VZCZCXRO0435
PP RUEHIK
DE RUEHRL #1602/01 3521359
ZNR UUUUU ZZH
P 181359Z DEC 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 6097
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHMO/AMEMBASSY MOSCOW PRIORITY 2121
RHEHNSC/NSC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BERLIN 001602 
 
SENSITIVE 
 
SIPDIS 
 
E.O.  12958: N/A 
TAGS: ECON ETRD EINV PREL GM RS
SUBJECT: GERMAN-RUSSIAN BUSINESS: RIDING THE BEAR 
 
Ref: A) Moscow 2732 B) 08 Berlin 1208 
 
BERLIN 00001602  001.2 OF 002 
 
 
¶1.  (U) SUMMARY: German firms are riding the Russian bear, 
but nobody wants to get off.  Meanwhile, Russian firms are 
increasingly investing in Germany to gain access to German 
technology.  Germany accepts this, even in seemingly 
sensitive sectors, as helpful to economic recovery.  Germans 
see Russian investment as a quid pro quo to facilitate 
access to Russia's vast market and remain largely committed 
to Russia's longer term future.  To help cushion the 
economic downturn, German exporters to Russia are benefiting 
from expanded German government export guarantees, a clear 
sign that the new government will likely continue to nurture 
German/Russian trade.  On the energy front, a high degree of 
interdependence remains a core reality, with price stability 
rather than gas cut-offs being the focus of concern.  As 
2010 approaches, German business and government are 
increasingly anxious about Russia's customs union with 
Belarus and Kazakhstan and point to a Russian tariff and 
customs collection regime that seems primarily centered on 
generating government revenue and bribes.  Despite its 
strong and unwavering commitment to Russia, German industry 
perceives Russia as anything but a normal business partner. 
END SUMMARY. 
 
German Investment in Russia: Hanging Tough 
------------------------------------------ 
 
¶2.  (U) Investing in Russia is difficult even in good times, 
but German business has no intention to cut and run. 
Germany estimates its investment stock in Russia at 17 
billion euros as of 2008 -- quite small (2 percent) measured 
against Germany's world-wide FDI of 880 billion euros, but 
comparable to Germany's FDI to China (also 2% of total FDI). 
Estimates of the number of German firms operating in Russia 
vary from four to six thousand, but everyone agrees that few 
German companies have left the Russian market despite the 
financial crisis, although some have reduced staff. 
Volkswagen, Germany's biggest industrial investor in Russia, 
announced in November that it will expand its production 
facilities in Kaluga, 170 km southwest of Moscow, despite 
the economic downturn and major German retailers such as 
Metro and Media Markt recently expanded into Russia. 
Regional differences remain, however.  Both the Ostausschuss 
der deutschen Wirtschaft (German Committee on Eastern 
European Economic Relations or OA) and the German Economics 
Ministry say the investment climate in Russia, while 
improving, is still not satisfactory and varies widely by 
region. 
 
Russian Investment in Germany: Strategic 
---------------------------------------- 
 
¶3.  (U) Since the onset of the financial crisis, the German 
public's fear of foreign investors buying up German 
companies has given way to a greater willingness to attract 
foreign investors, including investors from Russia.  Only a 
year ago Germany passed a law, often called the "Gazprom 
Law."  Its aim was to establish a government screening 
process aimed in part at preventing Russian state-owned 
enterprises from taking over German companies in strategic 
sectors.  At the time there were persistent worries that 
Russian firms would exploit intellectual property to create 
competing products. 
 
¶4.  (U) Now, however, Russian firms are making significant 
investments in strategic German sectors with virtually no 
signs of public concern.  In August of 2009, Russian 
businessman Igor Yusufov bought the Wadan shipyards in 
Wismar und Warnemuende in a multi-billion-euro deal.  In an 
October 2009 meeting between German Chancellor Merkel and 
Russian President Medvedev, both leaders expressed public 
support for the deal.  Russian firms are also considering 
investment in German microchip producers Infineon and 
Qimonda.  One major Russian investment, however, was 
thwarted this year when GM rejected plans by a Canadian- 
Russian consortium led by Magna to buy a majority stake in 
Opel.  GM's decision shocked both the German and Russian 
governments, not least as both sides wanted to use it as a 
basis for cementing ties in other sectors (ref A). 
 
¶5.  (U) Russian firms' investments tend to be strategic as 
well as commercial.  They already hold significant stakes in 
the travel company TUI, construction firms Hochtief and 
Strabag, and in mining firm Kali+Salz.  Russian Embassy 
Commercial Officer Dr.  Bondarev points out that Russian 
firms invest in Germany for many of the same reasons as 
companies from other countries: diversification, strategic 
 
BERLIN 00001602  002.2 OF 002 
 
 
access to the German and EU market and hopes for a good 
return.  While Germany is regarded by Russian firms as a 
highly competitive and challenging market, it offers the 
kind of predictable investment environment many Russians 
find attractive. 
 
Fall in Trade Propped Up by Export Credits 
------------------------------------------ 
 
¶6.  (U) Germany's exports to Russia have been sorely 
affected by the economic crisis.  In the first eight months 
of 2009, two-way trade fell by 60% compared to the same 
period in 2008.  The German government's export credit 
entity KfW stepped in to support trade flows through loan 
agreements with six Russian banks to help finance purchase 
of German exports by small and medium-sized Russian firms. 
The German government is currently considering further 
expansion of the export credit program.  Russia's exports to 
Germany mostly consist of oil and gas, and these have been 
relatively less affected.  Russia currently runs a trade 
surplus with Germany of 3.5 billion euros. 
 
Energy Relations: Mutually Dependent 
------------------------------------ 
 
¶7.  (U) Russia is Germany's principal energy supplier and 
depends heavily on energy revenues from Germany.  Germany 
purchases 34 percent of its oil and 45 percent of its 
natural gas from Russia.  Russia sells 80% of its gas to 
Europe, its greatest source of income.  This is part of an 
overall pattern of mutual energy dependency, which Dr. 
Kristin Westphal, an expert on the Russian energy sector at 
the German Institute for International and Security Affairs 
(SWP) characterized as "intervulnerability." Putting it more 
bluntly, Andreas Metz of the OA said, "we have no energy, 
but they have no money." 
 
¶8.  (U) Dr.  Westphal characterized Russia as a "less 
reliable energy supplier than the Soviet Union." Fear of a 
gas cut-off has been replaced by worries over possible price 
extortion, as Russia could be tempted to abuse its dominant 
position as Germany's chief energy supplier to increase 
prices.  Germany recognizes the need to diversity its energy 
supply, but few concrete steps have been taken.  The planned 
North Stream pipeline, which would run under the Baltic Sea 
and deliver gas directly from Russia to Germany, simplifies 
Germany's receipt of Russian gas, but does nothing to 
diversity supply and has aroused suspicion among Germany's 
neighbors. Note:  After the January gas crisis, MFA and 
Chancellery officials talked openly of Gazprom no longer 
having a "perfect track record" as a reliable business 
partner.  However, as the memory of the gas crisis faded, 
officials quickly forgot their new criticism of Gazprom. End 
Note. 
 
 
 
Tariffs: Cash Cow, Customs Union 
-------------------------------- 
 
¶9.  (U) The Russian Government's tariff policies continue to 
be a concern for German industry, as is its intention to 
create a customs union with Belarus and Kazakhstan.  Late 
last year, Russia increased import duties for new cars from 
25% to 35%, resulting in significantly higher prices for new 
German cars exported to Russia, while duties on used cars 
doubled.  German interlocutors note that customs duties 
still constitute a significant source of revenue for the 
Russian government.  Oliver Wieck of the Federation of 
German Industries (BDI) said 40% of the Russian government's 
non-energy revenues come  from customs duties.  A contact at 
the Association of German Chambers of Industry and Commerce 
(DIHK) reported that German freight trucks have to pay 2,000 
euros just to drive into the inspection bay; no receipt is 
given for the fee which presumably is pocketed. 
 
Comment 
------- 
 
¶10.  (SBU) The German-Russian economic relationship is 
complementary, as each needs what the other has to offer. 
The consensus in Germany's political and business 
establishment strongly favors engaging with Russia.  All 
hope that Russia will one day develop into a more "normal" 
business partner, but for now it remains anything but.  End 
comment. 
 
MURPHY