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. Last Updated: 07/27/2016

German Economy Feels Chills of Russian Crisis




Russia remains one of the major sources of instability for the German economy and the crisis has taken a big bite out of the profits of Germany's largest commercial banks, the country's leading economic institutes said in their spring report.


The report issued in late April states that "the cooling of the economy is due largely to foreign economic factors," particularly the crises in Asia, Russia and Latin America.


The six research institutesf located in Berlin, Essen, Halle, Hamburg, Kiel and Munich f now forecast German economic growth of 1.7 percent in 1999, down from 2.8 percent in 1998.


While Asia's contribution to the decline of German exports and the increase in provisions by financial institutions for bad loans is bigger in absolute terms, Russia is by far the leader in terms ofthe degree of the contraction.


In January f the latest month for which figures have been released f German exports to Russia dropped 57.8 percent to 500 million Deutsche marks ($276.2 million).


A sag in demand in the European Union contributed to an overall decline of 6.5 percent in German exports in January. In total, exports totaled 69 billion marks.


Russia thus accounted for about 0.4 percent of that volume, down from 1 percent before last year's financial crash.


But though the impact of Russia's crisis on Germany through trade channels is limited, its status as Germany's largest borrower poses more of a threat.


"In terms of real impact Russia's role is not significant," said Herbert Br?cker, senior economist with the German Institute of Economic Studies in Berlin. "But there are rising concerns that Russia will not pay on its debts."


Br?cker says another agreement with the Paris Club is likely. Russia struck its first agreements with the London and Paris clubs of creditors in 1996 to restructure its Soviet-era debts.


Part of Russia's debts is secured by Hermes, a government-owned agency that provides insurance to exporters of German goods. So if Russia fails to pay, the German government will have to come up with the money from the public coffers.


Even trade finance agreements turned out to be loss-making after Russian banks defaulted last year.


Provisions for anticipated losses on loans will also eat into the profits of Germany's largest commercial banks. The banks that participated in the largest syndicated loan deals are Deutsche Bank, Commerzbank and Dresdner Bank, Br?cker said. According to various estimates, Russian borrowers owe some 40 billion to 50 billion marks to German bankers.


Last year, Deutsche Bank was downgraded by both Standard&Poor's and Fitch IBCA to double A plus from triple A.


Deutsche Bank (Moscow) was for the first time included in Deutsche Bank's consolidated financials last year.


Deutsche Bank's shares lost half of their value in just two months following Russia's refusal to service its domestic debt and recovered to a total loss of 22 percent by year's end.


Last year Russia failed to service only $2 billion of its foreign debts. This year's toll will be as high as $8 billion.


Commerzbank's net exposure to Russia is only about 280 million marks, bank spokesman Denis Phillips said.


But Commerzbank stated in its annual report that "emphasis in our provisioning was again on the Asian emerging markets economy and Russia."


Bank Austria recently reported profits were down 30 percent on a yearly basis.


"It was a severe blow for us and is mostly linked to Russia," said the chief executive of Bank Austria, Gerhard Randa.