Sanction Fallout Slamming the Shop Door on Russia

German department store chain Globus had ambitious plans to expand in Russia, until western sanctions hit the country. The retailer is one of thousands in Germany feeling the bite.
Less going on at the Globus butcher shops in Russia.

One year after the beginning of the conflict in Ukraine, the mood of German business entrepreneurs in Russia is at a low point.

The economic situation has deteriorated with every escalation in the rift between Russia and the West.

According to the German-Russian Chamber of Foreign Trade (AHK), three quarters of German firms are affected by the conflict, and don't intend to invest in Russia this year.

Johannes Tholey, the head of Russian operations for the department-store chain Globus, said he cannot invest hundreds of millions of euros in Russia because of Western sanctions.

“The year 2014 was an unmitigated catastrophe for our development,” Mr. Tholey said at a gathering for German business people with a presence in Russia at the German Embassy.

The event was hosted by Ambassador Rüdiger Freiherr von Fritsch, on the same day the second agreement for peace in the Ukraine was being negotiated in Minsk.

We can forget the huge expansion – that has been shelved and forgotten. Johannes Tholey, Head of Russian operations, Globus

Russia was considered for decades to be a great hope for the German economy because of its eager consumers and low taxation.

About 6,000 German companies are located in the country and are accustomed to crises. This time is different though, said Ulf Schneider, founder of Russia Consulting and an AHK board member: “German entrepreneurs in Russia have no perspective as to when the crisis will end.”

In May of last year, Mr. Tholey planned to open at least three new stores in Russia annually until the end of the decade. “Now we will be happy if we manage to open one,” he said. “We can forget the huge expansion – that has been shelved and forgotten.”

Mr. Tholey, 53, has been general director of the Russian subsidiary of Globus, a department-store chain from Saarland, a state in western Germany, for six years. The family-owned firm has almost €7 billion in annual revenues and 38,000 employees.

The managing shareholder, Thomas Bruch, is a great-grandson of the company founder and ranks among the richest Germans. In Germany, Globus operates building-supply stores as well as superstores, mostly located along highways on city outskirts.

Russia is Globus' most important foreign market. Its first store in Russia opened in 2006, and since then eight more have been added. The stores have annual sales of €1.1 billion. Globus says its revenues per square meter are higher than those of other hypermarkets in Russia; the company doesn’t release specific figures.

Large superstores are booming in Russia. Mr. Tholey saw this development coming 13 years ago. Back then, his boss sent him eastward to conduct a market analysis. He told the corporate headquarters in Germany he saw an opportunity for plunging into a far-from-saturated market.

The move was wildly successful. In the first year, revenues were twice what had been expected. With its stores around Moscow, Globus profited from the economic upturn during President Vladimir Putin's first term in office.

Quelle: Pressebild
Johannes Tholey, head of Globus' Russia operations, has had a difficult year.
(Source: Pressebild)

 

Mr. Tholey was promoted to general director. He’s now the boss of 7,500 employees. The largest Globus superstore in Russia is located in Krasonogorsk, a suburb of Moscow. The store covers more than the size of four soccer fields.

“You won't find anything like this in Germany,” Mr. Tholey said as he led a visitor through the store. His employees prepared fresh food at counters. Young children pressed their noses against the glass of a tank filled with swimming carp, trout and sturgeon. Beneath the company logo at the checkout was the same slogan used in Germany: “Globus. Where all is still right with the world.”

In August, Mr. Tholey noticed everything was no longer right with his world. Five months after annexing Crimea, Mr. Putin banned imports of most Western foodstuffs. “That brought the crisis home to us,” Mr. Tholey said.

In August, still only 5 percent of his goods were affected by the embargo. But then came September and the financial sanctions by the West against Russia. Russian banks were excluded from Western capital markets, and Western development banks were no longer permitted to finance investments in Russia.

“These sanctions are destroying everything in Russia,” Mr. Tholey said. “The stop in imports of foodstuffs was nothing in comparison.”

A loan of €36 million for a new store, which Mr. Tholey had been negotiating for months with a subsidiary of the World Bank, was canceled at the end of September.

The year would end on an even worse note for Mr. Tholey. In mid-December, the value of the Russian ruble fell on one day by almost 20 percent, and the Russian Central Bank reacted by raising the prime rate to 17 percent. “That was a mega-shock for us; we're still reeling from that one,” he said.

That’s because equipment for his new stores comes mainly from the West and has become up to 70 percent more expensive through the decline in the ruble. He said financing through Russian banks, with interest rates of more than 20 percent, has become impossible since then.

After the death of his expansion plans, Mr. Tholey has watched sales at his stores fall by a double-digit percentage in 2015. “That shows us that in January, the crisis hit ordinary people in Russia.”

Because of inflation, his revenues have remained the same, but he is noticing that potatoes and noodles are clearly more in demand than meat. Mr. Tholey hopes that he will not have to lay off any employees.

“I have responsibility for their families. And many of my employees have relatives in Ukraine – for that reason, the crisis also affects me personally,” he said.

 

Handelsblatt's Maximilian Nowroth reports from Russia. To contact the author: [email protected].