Russia Sanctions Extract Their Pound of Flesh – From Germany

The elegant sanction spiral the US and the EU are imposing on Russia has not been, let’s say, welcome by German business tycoons. But they can’t fight it directly. They have to do it indirectly, by evoking dire consequences.

So, over the weekend, Daimler CEO Dieter Zetsche told the public that business in Russia had been booming, with sales still up 20% in the first half, “but now the momentum is going down.”

Even before the start of the Ukrainian fiasco, the Russian economy was in “a difficult phase,” and the sanctions leave it “further impaired,” he said. “This impacts the Russian car market and thus also Daimler.” Russia is a smallish but important market for Daimler – as is the case with many German companies. But car sales in Europe have been abysmal. And Daimler had been counting on Russia as one of the bright spots.

But being a good soldier of Germany AG., he cannot publicly attack the government’s foreign policy. Domestic policies, however, such as the introduction of the first minimum wage, are a fair target for these seasoned and ultra-wealthy warriors [ Extortion Over Minimum Wage In Germany: BMW, Daimler, VW Threaten to Offshore Production].

But attacks against foreign policy must be indirect. And so he said what they all say, that it was “very clear,” when it comes to foreign policy, there is “the primacy of politics,” he said. “The economy has to adapt to the conditions set by government policy – independent of the direct consequences.”

And the direct consequences are not good for Daimler. The company has deep connections in Russia, including equity investments, such as a 15% stake in Russian truck builder Kamaz. And it’s assembling trucks in Russia under the Mercedes-Benz and Fuso brands. Other German companies are similarly involved, and the sanction hurt.

This phenomenon has already shown up in the Ifo Institute’s Business Climate Index, which has been dropping since March, and in its Business Expectation Index, which has been dropping since the beginning of the year. All four sub-indices – manufacturing, construction, wholesaling, and retailing – have taken a hit.

Now the media-savvy and always on the forefront economist Hans-Werner Sinn, president of the Ifo-institute, chimed in with a piece in the Wirtschaftswoche. The sanction spiral against Russia and the conflict in the Ukraine have already damaged the German economy. “The economic recovery that began in the second half of last year and continued until winter seems to take a longer break now,” he said. And Ifo’s growth estimates last month of 2.0% for this year and 2.2% for next year? Forget that. They’ll have to be lowered.

“The assumption that the second quarter of 2014 compared to the first, grew by 0.3% is no longer tenable given the current state of things. More likely is zero growth.”

And for the third quarter? “The currently estimated growth of 0.4% will likely have to be revised down. That will significantly reduce the annual growth forecasts for 2014 and 2015.”

In Q1, Germany enjoyed a bout of growth of 0.8%, in part due to the unusually mild winter weather, the fastest in three years. At the time, it sparked a lot excitement, now obviated by events. Even though the Bundesbank a month ago raised its annual forecast for Germany by 0.2 percentage points to 1.9%, it too saw stagnation in Q2. And now Q3 and Q4 are looking increasingly iffy.

But Sinn was quick to point out, by drawing a fearsome parallel, that Germany won’t plunge into the kind of economic hole as it had during the Financial Crisis, he said. He had his reasons: “First, the domestic economy is supported by a considerable increase in consumption; secondly, the service sector is very solid; and thirdly, the Ifo indicator, compared to the earlier periods, softened only moderately. Thus, there is no resemblance to the disaster of 2008.”

But by bringing up the “disaster of 2008,” he reminded Chancellor Merkel – and for that matter, President Obama – what politics could do to the economy, if the political leaders continued to storm down the road of economic sanctions. It was a warning by Germany AG, echoing Daimler CEO Zetsche: the German economy lives and dies by its exports, and it cannot afford an economic conflict with Russia.

European Council President Van Rompuy had a dream: the sanctions “should have a strong impact on Russia’s economy” but only “a moderate effect on EU economies.” But the Association of German Chambers of Commerce and Industry (DIHK) warned that exports to Russia would plunge 17%, after having plunged 16.9% in April, when the sanctions began their handiwork, and 17.5% in May. Read….  Sanction Spiral Successful: German Exports to Russia Plunge

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