German business in Russia is not sitting on its hands
The decision to create the German-Russian Foreign Trade Chamber (Deutsch-Russische Auslandshandelskammer, AHK) was taken in Spring 2006 at high-level bilateral intergovernmental consultations in Tomsk, a large administrative center in the east of Western Siberia. The opening of this union took place in December of 2007 in Moscow, but AHK’s history started in the last century. It dates back to the establishment in Moscow in 1995 of the German Economic Union in Russia (Verband der deutschen Wirtschaft in der Russischen Föderation) – a novel commercial Russian juridical body which united firms and businessmen from Germany who conducted business in Russia.
Currently, the AHK, with its headquarters in Moscow, has a philial in Saint Petersburg and regional agencies in a series of Russian cities, as well as an agency in Berlin. What attracts German businessmen to Russia, and how do they feel in the Russian market? Capital Ideas discussed these questions with AHK’s representative Matthias Schepp.
Mr. Schepp, the main goals for foreign trade chambers and trade representatives are well-known: the advancement of economic interests, in this case Germany’s, in Russia, promoting development of bilateral trade relations, understanding economic and legal terms and market conditions in the Russian Federation, providing various types of services for German business, etc. Which of AHK’s goals in your eyes are priorities?
АНК represents the interests of German business in Russia and the interests of Russian business in Germany. Almost 70% of AHK members are German companies, and 22% are companies with Russian capital. In politically difficult situations, and right now there is exactly such a situation, business is the most reliable and stable bridge uniting our two countries – Russia and Germany.
You have been heading АНК for a relatively short period of time – since Spring 2016. What have you managed to accomplish in that time, what can you boast of?
First of all I would say the fact that the number of the chamber’s members has recently once again started to increase. In 2017, in comparison with the previous year, membership in the chamber grew at a fast pace: the growth of new members increased by 40% in comparison with the previous year’s numbers. On the other hand, we have managed to reduce the number of companies which have left the chamber by 20%.
Moreover, the Committee on Digital Economy was founded with three working groups: for startups, for safety and for electronic commerce – the area of the economy which includes all financial and trade transactions conducted by help of computer networks , and also business processes connected with conducting such transactions.
Aside from this, we have managed to affect certain legal processes. On January 1, 2018 a law on perfecting professional education came into force which specifies that the costs of training can include a variety of expenses – maintenance of premises and equipment used for training, labor, the cost of property provided for the learning process, and so on. This way a company’s professional development expenses can be deducted from its taxes. We presented this demand over the course of a series of years to our Russian partner, the Agency for Strategic Initiatives. This example demonstrates well that our chamber is giving a helping hand first of all to Russian companies, insofar as the aforementioned law, naturally, covers all companies which work in Russia.
Journalists and their respondents have managed to beat questions about sanctions to death. Nonetheless, restrictive measures against Russia are continuing to take place and sometimes it seems that no one intends to ever cancel them. Is German business ready to further function in the Russian market in such difficult conditions?
German business is the world champion for export, and in Russia it holds the first place for production localization. All of this is because it is able to adapt in an operative way to new conditions that arise. Director generals and other managers of German companies do not sit on their hands, crying that “oh, everything is so difficult” – they under no circumstances do so. On the contrary, they endeavor to quickly assess the situation and make decisions which will allow for them to quickly adapt to the new circumstances.
What attracts German companies to Russia? Some kind of tax premiums, cheap labor force, low productions costs, or something else?
In spite of the weak economic growth in Russia and “glacial period” in political relations between Russia and the West there is a visible boom in German investment in Russia. Volkswagen alone has invested an additional half billion euros in production in the Russian Federation. Not long ago BMW announced their intention to build a factory in Kaliningrad, and Mercedes Benz plans to launch automobile production outside Moscow in 2019. What is this boom connected to? German business is attracted by three factors. First, this is the weakened ruble. If you count in euros and dollars, then working in Russia has become practically twice as cheap, including, let’s say, to buy a factory or create a business. Let’s remember that not so long ago the course of the euro in comparison to the ruble was one of 35 or 40. Currently, it is one to 70. This allows managers of foreign companies to hire relatively well-prepared personnel. Therefore wages in Russia are currently reaching almost the same level as in China, but the quality of work in Russia is better.
The second factor resides in the bettering of the business climate in Russia. This tendency has been reflected in the Doing Business Report, which is research conducted annually by the World Bank and which assesses the simplicity in 189 countries of realizing business based on 11 indicators. According to this report, Russia rose last year to the 35th spot, while in 2011 it was only on the 124th place, between Uganda and Uruguay.
The third factor is import phase-out and localization policy. German business welcomes all stimuli in this regard which are offered both at the federal and regional levels. At the same time it views protectionism negatively. We, of course, require that German companies have the opportunity to interact with Russian firms as equals and demand that Russia view foreign investors as full-fledged partners.
Which German companies are represented in the Russian market? Are they mostly large concerns or small and medium businesses?
Practically all large German companies are active in Russia, but if you look at the 800 members of AHK, then small and medium businesses make up the majority. This fact reflects the power and strength of German economy, which rests on this kind of business. More than 90 percent of companies in Germany are small and medium businesses and frequently even family businesses.
In Russia there are a remarkable amount of foreigners, including German recruiters and consulting agencies for recruitment and providing various consulting services. Is it that these services are so in demand in Russia?
Yes, these companies offer similar services across the world. This without a doubt is good for these agencies’ Russian clients. They also partially serve the interests of foreign business in Russia.
Which German companies have come to Russia recently? How many businesses are working with German capital in the country?
Currently there are 4965 such businesses active in Russia. The strengthening of the German economic presence in Russia is taking place mainly based on the fact that German companies already located here are expanding their activities. Thus, over the last year a few “hidden champions,” as we call them, have opened or expanded their production. These are businesses which may not always be well-known, but whose products can be seen almost everywhere. Among them, for example, are Wika Mera, producer of measurement and regulation technology, which opened its factory in Moscow; Kermi, which manufactures heating equipment and whose production is also based outside of Moscow; or the medical and dietary supplement manufacturer Bionorica, which opened production in Voronezh.
The term “import phase-out” has already been said in our conversation. How actively do German firms take part in this process?
According to Bundesbank, in 2017 German companies invested over 1.6 billion euros in the Russian economy. This is the largest sum spent in Russia by the foreign business community.
Which of the most significant new projects does German business intend to implement in Russia this year?
Germany automobile manufacturing is traditionally strong. It is worth bringing up Linde, which is taking in large investments in Khabarovsk Krai. As you would expect, cooperation in the energy sphere is advancing, the start of which was laid back in the 1970’s. We hope that ultimately the Nord-Stream 2 pipeline will be built.
Please allow a personal question. Before heading AHK, you worked in journalism for a long time. In particular, you managed the monumental German journal Der Spiegel’s Moscow branch. How did a successful journalist suddenly become the head of a foreign trade chamber?
It seems to me that there is nothing surprising in this if you consider that 70-80% of my current work corresponds with what I did earlier, given thatI used to pay attention to both the economy and politics. Therefore for me this step was not in some way unusual or supernatural. De facto, little has changed for me. More over, the tasks I currently have before me appeal to me all the more because now I have the opportunity to not just write something, analyze, comment, critique, but actually influence the decision-making process.
You have been in Moscow for some time, it would be appropriate to call you an old hand. What do you think of the Russian capital, how much has it changed from the time of your arrival to the mega city?
Moscow has changed dynamically over the past years, regardless of the recession and economic crisis. All of my acquaintances who ended up in Moscow for the first time are truly surprised at how modern the city is. The Moscow Mayor’s team has managed to make the city appealing for residents. This means, for example, parks, internet access and the subway. Efforts are being taken to reduce the number of space in the center for cars and create more for people. And all of this happening right before us. If you will, we are talking about a breakthrough in its own way of the centuries-long paradigm of the capital, as during both the czars and the “red czars ” people served the capital as a symbol of empire, and now the the capital is starting to serve the people. For example: in Moscow you can park your car and then pay with your smartphone. This is still a long way away from happening in German cities.
There is nothing like this in Berlin?
No, there is not. The quality of digital services in Moscow are much higher than in Berlin. In this sense Moscow is a much more modern city. I am a fan of Moscow and even wrote a book about the Russian capital. It is called “Instructions for use: Moscow,” and is to some extent its own kind of “psychological guidebook.”
The final question which is traditionally asked is what do you think of the World Cup taking place in Russia? Did AHK take part in some way this sports holiday?
We are very happy that the World Cup 2018 is taking place in Russia and are sure that the host country will show itself off well. The German team is coming to the World Cup 2018 to defend its title as world champion in soccer. But Germany has something else to be proud of besides soccer. The fact is that German business is a champion in investment in the Russian economy, and this record will be presented as part of AHK’s multimedia project “Craftsmen Of Russia: Made According to German Standards,” which will demonstrate the accomplishments of German business in Russia. “Craftsmen of Russia” is a photo-album and contemporary website consisting of, most of all, beautiful photographs which famous photographers from Germany and Russia worked on. We will tell the story of 35 German companies in Russia – from concerns with a global reputation to new startups. The presentation of this project will take place on May 22 in the GUM on Red Square, while select photos will be exhibited on Stary Arbat and Chistoprudny boulevard in Moscow.