The “mal-calculation”
It took a while. But it had to come, the public warning shot – after what must have been a ferocious lobbying campaign behind closed doors. No one in Germany is allowed to get in the way of the sacrosanct exporters. The German economic model, to the chagrin of neighboring countries, is based on them.
It wasn’t as bombastic as US Secretary of State John Kerry’s blast to lawmakers that the Ukrainian debacle could “get ugly fast,” and “in multiple directions,” but it had the heft of the German export industry.
Anton Börner, president of the German Association of Exporters (BGA), which represents 120,000 companies, the lifeblood of the economy, warned at a press conference in Berlin that further escalation of the crisis in the Ukraine could hit exporters very hard. He said that the BGA expected exports to rise 3% to €1.13 trillion and imports 2% to €914 billion for a trade surplus of €215.6 billion – the highest in history. But “if the crisis in the Crimea escalates further,” these wondrous forecasts of endlessly growing exports and surpluses “could turn very quickly into a mal-calculation.”
The sanction spiral
Further intensification of “the most serious political crisis in Europe since the end of the war in former Yugoslavia” would degrade bilateral economic relations between the EU and Russia. He warned not to underestimate the drag of secondary and tertiary effects on the world economy. “Russia itself, Europe, Germany, and the whole world have a lot to lose,” he said. “But if there’s a sanction-spiral, Germany has the most to lose.”
About 6,200 German companies were trading with Russia or had invested there. The bilateral trade volume was over €76 billion last year. And German companies have invested €20 billion in Russia. The “sanctions-spiral” that is currently gaining momentum could have “unforeseen consequences,” especially for Russia, he said. They’d be “painful for the German economy, but life-threatening for the Russian economy.”
And there’d be a price to pay, not only of economic nature, but also of political nature, he warned.
Better than pushing someone into a corner
“We merchants are always in favor of keeping a communication channel open,” he said. Within the Western world, Germany had the best connections to Russia, politically, diplomatically, economically, and culturally. So it would have to play a decisive mediator role, Börner said. “Talking is better than pushing someone into a corner.”
Given the “inexperienced and opaque” Ukrainian government, there were additional uncertainties – another reason to deescalate the crisis. The EU would need to integrate Russia and Putin in the decision-making processes, “at eye level and as part of the solution.” Putin should be given the “widest possible understanding for his situation,” but at the same time, it should become clear that unilateral changes of international contracts and borders would “lead his country to the sidelines.”
And the banks?
It isn’t just German exporters that are fretting, and lobbying with all their might. Russia, with an economy that is already stagnating, and dogged by vicious bouts of capital flight, has$732 billion in foreign debt. Relatively little of it is sovereign debt, but nearly $700 billion is owed by banks and corporations – most of them owned or controlled by the Kremlin. Oil major Rosneft and gas mastodon Gazprom owe $90 billion combined to foreign entities; the four state banks Sberbank, VTB, VEB, and Rosselkhozbank owe $60 billion. Some of this debt matures this year and next year.
US banks are marginally involved. Between Bank of America, Citigroup, JPMorgan, and Wells Fargo, they have only $24 billion on the line. But European banks and insurance companies are up to their dirty ears in this suddenly iffy and potentially toxic Russian debt.
When it comes due, it will have to be rolled over, and some of the companies will need to borrow more, simply to stay afloat. Alas, the current sanction regime of visa bans for the elite, asset freezes, and trade restrictions could make that difficult. Then there’s the threat, now more broadly but still unofficially bandied about, that Russian companies should simply default on this $700 billion in debt in retaliation for the sanctions.
Some European banks, including some German banks, might crater. Even the possibility of a major loss would further rattle the confidence in these banks with their over-leveraged and inscrutable balance sheets and their assets that are still exuding whiffs of putrefaction. And this sort of fiasco, as the financial crisis has made clear, has an unpleasant way of snowballing – and taking down the already shaky global economy with it.
During the financial crisis, German exports collapsed, banks toppled and got bailed out, and the economy experienced its two worst quarters in the history of the Federal Republic. No politician in Germany has any appetite to re-experience that. And the banking industry, with its powerful and long tentacles winding their way through the hallways and doors of the German government, has been assiduously at work, quietly and behind the scenes, to whittle any sanctions down to irrelevance.
Washington’s defaulting on an agreement with Russia about Ukraine’s future, and the prospect of NATO troops in Ukraine, convinced Putin and much of the Russian elite that there’s no point in negotiating with the US. Big risks lie ahead. Read…. From Now On, No Compromises Are Possible For Russia
