The Russian invasion in Ukraine has revealed Germany’s structural economic vulnerabilities linked to the country’s excessive dependence, until recently, on the fossil fuel imports from Russia. With its war, the Kremlin chose to upend decades of accommodating German Ostpolitik by weaponizing Germany and Europe’s decision to opt for Russian gas as a transition fuel for achieving their green transformation ambitions.
Breaking bad habits.
The cornerstone of the Russian-German economic ties has been the import of cheap Russian energy for powering German heavy manufacturing, which then has exported back high added-value products and sophisticated machinery. Germany was Russia’s second largest trading partner and until the fall of 2022. Russia was the main energy supplier of Germany delivering between 35 and 40% of Germany’s total oil, gas and coal imports. German exports to Russia, consisted mainly of machinery, electrotechnical products (including dual-use goods such as semiconductors) and pharmaceuticals.
Despite Moscow’s increasingly authoritarian and aggressive anti-Western posture, and even after the annexation of Crimea in 2014, Germany continued deepening its trade and investment relations with Russia, ensuring uninterrupted influx of capital and technology for the Russian economy. The largest Russian companies, many of which state-owned, struck successful cooperation agreements with German firms. Such links continue to undermine the timely and effective enforcement of sanctions and goods control, dampening EU and Germany’s response to Kremlin’s aggression in Ukraine, and prolonging the conflict.
The scale and brutality of the Russian invasion have summoned a decisive response from the German society and the German government, following the initial shock. As a result, Germany has quicklyinaugurated emergency economic security and decoupling polices in the energy sector, and has upheld unprecedented EU and G-7 sanctions and technology and goods controls on Russia. Germany has fully diversified the supply of crude oil and coal, and has reduced the import of Russian gas to a minimum, largely via LNG and small volumes of pipeline gas. In addition, the introduction of sanctions in 2022 sharply reduced the exports of almost all goods, with the exception of pharmaceuticals, which sales have not yet been sanctioned.
Corrosive bonds.
Over the past decade, Russian companies consistently increased their shares in Germany's critical energy infrastructure without any real opposition from the German government. in hindsight, this corrosive dependence was might have been part of a strategy to paralyse Germany in the face of increasing aggression towards Ukraine, so that Russia could pursue its geopolitical ambitions without fearing economic repercussions. Russia has tried to export its home-grown state capture model through building strategic corruption relations. Russian FDI in Germany almost tripled between 2012 and 2020, reaching around EUR 9.5 bn. While the German government has been struggling to regain control of some key assets at home, German companies are facing resistance from the Kremlin to sell off their assets in Russia, leaving many in a kind of “limbo” where they have stopped production but still maintain their corporate structures within Russia.
De-risking but not decoupling?
The Russian economic influence in Germany seems to have lost its strategic edge after the German government placed under special control the key Russian state-owned oil and gas assets in the country. However, many German companies remain stranded on the Russian market, as they have rushed to build excessive exposures to the Kremlin-directed economy throughout the past decade, despite considerable governance and rule of law risks. On the eve of Russia’s full-scale invasion of Ukraine in 2022, around 4,500 German companies were operating in Russia, with total average annual revenues within their operations in Russia of between €50bn and €60bn, and employing around 200,000 people.
German firms have frequently actively sought Kremlin-anointed sweet deals, promising quick wins. For example, many collaborated with Gazprom on natural gas exploration and productions projects in Russia and have secured infrastructure and engineering contracts in Russia, involving power plants, electricity grids, motorways, and other public facilities. Of the 375 largest German companies operating in Russia, 25% have announced they are leaving the country. Yet, only 6% have actually left. More than half of companies have decided to continue operations in Russia or have put business on hold awaiting regulatory or political clarity.
Many of these companies depend on the Russian market for a significant share of their global revenues. Ekosem Agrar, for example, is a German company but makes 100% of its revenues in Russia. So, pulling out of Russia would be tantamount to bankruptcy. Companies such as Liebherr, Claas, Knauf and Metro have all decided to stay in Russia, often citing a sense of responsibility to their employees and customers as the reason for their decision. In reality, however, it is more likely to be the fact that these companies depend on the Russian market for 6-17% of their revenues, rather than ethical concerns.
What’s next?
Germany and Europe have paid a high price for not heeding their dependence on unpredictable, authoritarian regimes, like Putin’s Kremlin. The fact that Germany managed to de-risk its economy and survive Russia’s winter energy blackmail, should not be a ground for complacency and return to business as usual. The Kremlin continues bombing Ukraine and threatening the West and the EU with imminent annihilation. With China’s increasingly authoritarian and assertive stance,Germany needs tonavigateEuropeto a new economic security strategy for the way forward, based on the lessons learnt from the past year of pain from decoupling from Russia’s corrosive influence.
The German businesses should continue to gradually phase out their exposure to the Russian market by closing their operations in Russia and by letting joint ventures and corporate partnerships with Russian companies expire. There is also an urgent need to map the informal Russian economic and political networks active in Germany and dismantle their influence. Germany and the EU need to build up institutional defenses to fend off strategic corruption attempts and raids on Europe’s technological base.
Germany’s economic security strategy requires sophisticated mechanisms for screening and halting of overt and covert Russian strategic investments in Europe linked to state-owned companies and oligarchic networks close to the Kremlin. Such screening needs to be complemented by measures for ensuring intrа-EU corporate ownership transparency and the strengthening of the European anti-money laundering infrastructure and efforts on reducing the Kremlin’s hidden economic footprint in Europe.
