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24.09.2019

RUSSIA: TIME TO RECALCULATE

How effective are the economic sanctions against Russia really? After five years it is time for an honest summary.

By Anke Henrich

In early 2014, the world watched the events unfolding on the Crimean Peninsula and a little later in the east of Ukraine with either anxiety or horror, depending on their interests. Following the military occupation of Crimea, Russia's President Vladimir Putin signed a treaty incorporating the peninsula into the Russian Federation on 18 March 2014, citing a referendum of the Crimean population that has not been internationally recognized to this day.

The reaction from the European Union followed more than three months later, with the imposition of an embargo on Russia due to the, in its view, illegal annexation of Crimea and the coastal city of Sevastopol.

The embargo, which also affects German mechanical and plant engineering companies, still applies today, five years later. However, its usefulness is disputed as the situation in Crimea has altered little since then. "Now other states like China are supplying the Russian market. They will remain and defend their position. It makes me worry about the future," comments Reinhold Festge, who until 2013 was an Executive Partner at mechanical engineering company Haver & Boecker in Oelde, Westphalia.

Like many other companies, the manufacturer of packaging machines for bulk goods has also suffered from increasing bureaucracy when doing business with Russia following the annexation. As the head of a family company founded back in 1887, Festge can look back on a long history. There have been plenty of crises. But he adds: "I have never seen sanctions achieve the political success they were put in place for. They simply give other countries the opportunity to claim market shares." Festge, born in 1945, does not mince his words: "I generally see a tendency to use sanctions when policies fail."

As well as individuals and companies, the EU’s sanctions against Russia also concern financial transactions, weapons and the export of dual-use goods, i.e. products that can be used for both civilian and military purposes. In particular the issue of dual-use goods affects many mechanical engineering companies, as they have difficulty proving that their machines and plants will be used exclusively for civilian purposes.

The long arm of the USA

In addition, the US government passed a legislative package ("CAATSA") with far-reaching sanctions against Russia in July 2017. This also enables punishments for companies from third countries that do not comply with the export restrictions deemed necessary by the US.

This August, the US imposed further sanctions against Russia due to the poisoning of the former Russian agent Sergei Skripal. Among other measures, Moscow's access to international credit is to be impeded and the export of goods and technology to Russia that could be used for chemical or biological weapons restricted. For German companies this means having to consider their business strategy before making transactions involving Russia; after all, this could endanger their access to still more important business in the US.

For its part, Russia has reacted by initially introducing a ban on imports of many foods from the sanctioning countries. At the same time, it has increased state support for its own mechanical engineering companies in order to reduce its economy's dependency on exports. Putin had already tried to protect his industries with protectionist measures before the annexation; now he is clearly using the West's sanctions as a reason to go further.

Both sides have brought out the big guns. At their summit in Biarritz in late August, the heads of state and government of the G7 countries once again discussed whether to let Russia back in to the group. They decided against.

China spots an opportunity

The sanctions - currently slated to last until 2020 - do not make business any easier for mechanical engineers from Europe. But the weak Russian ruble and the fallen oil price are having an even greater effect, as Russian customers do not have any money to invest. German machinery exports did rise slightly again last year by 2.6 percent compared to the previous year, to 5.4 billion EUR - but this is compared to a much lower basis than at the start of the decade. The first half of 2019 once again saw exports fall by 8 percent compared to the previous year. They are far from recovering to the level they enjoyed before the sanctions - machines worth a total of 7.6 billion EUR were supplied to Russia in 2013. German banks continue to respond very hesitantly to financing requests for Russian export business.

A more detailed look at the export statistics reveals that it is primarily the Chinese government that has immediately exploited the competitive advantage of being able to supply goods to Russia without any access restrictions. This advantage is accompanied by cheap loans and Chinese machines that are ever-improving.

In 2016, two years after the EU sanctions entered into force, China had already replaced Germany as the most important foreign machinery supplier. Russia is now only in twelfth place in the list of German export recipients, down from fourth in 2014.

For Carl Martin Welcker, President of VDMA, the conclusion is clear: "After five years of sanctions, it is now time to assess whether they are having the desired effect. We are not demanding radical action; we just feel it is appropriate to take stock. The EU needs to reappraise its position." He is also worried that the German economy is increasingly being made liable for achieving political goals.

Further Information

VDMA Foreign Trade Department   | Haver & Boecker

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Contact
Monika Hollacher, VDMA Foreign Trade Department.