Business Will Overcome Economic and Political Obstacles

AHK

Michael Harms

Russian industry has allies who understand the long-term importance of trade, says Michael Harms, Chairman of the German-Russian Chamber of Commerce, AHK. But he is concerned that business is being politicized. He told Mark Gay that long-term trust in the Russian market must be repaired.

The media usually focus on consumer goods and overlook other sectors like chemicals, machine tools and heavy industry. How do you categorize Russian-German trade and which are the unsung heroes?

We can summarize it as advanced manufacturing: equipment for the food sector, electro technical equipment, measuring equipment and in particular machinery and chemicals. Germany is not as strong as the United States in software. But with these hidden champions, machinery and tools, Germany is not only the leader on the Russian market but also the world leader. Consumers do not see these products but they are essential for the running of the oil and gas industry and Russian domestic industry and here the main investors are the private Russian investors in the food industry for example. Most food processing machines come from Germany or Italy.

We could summarize this as three sectors: advanced manufacturing, hidden champions and industry 4.0, the Internet of things or the merger of software and industrial production.

How do German companies identify the changes and needs of the Russian market?

Russian industry is now part of the global market. It is no longer true that Russian industry can do everything on its own. Competitive, global companies, for example progressive, technology-driven companies like Russian Helicopters rely on global suppliers, partners and global markets.

Russian industry as a whole is not competitive on the world market. You can see this from the structure of Russian exports: it is mostly oil and gas with very few manufactured products. The government has identified the problem and Russian industry is modernizing. It has a good heritage in some branches of industry like aircraft and space. They have leading companies worldwide in the software market and the extraction of oil and gas so there are some interesting branches which can be developed with German and western partners.

There is no special German approach to the Russian market but their mentality is quite close, and Germans like the Russian style of communication and doing business.

German industry seems to have an understanding of the Russian market. Maybe destiny is too grand a word — perhaps a future that cannot be avoided in terms of trading with the east. Is there a gap between the thinking of business people and politicians?

With Germany being in the heart of Europe and having these traditional ties with the east it is a kind of destiny, a future and an opportunity to expand beyond their own market and explore this huge market for German companies.

I would not say that German politicians do not understand the need for a strategic approach. We were one of the first countries that defined the Partnership for Modernization with Russia, which German foreign minister Frank-Walter Steinmeier proposed five years before other such plans. Politicians realize that with the European Union Russia can be one of the most influential economic blocs. We need free trade with Russia but all these things are now questioned by the political crisis. On the one hand we know about the strategic importance of the Russian market, on the other we have certain values that are threatened by the crisis.

Which values do you mean?

The values of European stability, security and peace. These are threatened by the Ukrainian crisis and we cannot avoid this discussion. There is no difference on the importance of having a long-term strategic partnership with Russia on both the political and business levels.

Bilateral Trade between Russia and Germany

AHK

One strength of German business is the Mittelstand, the small and mid-sized companies. What can Russia learn fromthis?

The structure of industry is very different. Most Russian SMEs are in services and local industry, unlike German mid-sized companies that are active in industry and on a global level. To transfer this whole philosophy and the whole structure is not easy. Even the United States does not have such an SME sector, which is a feature of German or German-speaking countries predominantly, though also in Italy.

On the other hand the question of the Russian SME sector is in the first instance a question of business climate. You need low transaction costs, a stable business environment and economic freedom. You do not need too much state interference or the dominance of large state-owned monopolies. Unfortunately we have all these things in Russia. Politicians clearly see this problem; prime ministers and presidents have mentioned this in their speeches for 10 years now.

Have German companies cut their forecasts regarding the Russian market or is the situation too fluid for such forecasts?

We have three main factors that have lead to a deterioration of expectations towards the Russian market for all foreign companies. This is the slowdown of growth in Russia since last summer. The second thing is the devaluation of the ruble that affected exports and made more expensive the import of parts from the euro zone. The third thing is this political uncertainty. Together, these have led to a gloomier picture than a year ago.

From our assessments and questionnaires, business is still going quite well for most branches of industry but it is clear we will not see major growth. Some branches or companies will see a slowdown in both revenue and profits, for example the automotive industry. Some German companies which provide equipment to private Russian investors in the steel and metallurgical industries are also suffering because the Russian groups are not investing and the world steel market is in a difficult position.

How much is due to the ongoing global financial crisis and how much due to the political crisis?

Mostly the problem is still growth and the ruble. The political situation got worse after the last round of sanctions. While we had level one and two sanctions aimed at specific individuals it was not such a problem for companies already active on the market.

The bigger problem is the lack of long-term trust that a lot of German investors have felt towards the Russian market: confidence in a stable business framework.

Over all, has the drive towards protectionism, which many people predicted at the start of the financial crisis, begun to accelerate?

I think so. We are very concerned about the tendency for much more protectionism on the Russian market. It began after the WTO accession when Russian industry put politicians under pressure because industry is still not very competitive. What is clear form my perspective is the loss of jobs and Russian companies to the world market and they wanted to protect industry, for example the vehicle scrappage fees, regulations on medical equipment and restrictions on agricultural machinery, and now it is speeding up. Before it was just the economic question but now we will have arguments about national security, that Russia should build up its own industry for "national security". This is a very strange argument because Russian industry can be competitive only if it is open to the world markets. If you protect your industry it is the direct path to stagnation: we saw it in the Soviet Union and we see it in any country that tries to close its economy.

Are the Russian markets more open now than they were before WTO? Do you still see a net benefit?

If you look at the level of import duties we clearly see an advantage. We have a more stable framework, the inclusion of Russia in the WTO system, clear regulations and we are solving trade disputes but unfortunately nowadays we have emerging signs of a reverse development. It is still too early to assess the reform process.

More German companies have begun to localize part of their operations in Russia, even mid-sized companies. Can localization provide a way around sanctions or disruptions to trade flows?

It is partly a strategic trend because Russia has big enough markets that you can localize here. Also you have the Eurasian Economic Community space and, previously, the Ukrainian market. You have all the advantages of being a Russian producer, with some government support, no foreign exchange rates to worry about, no customs, and so it is the right trend especially for industries in electrical technologies, agricultural machinery, automotive. But the best conditions for this are those of growth and of stability, in politics and business, and both these things are now under question. Several German companies have halted their plans to invest because of the slowdown in growth and the political situation.

Does the EEC have any advantage for business in terms of harmonized taxes in the Eurasian area?

I think it is a very positive trend. You have a bigger market with more or less common regulations. You have import duties with the same technical regulations and standards so you have more reliability in foreign trade. We had very close interaction with the regulation commission (that established the common regulations) and it had very qualified individuals. The dialog on technical regulations went quite well but further progress may be on hold.

Have Russian customs staff improved their performance?

There are still al lot of problems but things are getting better. For example the use of electronic forms is working better and better and they have moved almost all of the customs stations away from Moscow and closer to the borders where goods enter the country. This is much more efficient. I would not say there is no corruption but there is less and we see fewer complaints from German businesses.


Russia - Germany 2014
Russia - Germany 2014
Its a challenging time for German and Russian businesses, especially smaller and mid-sized companies. Some had recently localized production in Russia, making long-term commitments to the country. Large investment funds had been looking for prospects in the real estate market. Now some of these investors have put their plans on hold. Its a challenging time for German and Russian businesses, especially smaller and mid-sized companies. Some had recently localized production in Russia, making long-term commitments to the country. Large investment funds had been looking for prospects in the real estate market. Now some of these investors have put their plans on hold.
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