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Subdued business prospects: German companies in Russia

The political standoff between Russia and the West over the future of Ukraine is stressing the Russian economy, and German companies are feeling the effects. Many firms have seen revenues and investment volumes decline.

Claas GmbH is proud of having been active in Russia for a long time. The German producer of agricultural machinery has been on the ground since the end of the 1980s. A decade ago, the company built a factory in the southern Russian town of Krasnodar to supply the regional farm equipment market.

Claas recently decided to double the output of combine harvesters and tractors there, investing more than 100 million euros ($137 million) in the facility. But right now, business is not as brisk as it should be.

Company spokesman Wolfram Eberhard doesn't want to disclose any specific figures, but admits that "the current stagnation in business ties with Russia and Ukraine will certainly have an impact on our earnings this year."

The political stand-off with Russia has begun to have impacts on the German economy. According to a poll conducted by the German Chamber of Foreign Trade and Commerce in Moscow, 61 percent of the companies polled say the political crisis is already affecting their daily operations. A third of respondents attest to dwindling revenues.

Russia is the fourth-most important export market for German machinery, at a volume of 7.8 billion euros last year. The German Machine Engineering Association (VDMA) says exports to Russia dropped by 19 percent year-on-year in the first two months of 2014.

'Made in Germany' getting more expensive for Russia

But shipments to Russia started decreasing before the onset of the crisis, as Russia's economy has been on a downturn for quite a while. Last year, the ruble lost almost a fifth of its value in relation to the euro - and the political crisis has sped up the ruble's decline. It's becoming costlier for Russian firms to borrow, investments are being delayed, and machinery "Made in Germany" is getting more expensive because of the changing exchange rate.

Metro store in Russia

There will be no partial IPO for Metro until further notice

German pharmaceutical company Stada, for instance, saw its income decline by 13 percent in Russia, its second-largest market. Automaker VW sold far fewer units in Russia in April 2014 compared to the same month a year earlier. It's the same story with sports equipment maker Adidas, which logged lower revenues in the first quarter because of the ruble's devaluation.

Many German companies are worried about the political crisis worsening, and delaying planned investments. According to the Association of German Chambers of Industry and Commerce (DIHK), food company Kühne has deferred its plans to build a factory in Russia for an unspecified time, although it had already bought a plot of land and gone through the required approvals.

Retailer Metro has put on hold the planned IPO of its Cash & Carry business in Russia. Plans for the business to go public are not completely off the table, the company said in a statement, but it added the firm had always emphasized that the right capital market conditions have to be in place for such a move - and given current political developments, conditions are not suitable at present.

Impact on Germany is real, but limited

The DIHK says some 6,000 German firms are currently active in Russia. For the big, DAX-listed blue chips, Russia is just one market of many, and so the impact of the conflict over Ukraine is limited.

"Our Russia business is important, and in recent years our sales there have been growing faster than in most other markets, but it's not overwhelmingly big yet," says Tobias Baumann, a German Chamber of Industry and Commerce (DIHK) expert on Russia. He notes that German exports to Russia account for only about 3 percent of Germany's total experts. A Russia mired in recession wouldn't have dramatic consequences for German business. Leading economic think tanks estimate a 3-4 percent economic downturn in Russia would result in a mere 0.3-percent dip in Germany's gross domestic product (GDP).

Claas factory in Krasnodar, Russia

Claas stays optimistic about doubling production volumes

For some smaller firms that have invested heavily in Russia, in contrast, a worsening of the crisis could be their undoing. But hardly anyone is willing to throw in the towel right now.

"Most companies are sticking to their medium and long-term business plans for the Russian market," says VDMA's Monika Hollacher in summing up the conclusions of a survey of German machine builders.

Farm equipment maker Claas is no exception. It says the political crisis of the moment is no reason to scale back its 100-million-euro investment programme for Russia.

"There are always some short-term crises and risks," spokesman Wolfram Eberhard says. "But as a family-owned business, we have a long-term perspective." He says investments in factories are always of a long-term nature, and so are the prospects for the company's Russia business.

"Russia still needs to modernize its agriculture, that hasn't changed."

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