Russian roulette German companies stand to lose if the West's Russian diplomacy fails

Right now, it’s all soccer and smiles, but if the relationship between Russia and the West collapses further, German companies will foot the bill.
What happens if he falls?

Never mind the goals scored in Russian stadiums and the happy photos coming from the World Cup, German managers are sweating about Russia.

Which German firms would lose most if and when the conflict between the West and Russia escalates? Try bankers, engineers, traders and makers of machines and trains. For them, any tension with Moscow is bad news.

Russia is a big part of many German firms' sales, trade, or acts as a transfer country for oil and gas. In 2017, trade between Russia and Germany jumped 23 percent, with Russia importing €19.7 billion ($23 billion) in German goods. And while it’s all sunshine and soccer for now, come winter, that link keeps Germany’s homes warm: 40 percent of Germany’s gas needs and a quarter of its oil come from Russia.

Business confidence is fragile

Many companies’ share prices, as well as the rouble, took a tumble when Washington issued a blacklist of businesses and executives close to the Kremlin in April. New sanctions wouldn't just cause problems for investors, but also for Russian goods traders.

Even banks and institutional investors are preparing for worst-case scenarios, like if sanctions were to target Russian bonds or companies closely aligned with the Russian government. In such a situation, a US investor with shares in a targeted company would have to sell them within 30 days. Often, shares in companies like Russia's natural gas giant Gazprom, are part of major index funds, which Germans like to invest in.

German companies, meanwhile, worry what would happen if the US treasury refused to let other countries use dollars for business transactions involving Russia. When Washington slapped sanctions on Putin’s oligarchs, Swiss company Sulzer's business ground to a halt. “All our bank accounts were blocked, we couldn’t make any dollar transactions anywhere in the world, said Sulzer’s boss, Greg Poux-Guillaume.

The problem was oligarch Viktor Vekselberg, who owns holding group Renova, which in turn owns pumpmaker Sulzer. He’s one of the seven oligarchs blacklisted by the US Department of the Treasury's Office of Foreign Assets Control (OFAC). Fast maneuvering saved the day: Sulzer bought its own shares back from Mr. Vechselberg. Once Renova’s proportion of shares was below 50 percent, the OFAC released the blocked assets.

Sigal Mandelker, who handles sanctions on “rogue states" for the OFAC, said, “We’re trying to minimize the effect it is having on European companies. However, that doesn’t ease Germany’s fears.

Banks, from Deutsche to Commerzbank, or Swiss UBS, are active globally and must implement US regulations regardless of how they harm customer relations. The consequences of failing to adhere to these regulations are scary: A US monitor has been stationed at Commerzbank since 2016. He was dispatched from the US after Germany’s second-largest bank carried out transactions for Iran’s shipping companies despite sanctions.

Railroaded by sanctions

Stories like what happened to Siemens in Ukraine make matters even worse. Four Siemens gas turbines on their way to a project in southern Russia on the Taman peninsula inexplicably showed up in Crimea in 2017. They either somehow got stuck on the way – or were illegally moved, Reuters reported.

The EU's sanctions on Russia mean European companies can’t do business there, so when Siemens sued for the return of the turbines, they lost. Siemens then backed away from Russia in a painful step, as the conglomerate has 3,200 workers there, annual sales of €1.1 billion and access to the third-longest rail network worldwide – very appealing for a firm that makes rail technology.

Schaltbau is another German maker of rail technology invested in Russia that could suffer if business relations deteriorate. Schaltbau’s boss, Bertram Stausberg, told WirtschaftsWoche he was confident about the market. But lobbyists, including the Ost Auschuss, or German Committee on Eastern European Economic Relations, want Berlin to act and protect German companies.

SMT Scharf makes equipment for the rail systems found in mines for gold, platinum, diamonds, copper and nickel. The company makes 95 percent of its money outside Germany. Of that, 33 percent is in Russia; it’s SMT’s biggest market.

Then there’s the energy business, chiefly Wintershall, the oil and gas arm of BASF, Germany’s biggest chemicals company. Wintershall has always had good relations with its domestic counterpart, Dea. The plan was to merge the two companies and split the resulting firm between its respective owners: BASF gets 67 percent while Letter One would hold the remaining 33 percent. The fly in the ointment is Mikhail Fridman, an oligarch worth €13 billion and not yet on the US’ radar. As one of the richest Russians, he could wind up there soon.

It becomes more complicated with additional layers of ownership and regulators from different countries. Wintershall has invested in Nord Stream, the transcontinental pipeline Washington fears will leave Europe more dependent on Russian gas. Wintershall holds 15.5 percent of shares and Uniper, a German utility, has another 15.5 percent.

Uniper also operates power stations in Russia. It’s owned by E.ON, which wants to sell its 46.7 percent stake in Uniper to Finish company, Fortnum. The trouble is the Russian authorities have to approve it first. If they say no, it could send the companies’ share prices into a dive. Gazprom is the biggest shareholder in Nord Stream, and its boss, Alexei Miller, is also on the sanctions list.

Gazprom is also the only shareholder in Nord Stream 2, a second, planned pipeline. But a series of European companies, including Uniper, Wintershall, France’s Engie and Austria’s OMV, along with Royal Dutch Shell, are financing half of the project. If sanctions hit them too, the pipeline’s financing would be in trouble. Salzgitter, a German maker of the pipeline, would be affected too.

Rouble trouble

Then there are companies losing money because Russia's currency is so weak. The company heads talk tough, but it's still a turbulent market. Olaf Koch, who runs Metro, Europe’s biggest retailer, told shareholders it is committed to Russia and its 16,000 employees, even after the company lost 10 percent of its sales in the first quarter of its business year, given the changed exchange rate.

Ceconomy, a consumer electronics retailer, has the opposite problem. It has 57 stores in Russia, has been making losses and trying to leave the Russian market for some time. Ceconomy is owned by Germany’s Media-Saturn and is preparing to sell its business to Russia's Safmar. It would take a 15 percent stake in Safmar’s parent company,

For now, attention is focused on the soccer stadiums of Russia. But executives up and down Germany are listening and watching closely to events beyond the trophies and the penalties.

This article was authored by Frank Doll, Saskia Littmann, Anton Riedl, Christof Schürmann and Heike Schwerdtfeger, all writers for WirtschaftsWoche, our sister publication. To contact them: [email protected]