin as he visited Volkswagen’s stand.

This mutual trust is now being tested. Ulf Schneider, managing partner at Russia Consulting, which advises a couple of hundred German companies engaged in Russia, says: “I’ve heard a lot of voices – German managers at Russian subsidiaries – saying ‘everything we built up over the last ten years, it will take us another five years to build that up again – back at the German headquarters they have lost confidence’.”

Worries were sparked in particular by remarks made by a lone member of Russia’s upper chamber – widely reported in the German media – that Russia might respond to sanctions by seizing foreign-owned assets.

KPMG, the accountancy firm, warned this week that German companies are already pulling cash out of their Russian subsidiaries as a precautionary measure.

Mr Schneider said he was not aware of that happening yet but said German headquarters were calling up to ask if their cash and investments are safe.

“They are checking how much cash is in the Russian bank account and considering if it would be possible to pay an extraordinary dividend to the German headquarter – these are questions people investigate and this is fully understandable as the country risk has increased.”

Leoni, the German car parts supplier that has two Russian plants and another in Ukraine, does crisis planning for various eventualities. If necessary possible responses include adjusting inventories and financial flows.

German business leaders fear that Russia could turn away from Europe and look east to do more business instead.

“If sanctions are more comprehensive and last longer, there could be a massive shift of the Russian economy towards Asia,” the chief executive of car supplier ZF told a German car magazine.

Andreas Knaul, managing partner of the tax and legal practice at Rödl & Partner in Russia, said German clients are enquiring about the possible impact of Russian sanctions on their interests. So far the impacts are minimal, however, German firms with US parents are more cautious, he says. “These are saying for now they will freeze their investments.”

“We also have requests from clients to be more vigorous on background checks on business partners [to see if they are on the sanctions list],” he added.

Regardless of sanctions, German companies are already feeling an impact from the crisis because of the devaluation of the rouble and turbulence in financial markets.

Metro has put plans for an initial public offering of its Russian cash and carry operations on hold for the time being, citing conditions in financial markets. The DIHK German chambers of commerce and VDMA German machinery association have warned that some investments are being delayed.

“The close links between Germany and Russia are weighting on sentiment,” said Violante di Canossa, economist at Credit Suisse after the Ifo index, an influential poll of German manufacturing sentiment, fell slightly in March.

“Compared to a year ago our products in rouble terms have become 25 per cent more expensive,” said Wolfgang Eisser, managing director of Diosna, which supplies machinery for the bakery and food industries. “We see some projects have been delayed. Although business volume hasn’t fallen to zero it is smaller. The fear is that the currency could devalue further if the crisis escalates.”

Some German companies that sell in Russia “are being asked to recalculate invoices at a lower euro amount or to invoice in roubles,” says Mr Schneider at Russia Consulting.

Anton Schneider, marketing and sales manager at Moscow-based Rufil Consulting said: “The biggest problem right now is the uncertainty among the business community . . . Nobody we speak to is talking about quitting Russia, not at all . . . But the expectations for 2014 are reduced a lot.”

Additional reporting by Claire Jones and Richard McGregor

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