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German companies that did business in Russia were very happy with the investments they made. Sanctions are always um challenging no matter in which region in which economy they are proposed. I'm afraid to sound a little cynical. Uh but as Belta once wrote, first comes the grub and then morals. The headline was German companies want to go back to Russia. Yeah, it had heads scratching across the newsroom and that's a pretty legit reaction because as we all know we're still in the war with Ukraine between Russia and Ukraine. We're in the fifth year in the war and these headlines were coming just at the beginning of the so-called Russian Davos, right? The St. Petersburg
International forum. And so it had us wondering, you know, where did this headline even come from, Kai? So it comes from a German Russian private trade association that sits in Moscow of course and they surveyed some of their members and we don't know how many members they actually have. We don't know who the members are and the members said well the sanctions they harm Germany more than they harm Russia and Germany should get back into buying Russian gas and these kind of things. So you know the things are a bit out there and stuff and obviously others uh from the Russian government said well there is this German delegation coming to the St. Petersburg former it's really important to understand that there is no official
delegation whatsoever not from the German government and also not from any industry buddies uh here in Germany this seems like a you know forgive the metaphor like a Russian doll like the more you open it up the more mysterious this gets so you said there's no delegation but who's there so there's basically there are Russian companies that have some German ties So there is Thomas Bro for example, he owns or is part of a very big supermarket chain in Germany and he has a private stake. Uh so he himself has a stake in a Russian hypermarket. You know these really big supermarkets that sell you anything you want and that's why he's there. So Russian company. Um and then there is also Stefan Dur, German
citizen but also Russian citizen since 2013. um and he has the biggest um milk producing business in Russia and he also received the order of friendship in Russia. So you kind of know where these people sit. Yeah. All of this seems to definitely have a certain perspective to it. This um this association that surveyed its members who are secret but it's based in Russia and Yeah. Okay. So you've made that really clear, but it does still sound like such a wild mix. So I'm looking forward. Who are we speaking to today? Yeah, it's certainly not Thomas B because he was like, "No, I'm not going to talk to you." Um, but it was also really hard to track down any German businesses or German business
associations. Um, because even though if they sold all their parts uh that they had in Russia at some point, uh, they didn't make a lot of money on it. So, it was big write-offs in the billions that some companies had to do and obviously like they don't like to talk about it. So, I'm really happy that now with us is Andreas Yan from the German Association for Small and Medium-sized businesses where he's responsible for the international trade issues. And also John Luff from the UK um who used to run a consultancy business in Russia on investment risk and political risks and is now head of foreign policy at the new Eurasian Strategy Center.
Andreas, let's start with you. We just heard about some of these not so trustworthy, potentially new interests of German companies in Russia. But how interesting, so to say, is Russia for these companies that you represent? As a matter of fact, um this interest is very small and um concerns only um quite um small bunch of people. Um usually during um the last four or five years um the interest was declining considerably. When you see the facts and figures um the expert of the German economy to Russia in 2022 was about 45 um billion euro and last year only 10.8 um billion euro were remaining. So you can see the interest is declining and in our association honestly speaking um there are only small um enterprises in
the sector of agriculture um food um production which um are still there. Andrea, so some companies, German companies sold their assets um others had them seized um by Putin and others stayed. So, but when you look at this from the outside, anybody would say who in their right mind is actually staying in Russia. Definitely that's the question and um a lot of our entrepreneurs um they really um not very risky. They just um are considering the business opportunities all around the world. And if you see for instance um uh the AAN region with onethird of the global trade um and also um some trade agreements free trade agreements like meurum so you can see those regions um have a lot of dynamic and Germanmemes are
investing heavenly in these regions and um as a matter of fact for them is not um of any importance. um they just uh try to mitigate those risks and um if they have still some production lines they are using rather Kazakhstan or some neighboring countries like Armenia or Georgia but uh Russia as a market um is no longer of any interest for them. John um there was this famous saying from the former US President George W. Bush. She said, "Fool me once. Shame on you." You know, "Fool me twice. Well, you're not going to fool me again." Is I'm paraphrasing a little bit, but it makes me wonder, are is Germany and German companies are they setting
themselves up to get fooled by Russia again? Well, if they go back in force in the hope of making money quickly, then I think the answer is most definitely yes. But I think we can look at it maybe through another lens and say that the German companies that did business in Russia up to 2022 in many cases were very happy with the investments they made um because they were undoubtedly successful. German business was respected uh in Russia. Of course there is great long historical links but the structure of trade had remained really unchanged for over a hundred years. So Russia was exporting raw materials. Um Germany was largely um ex exporting machine tools uh services um things that otherwise Russia couldn't generate from its own market. And this
complimentarity I think has led people in Germany for a long time to believe that Germany and Russia somehow have this special economic relationship where their interests are balanced and that they can work well together. And of course the construction of the Nordstream uh gas pipelines um yeah that's right during the medical era for the most part uh they were a great symbol really of the I suppose the stability of this relationship but it was founded on really the export of um natural gas which had begun in the late 1960s but that business for both Germany and the Soviet Union initially and then Russia was very successful and you've worked with German companies as a consultant in Russia John, how were German companies different?
I think German companies I mean by virtue that uh very often there were Germans involved who were well trained I think were culturally sensitive and were seen to you know embody a business culture that of course organized very differently from Russia's but who I think were able to communicate very well with their Russian counterparts uh would respect them and you know often found solutions to the typical problems that arise in the Russian market. But I think we shouldn't at the same time, you know, overestimate the importance of this business relationship because it always seemed to me that it's its importance was exaggerated on the German side because when you measure it against the trade with Poland and I
remember that the precoid data that uh Russia was sorry, Germany was doing trade with Poland at a level that was 2.5 times higher than the trade it was doing with Russia even though the Russian economy was two and a half times the size of Poland's economy. So that right away tells you a story that the countries closer to Germany and central Europe have had greater um economic significance. Um John, you've been on the ground in Russia for quite some time. You consulted firms, you know, on how to navigate uh the government there. Can firms and companies operate there without sort of, you know, bending the knee towards the government or is that
just something that doesn't work that doesn't fly over there? Well, I think it depends. It depends on the sector you're working in. If you're in the let's say oil and gas business, then inevitably you're dealing with the Russian state. If you are, let's say, a Middlestand uh company, then you're not going to have that sort of state level interference, but you're probably going to come up against, you know, more local problems that can often be very difficult to resolve. And the problem in that case is that you can't very easily uh get to a decision-m level to resolve them. So typically the big German corporates could with political help of course from Berlin knock on the right doors in Moscow to deal with their
issues and my experience was that the middle companies uh when they encountered problems found them much more difficult to deal with and therefore they found Russia a more frustrating place. It's not to say that they didn't manage in many cases to find at least some you know compromises or indeed solutions but it was hard work. Andreas, um, your, uh, industry body was also one, uh, prior to 2022 that questions a lot, questioned a lot of the sanctions. Uh, DW just did an interview, uh, this week with a chemical company where they also questioned the sanctions again against Russia. Um, is that questioning of sanctions against Russia a rightful question in your view? you know um as a matter of fact sanctions um are always um challenging
no matter in which region in which economy they are proposed um we have um seen it um too many regimes uh Venezuela um Iran North Korea um the countries will turn to other horizons so um as a matter of fact our member companies um they are good marked leaders in one small niche and um they are orientating themselves um in regions um in uh um clusters where success and where business um finds the rights condition. So there is no doubt you know there were no question marks um to their reaction and we are very um keen of that and we assess um those companies also to find new markets where they can do business in a quite efficient way. Um so it's a it's um as a matter of fact um a geopolitical a genuine understanding also uh of the cos
um if I would like to be involved um in a region where um people are committing u war crimes you know so um the answer of course for an overwhelming majority of them is no. Um, John, a bit of a grim one, but you have uh some experience with that as you operate it in Russia a lot. There are still businesses in Germany that still operate there that still generate revenue there, pay taxes. Um, you know, I'm always wondering like at which point, you know, when you look at the balance sheet or when you look at the revenue, what kind of percentage are companies, you know, willing to sacrifice at some point to take the
higher letter on the moral stance? you know, when do you say, "Okay, we cut 10% of revenue, but we're out of Russia. That's fine for us." Or, you know, is there anything with which you can quantify this decision? Well, I'm afra I'm afraid to sound a little cynical. Uh, but as Bel once wrote, "First comes the grub and then morals, if I translate that correctly." And of course, you know, some businesses um have made the judgment that they're happy to remain in Russia that they don't uh feel clearly any pangs of conscience about the fact that they are contributing revenues to the Russian budget which is using budget revenues of course to launch this appalling war against Ukraine. So in my
view those companies need to live with their own uh conscience. Uh I tend to think that um there is justice in this world and uh they will probably pay for it at some point somewhere else. But that's just of course strictly speaking my personal view. I would not want to be a business owner uh still committed to the Russian market. And of course life for them may become more difficult and there were certainly some companies that chose to try to stay in Russia uh after February 2022 after the start of the VW war against Ukraine but then realized that their position was no longer tenable. So depending on how long this war lasts, um let's see how many of those companies actually really stay the course.
So to which areas or to which um countries uh do the businesses then go to like where do they try to compensate for the business they lost in Russia? Um, so we can see that a lot of them went to Kazakhstan but also to Southeast Europe. When you see how quickly countries like um Bulgaria, like Hungary, like Croatia, Serbia um increased um their foreign trade with Germany. Um and in the same time central Asian country like Uspikistan and um Kazakhstan absorbed um this decline um of Russian trade, right, John? Given everything we've heard, I'm wondering, you know, what's the incentive here? Is the Russian economy a good one to be in if you're a business?
Well, it depend depends on the prevailing conditions. I think there's still hope uh in some European circles, particularly among the bankers who speak to them, they think that at some point sanctions are going to be lifted, that the Russians are going to want to normalize relations with Europe, that there will be new business opportunities and because of the impact of sanctions over what will have been more than 5 years, I'm quite sure by the time any sanctions are seriously relaxed, we will see appetite for uh western goods uh and services and maybe some western commodities even that of which the Russian economy has been starved and over the last uh four and a half years
Russia has um by force has become very dependent on Chinese uh imports on trade with China and if it were not for Russia's ability to sell oil to China at current prices if it were not for China's readiness to supply so-called dual use goods totally electronic components The Russian defense industry would certainly not be functioning the way it is today. And I'm convinced that Russia would not be building as many drones and missiles as it is today that it's using to extraordinaryly destructive effect against Ukraine. So I think it's fair to assume there will be some sort of rebalancing at some point. I tend to think that after Putin leaves power personally and then I would very much hope for Russia's sake that it is able to normalize uh relations with its
neighbors is able to establish a long-term uh peace with uh Europe um a sustainable peace which will not just be on Russia's terms and in that case I think we will see more investment in Russia and there will indeed in those conditions uh be I think really important opportunities for German companies and not just German companies but Germans in my experience are well adjusted to the realities of Russia. There are lots of things that uh Germans, if I can um generalize at this level, that do admire in Russia and equally there are many things that Russians admire about the way Germans go about business and uh the way Germany is organized and you know despite of course in Germany all these laments about the over bureaucratization and how
long it takes to take decisions all these things. I still think that in Russia there's a great admiration for Germany's technological prowess. Um John, you just mentioned it like the banking sector being a possibility, you know, to go back after the san sanctions are lifted. Do you see that really like that after the sanctions go away that a lot of businesses uh will come back? Um maybe John, you first and then we go to Andreas. No, I don't think there'll be a lot of them, but you will certainly see some people who are prepared to take the risk and who understand the benefits of being the first mover
because if the business does restart and you're in the business of financing uh investments, you want to get there quickly. So I would expect that we'll see a surge of interest from a small number of players, not necessarily committing large amounts of money, but testing the market, testing to see whether the Russian government is going to try to make the country more investment friendly. But let's remember in this extraordinarily repressive environment in Russia where power is heavily concentrated at the center the scope of course for the traditional uh corrupt practices you know all these problems are making life difficult for foreigners the level of antipathy towards foreigners this is not going to make it I in my view a very friendly place to uh to operate
Andreas do you agree exactly I agree completely um the we have still an office um in Moscow and our representative um tells us exactly the same details as John mentioned. Um there is um real um threat and um also some bureaucratic hurdles uh 10 times worse um than here in Germany. Um so no investmentfriendly climate and no matter what they might announce um as a matter of fact on the daily base um those companies um uh are facing a lot of challenging also the change of the currency inflation all this um aspects um are not really um able to um increase um the appetite um of Germanmemes is to come again and to come back.
Andreas, I know we've heard a lot of um qualifying so far in this conversation, right? That things kind of depend on uh when sanctions are lifted, how a piece is negotiated, and what industry a business is in? But I'm wondering for for the companies that your association represents, how big and important is the Russian market for these businesses? some in small niches like in machinery um in construction in um renewable energy. We have been um connected with some companies um who were there and he told us that um was affecting around about um 20% of their business for the time being um no one has a lot of nostalgia. They are trying to of course to just cope with this challenges and also it concerns um a
fact that um those people who were working for the companies um were there from third fourth generation you know all these linkages which were existing um even on Soviet days. So this is um the real tragedy that there is no how all this what was on the ground is now going um to China and to other horizons. John Andreas, thank you so much for your time uh and joining us on the show. We really appreciate your insights. Thank you. My pleasure. Thank you very much. Thank you. That's it this week from us at the DIP. And of course, if you have any questions or comments, please leave them wherever you're watching or listening to this podcast right now.
Of course, you can also shoot us an email at the dipdw.com. We love to get all your messages. But of course, until next time, thanks for watching and listening to the dip.
