The German economy continues to believe in Russia
The Russian-German Chamber of Commerce (RGCC) recently changed its address and acquired property in Moscow, moving into the spacious quarters in one of the Russian capital’s modern business centers. Does this step mean that the RGCC is ready to take on new challenges and broaden the scope of its activities? What is the current status of our bilateral economic cooperation? RGCC’s Chairman of the Board Matthias Schepp answered these and other questions in an interview with Capital Ideas.
Mr. Schepp, before we talk economics, a bit about geography. Recently, the RGCC moved from the House of the German Economy in Moscow to the Fili Grad business center. What was the reason behind this decision?
Acquiring a new office building was a strategic decision which our company members were almost unanimously in favor of. We used to rent a very expensive office in the center of Moscow. But I don’t like investing in pretty walls, I like investing in strong people. We decided to stop renting and acquired a new office in the modern Fili Grad business center, which incidentally was built by a famous German architect with Russian roots – Sergei Tchoban. At this point, a mortgage is cheaper than making rent payments at our former location. So we cut down on our expenses and freed up valuable resources for our key tasks – representing the interests of our 900 member companies, providing services for German business, and advancing Russian-German business relations.
Since you aren’t renting the new RGCC space inside the Fili Grad business center, like you used to do at the House of the German Economy, one can’t help but conclude that owning property means the RGCC is in Russia for the long-term. Is this correct?
Of course. This is a serious statement – to purchase real estate in spite of the skeptics during a time of sanctions, protectionism, and a new confrontation between Russia and the West reminiscent of the Cold War. The German economy continues to believe in Russia. We worked closely with the Government of Moscow to pick the ideal location. This building with elegant architecture by the famous architect Sergei Tchoban in Fili Grad symbolizes a breakthrough, ambition, novelty and the 21st century. We need to be located very close to our key partners, who have moved to Moscow City – the Ministry of Economic Development headed up by Maxim Oreshkin and the Ministry of Commerce and Industry headed up by Denis Manturov. The residence of our chamber’s Vice President Alexey Mordashov is also located nearby. We are also happy that the Roscosmos State Corporation is building its new headquarters close to us as well.
In spite of the location change, your goals remain the same: to strengthen economic cooperation between Germany and Russia and to provide support for German business in the RF, as well as for Russian business in Germany. What are the chamber’s priorities right now?
The interests of our company members, together with the challenges of our times, are and continue to be the key guideposts for our operations. One of the most important and long-term trends right now is digitalization. Within the scope of the German-Russian Initiative on Digitalization (GRID), we work with our partners – the Russian Union of Industrialists and Entrepreneurs, the German Committee on Eastern European Economic Relations, and company members – set up cooperation and exchange of best practices between German and Russian enterprises from the spheres of digital manufacturing and Industry 4.0. At this time, companies that have joined GRID include Rostelecom, Rostec, Skolkovo, Volkswagen, Sinara Group, TMK, Remondis, Kaspersky, Siemens, SAP and Bosch. Another pressing challenge in Russia is waste processing, and here we see a lot of potential for cooperation with Germany. The world-famous waste management company Remondis, an RGCC member, has been operating in Russia for almost ten years already. Eight years ago, they invested into implementing a separate waste collection system in Saransk. The company chairs the RGCC group on issues concerning environmental protection and waste management. On 20th November 2019, we have launched the digital platform “germantech” (http://germantech.ru/) where Russian companies can find German technology and services for the creation of a waste management industry with high recycling quotes and modern environment protection standards.
At the same time, the importance of the Eurasian Economic Union (EAEU) for our member companies is growing. We are developing and supporting a constant dialogue on all issues related to technical regulation and synchronization of EU standards with EAEU standards, and also facilitate effective communication between companies and relevant organizations. The RGCC’s accomplishments within the scope of this partnership were recognized by Chairman of the Board of the Eurasian Economic Commission (EEC) Tigran Sargsyan, who was present at the opening of our new office in Fili Grad this summer. He presented us with an order for our contribution to the development of EAEU’s cooperation with Germany and the European Union.
The Russian-German Chamber of Commerce is and continues to be the largest foreign business association in Russia. Because of the crisis in the global economy and tense relations between Russia and the West, many German companies are leaving the Russian market and being replaced by other companies. How many members does the RGCC currently have, which new German companies have recently entered the Russian market, and how many of them are operating in the RF?
There are currently almost 4,500 companies with German involvement. And in spite of all the challenges, almost no big German companies have left the Russian market. On the contrary, we’ve seen the number of RGCC members grow by 10% over the past two years. Currently, we have 900 members. The scope of their operations varies from production, construction, and logistics to IT, legal consulting services, communications, investments, and banking. The growth trends of German business in Russia demonstrate that these companies will continue to operate here in the long-term. And this doesn’t just go for major players, but also small and medium-sized business representatives. Today, the RGCC is the only business association that is growing.
In spite of the economic crisis and the complicated relationship between Moscow and Berlin, Germany continues to actively invest in Russia. How do you explain this?
It’s true that, according to the Bundesbank, direct German investments in Russia last year reached 3.3 billion euros – a record high since the financial crisis of 2008. Two factors explain this – import substitution and a weak ruble. To protect their share of the market, German manufacturers have to localize production in Russia. And the weak ruble is an advantage, since labor costs in Euros have dropped by almost half. Still, it’s important to make sure that these policies don’t transform into a new type of state planning, where bureaucratic regulation hinders business activity and prevents business from developing and add efficiency, productivity, and value to the country.
As you already said, in 2018 German companies invested over 3 billion euros in Russia. What kind of numbers should we expect to see in 2019?
The Bundesbank hasn’t published the numbers yet, but we know that direct German investments amounted to 1.7 billion euros in the first quarter of 2019. And we hope that this positive trend is preserved. Still, according to our business climate surveys, the expectations of German entrepreneurs regarding further improvements in the state of affairs remain restrained.
How intensively is Russian-German trade developing right now? According to the German Committee on Eastern European Economic Relations, Poland and the Czech Republic moved into first and second place in terms of trade volumes with Germany in Eastern Europe. Why did Russia lose its leading position?
There are a number of factors that explain this, both internal and external. In terms of external factors, it’s definitely the EU sanctions against Russia and the counter-sanctions, as well as the US sanctions against Russia. In terms of internal factors, it’s poor market conditions, over-regulation of the market, and the fact that the state still plays a big part in the economy. If it weren’t for these obstacles, trade between our countries would develop much faster.
Will Russia be able to emerge as a leader in this sphere and what needs to happen to enable this?
Over the past few years, alongside a few losses, Russia has made serious progress. It didn’t crack under the double pressure of the sanctions and the relatively low prices on raw materials. Russia was able to improve its business climate in a number of regions and key areas of the economy. This is why it has moved up in the World Bank’s Doing Business rating from 124th place in 2011 to 28th place. It’s only 6 places away from Germany right now. The economy needs more room to breathe through reductions in bureaucracy and government regulation. This will create new opportunities, like in the exports of non-raw materials. In this regard, we launched the “Single Window for Export Assistance” jointly with the Russian Export Center this year. We consult Russian companies in issues related to exporting products to Germany, as well as German companies looking for partners in Russia. These measures, created to provide companies with support, can improve the development of foreign economic ties and trade, as well as boost the appeal of the Made in Russia brand on the European market.
Germany has consistently opposed Western sanctions against Russia. How much are these restrictive measures preventing the development of economic ties between Germany and Russia?
German companies doing business in Russia encounter serious challenges because of the sanctions, which have cost them billions of dollars. In our surveys, Germany companies definitely express opposition to the restrictions. But even under these conditions, they don’t stop and continue to develop their business. 63% of survey respondents don’t plan on cutting back on business activities in light of the US sanctions, and 29% responded they would be even more active! Just 8% would reconsider their plans. And in spite of the sanctions, German business in Russia is able to grow and remain confident about the future. In that same survey, 70% of companies described Russia’s business climate as “satisfactory” or even better.
Tensions around Nord Stream 2 have not subsided, as its opponents continue attempts to block the project’s implementation. One of their arguments is that the project would increase the EU’s dependency on Russian gas, which would turn Germany into Moscow’s “energy hostage.” What is your opinion on this?
Germany and Europe need cheap energy in order to retain their positions against the backdrop of global competition. Nord Stream 2 is indispensable in this respect. And this is why the Russian-German Chamber of Commerce published a position document with participation of Ministers for Economic Affairs Peter Altmaier and Maxim Oreshkin this year within the scope of the Conference for the Improvement of Russia’s Investment Image in Germany, which we hold in Berlin. This is how we’re conveying that the discussion about dependency is nonsense. Unlike ten years ago, there are options to purchase liquified natural gas on the global market if the so-called “big bad Kremlin” decides to shut off gas access. In terms of dependency, it’s bilateral: Europe needs gas, and Russia needs money.
At the last Saint Petersburg International Economic Forum, Russia and Germany signed a declaration of intent on “Russian-German Partnership for Efficiency.” What does this program entail, and how is it different from the “Partnership for Modernization” from 2008?
The partnership for efficiency sets the framework for many existing forms of cooperation aimed at increasing the efficiency of Russian companies with the help of German technologies. Unlike the “Partnership for Modernization” with Russia, which was announced by the former Minister of Foreign Affairs and the current President of Germany Frank-Walter Steinmeier in 2008, the partnership is less politicized and therefore has a better chance to succeed.
Could you give a couple of specific examples of German business accomplishments in Russia in the last few years, or ambitious projects that are implemented with participation from the RGCC?
There are lots of examples to bring up here. Over the past year, we took part in the launch of several new manufacturing facilities. One memorable event was the opening of the Mercedes-Benz plant outside of Moscow, which will manufacture luxury cars. Investments into the project amounted to over 250 million euros, and the plant will create 1,000 jobs. Linde Gas Rus intends to build an air separation plant for the Novolipetsk Metallurgical Plant by 2021, investing over 109 million euros in the project. In five years, Volkswagen invested around half a billion euros into the expansion of production capacities in Kaluga and Nizhny Novgorod. This summer, Volkswagen Group Rus signed a special investment contract that will be implemented on existing facilities for the production of cars and SUVs. The project entails a significant amount of investment into R&D, as well as in-depth localization, especially in the production of engines and gearboxes. Smaller companies are also picking up speed. For example, in July the German producer of food flavors Symrise, one of the leading players on the global market, launched a new line for the manufacture of liquid flavor agents. And just recently Henkel opened a new plant for the production of dry mixes in Leningrad Oblast. At the same time, a Knauf subsidiary launched the manufacture of innovative modular homes outside of Moscow. There are plenty of examples like this. They serve as proof that investing in Russia is still very appealing.