German exports to Russia have been on the decline since 2013. But despite the sanctions currently imposed by both countries, industry insiders remain positive with regard to the future.
Germany ships goods worth EUR 36 billion to Russia every year, which amounts to about 3% of the former’s total exports. Manufacturers of machinery contribute about one fifth of these trade volumes. The devaluation of the rouble, a sluggish domestic market in Russia, a dramatic drop in demand in major sectors, such as the automotive industry, and a growing reluctance of Russian customers to purchase investment goods have already had a negative impact on German trade with Russia since mid-2013. In the first half of 2014, exports of German machinery to Russia continued to decline. Russia is the fourth-most-important sales market for these companies, after all. According to national trade associations, sales in the sector fell by 19% compared to the same period last year.
The souring of relations caused by the Ukrainian / Crimean conflict, and the subsequent sanctions imposed by the EU on Russia, further exacerbated the problems for companies exporting to Russia. Acquiring new customers is particularly difficult, because companies in many sectors of the economy are currently hesitating to invest in new projects. Russia has responded to the EU measures by imposing a ban on foodstuffs from any country that implements the EU sanctions.
Falling volumes and financial requirements
Germany’s freight forwarding logistics industry is directly affected by these developments. Ingo Hodea of the Association of German Freight Forwarders and Logistics Operators (DSLV) says that «freight forwarders involved in the Russian trade are facing significant reductions in trade volumes. This applies not only to high-tech products and orders received by the machine and plant equipment manufacturing industry. The embargo that has been imposed on financial institutions also has an impact on foreign trade with Russia, by making it more difficult to secure funding.» He additionally pointed out several imponderables for the future. «The industry is particularly concerned about the imprecise wording of the embargo criteria, which allow too much scope for interpretation and thus increase uncertainty for companies doing business there,» he explains. The DSLV is currently endeavouring to provide the industry with a clear survey of the bans and licensing requirements which were introduced with the embargo regulations.
Sven-Boris Brunner, CEO of M & M Militzer & Münch and an expert on the Russian economy, mentioned other problems, including greater administrative expenditure. «For us, inspections have become routine, thanks to our experience with embargoes in other areas, and we have defined precise procedures and trained our employees in this regard. But it is our customers who’ll be the most affected by the changes, since they’ll have to provide more documentation for their consignments.» Brunner added that it is still to early to evaluate the impact of the embargo on Russian trade and to separate seasonal differences from effects that can be specifically attributed to the sanctions. He reported slight reductions in the volume of goods that are subject to dual-use regulations. «But we haven’t yet lost any business deals of note. On the other hand, some major projects are currently on hold, and investors are biding their time. In any case, I fear that the embargoes could slow down long-term investments in industrial projects. I’m afraid that we could lose business that way,» he supposes.
Besides patience, companies require entrepreneurial flair, creativity and flexibility when they are faced with the need to restructure goods flows and logistics chains, recent industrial surveys conclude. For many simple goods, companies can quickly find an alternative that allows them to keep their supply chains intact. The business environment for investment goods is more challenging, however.
Many freight forwarders have become more cautious with their forecasts regarding the prospects for goods volumes to be handled to and from Russia in future. Brunner remains optimistic. Russia continues to offer excellent market opportunities for the medium and long term, he said. «The Russian and German economies have become more and more interconnected over the last 20 years, and structures have grown accordingly,» the CEO continued. «M & M Militzer & Münch is determined to come out of the current situation stronger than before, and we’re looking forward to the future with optimism. We’re confident that a political consensus will be found.»