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Friday, September 19, 2008

Germany's Exposure to Russia

I have just written an extended analysis of the recent financial turmoil in Russia. At the end of the day the article doesn't really say that much that is actually new. Obviously the Russian economy is hardly likely to experience melt down, and it is a long way from being the Baltics, but growth will probably slow considerably in the short term, and this is bound to be bad news for Germany, since the German economy is pretty dependent on Russia via one channel or another.

Basically the sudden collapse of confidence in Russian financial markets threatens to blow a hole in the business outlook for German exporters. The risk is essentially that, as the price of oil continues to fall and Russian companies struggle to tap new lines of credit, demand for German goods could start to wane, and this would be very bad news given the German economy's export dependence and given that Russia is a significant export market for Germany.

Basically exports to Russia have offered noticeable support to flagging German growth, as first the US and then Southern Europe and the UK slackened their demand for German products, so I think slowing growth in Russia (and of course China) may well mean that the German outlook deteriorates significantly.

The big risk is not just that Russia ceases to be such an important source of German export demand, but that the slowdown in Russia also impacts on other countries who are close trading partners of Russia, such as those in central and eastern Europe. This will then hit Germany indirectly, since these countries are also customers for German exports.

The popularity of high-tech, German-crafted machinery in Russia has helped its exports rise by 23 per cent in the first half of this year to €15.8bn ($22.5bn, £12.6bn), according to the latest data from the German Federal Statistics Office. To put this in perspective, this is roughly 45% of the €36.8 billion euros sent to the USA over the same period. And exports to the UK dropped 1.5% in H1 2008, while to the eurozone they were only up 3.9%. So the importance of exports to Russia has not been so much the volume of exports, as the fact that this market has represented (along with China) new export growth, and this is what the German economy needs, constantly, since domestic consumption demand remains so perenially weak.

At the same time German direct investment in Russia reached €14bn last year. About 4,600 German companies have branches in Russia, including high-profile energy projects involving Eon and Wintershall, a subsidiary of BASF, the world’s largest chemical company.

One widely quoted sign of the increasing nervousness among German businesses is the increase in government export credit guarantees for sales to the Russian market. In 2007 the German government wrote €3.2bn worth of protection for German exporters and lending institutions against the possibility of default by Russian debtors, a rise of 61 per cent compared with 2006.

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