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. Last Updated: 07/27/2016

Germany's Trade Connection Just Getting Stronger

About 10 years ago Knauf, a Bavarian family-run building-materials business, made the first of a string of investments in Russia.

"Company co-owner Nikolaus Knauf knew it was a big risk, but the risk has paid off," said Leonid Loss, spokesman for the firm's Moscow office.

But turning a profit didn't come easy. After investing about 400 million Deutsche marks ($184 million) and staying afloat through the 1998 financial crisis -- when it was generating only $1 in sales for every $3 invested -- Knauf finally reached profitability two years ago.

But in all those years of investment, it has built up a national chain of 13 factories, mainly producing plasterboard. Knauf is now a market leader, and is still investing. It puts all its profits back into the business.

"We used the formula ?Russian staff, Russian raw materials, and products for the Russian market,'" Loss said. "Today, Knauf products are used in almost every modern building built in Russia."

Knauf is just one of many German firms thriving in Russia. According to data collected by the Moscow branch of the Delegation of German Industry and Commerce, or DIHT, 1,173 German firms have representative offices here -- a figure that has grown a staggering 30 percent in the last year.

Including joint ventures, fully owned subsidiaries and branch offices, German businesses have a total of 1,383 entities in the capital alone. And throughout Russia, German firms have 1,352 joint ventures, 798 businesses that are 100 percent owned by German firms and 102 branch offices.

"Germans are the largest foreign business community in Moscow," said Andrea von Knoop, who heads the local DIHT office. Knoop also heads the German Business Association, which has about 360 members.

Trade is booming too, with German exports to Russia up 55.6 percent to 8.4 billion Deutsche marks ($3.88 billion) in the first six months of this year after a banner year in 2000, when exports rose 31.7 percent, according to the German Statistics Office.

German imports from Russia rose 15.7 percent in the first half of 2001, after leaping 73.7 percent in 2000.

Germans have deep roots in Russian business, with trade between the two going back about 800 years. Many of today's leading companies in Germany were active in pre-Revolutionary Russia, including such firms as BASF, Mercedes Benz, Siemens, Zeiss, Agfa, Hoechst, Mannesmann and Bayer.

Russians have developed an idealized view of Germans, says Knoop. "Russians even have a saying: 'A German can do anything; if he can't do something, it just means that he doesn't want to.'"

"They hold us for being punctual and trustworthy and much more perfect than we are, that we are very reliable and not all of us are," Knoop says. However, it was no accident that the positive impression existed -- it is based on relationships of trust built up over many years.

East Germany was the Soviet Union's No. 1 trading partner among the Eastern bloc satellites. And although it was located on the other side of the Iron Curtain, West Germany also played a large role in the Soviet economy.

West Germany had trade contacts with the Soviet Union since the 1920s, but its economy opened to the Eastern bloc under Chancellor Willy Brandt's Ostpolitik in the early 1970s. Brandt dropped West Germany's hard line toward the East, allowing economic relations to blossom.

Mannesmann pipe maker took advantage of the opportunity, cutting the "deal of the century" in February 1970. Under the agreement, Mannesmann was to deliver 1.2 million tons of large-diameter pipe, and in return the Soviet Union would deliver 52 billion cubic meters of natural gas to West German gas giant Ruhrgas over 20 years. A consortium led by Deutsche Bank arranged bridging finance for the delay between the pipe and gas deliveries.

At the time, it was the largest single deal between the Soviet Union and a Western country and the biggest deal ever for Mannesmann.

"Since 1972, Germany has been the biggest Western trading partner of Russia, and in 1997 it overtook Ukraine as the biggest trading partner altogether," Knoop said.

Since President Vladimir Putin's election in March 2000, the mood among Germans considering investing in Russia has been buoyant, and the consequences of the large number of business-friendly laws passed this year should accelerate the process, Knoop said.

Germany is No. 2 in accumulated foreign investment to 2001 -- putting $6.27 billion into the country -- and the third-largest investor in terms of accumulated direct investment in Russia, behind the United States and Cyprus.

But despite Germany's high place in Russian trade, Russia occupies a small place in Germany's due to the relative size of their economies.

Although Germany last year imported a record 28.5 billion marks worth of Russian goods, Russia is only the 12th-largest exporter to Germany, accounting for just 2.7 percent of all goods brought into the country.

Last year Russia was in a lowly 19th place for recipients of German exports, taking in only 1.1 percent of all exported goods. Exports are still not back to the pre-crisis 1997 record of 16.4 billion marks.

However, Knoop said these figures showed just how great the opportunities were for growth. The German business presence is very diverse, unlike the U.S. business community, which has invested in fewer, but larger projects, she said.

Germans are doing business in almost every branch of the Russian economy, including construction and construction materials, telecommunications, chemical and pharmaceutical goods, medical technology, engineering equipment, metals, environmental technology and agricultural equipment, banking, insurance, aerospace industry and groceries, she said.

"Germany has traditionally seen Russia as a market of the future. We know that it's not an easy market," she said. "Germans know that it takes time and are convinced that the rewards will come if they stay long enough."

While other foreign firms left after the 1998 financial crisis, almost all German companies stayed, she said.

Although 90 percent of Russian exports to Germany are raw materials -- largely oil and gas -- Germany is the leader in exporting industrial equipment to Russia, accounting for 35 percent of the market.

Germany is providing Russia with the means to convert to producing more manufactured goods, Knoop said. "This machinery gives Russia an opportunity to develop its own products that can compete on the world market."

"The Russian food industry is a good example," says Knoop. "There is an increasing number of top Russian enterprises that are challenging foreign competitors with good quality and very attractive looking packaging."

"To do this, they need packaging machinery -- and much of this has come from Germany."

Knoop said German firms were also investing in Russian production.

"Many firms have realized that their mid-term and long-term success depends on producing here, with Russian staff and at Russian prices. And they are doing that more and more, especially the mid-sized firms. The large firms are not so flexible and take a long time to make such decisions."