The Russian economy is an important partner for Germany. A new political ice age would hit German companies harder than others. Consumers also feel it when Russia turns on the gas tap. Do the dependencies go further?
The world’s most important supplier of wheat, the largest exporter of natural gas, and the leading producer of vodka: Russia has a number of trump cards up its sleeve in world trade. Geopolitically, the successor state to the Soviet superpower cultivates the image of a great power – and wants to be treated as such. In terms of the economy as a whole, the largest country in the world does not come close to this claim: With a gross domestic product of half that of Great Britain, it only ranks eleventh in 2020.
Nevertheless, the Russian economy is an important partner for Europe and especially for Germany. A new political ice age like in the times of the Cold War, which sets in motion a spiral of further sanctions, would hit German companies harder than others. Consumers also feel it directly in their wallets when Russia turns on the gas tap for political reasons – and energy prices rise.
In the ranking of foreign trade partners in 2020, Russia was ranked 15th for German exports and 14th for German imports, as calculated by the Committee on Eastern European Economic Relations. Compared to the situation before the last round of sanctions, the country has lost importance.
In 2014, the EU and US imposed punitive measures in response to the Russian occupation of parts of Ukraine. Even before that, according to the Kiel Institute for the World Economy (IfW), trade was not particularly dynamic, but in 2013 Russia was still in eleventh place in the export statistics behind Belgium (China was fifth at the time), and in imports with a share of 4, 5 percent at least in seventh place.
Russia draws strength mainly from resource wealth
According to the Committee on Eastern European Economic Relations, the value of German exports to Russia shrank significantly by 13 percent to 23 billion euros in the first year of the corona pandemic: export goods are primarily machines, chemical products, motor vehicles and vehicle parts as well as electrical engineering. German imports from Russia — oil, gas, petrochemicals and metals — fell a full 30 percent year-on-year to nearly €22 billion, partly due to lower energy prices.
Traditionally, Russia draws its strength mainly from its wealth of raw materials. As a leading supplier of crude oil and natural gas, it is also indispensable for Germany – especially for gas that is pumped into the country via pipeline. In 1970, the Federal Republic and the Soviet Union signed the first natural gas agreement. In a barter deal, Soviet natural gas was exchanged for western pipelines.
East German workers welded them together in the Ukraine. Since 1999, the gas has been routed to Germany and Europe through the Yamal-Europe pipeline (capacity: 33 billion cubic meters) and the Ukraine pipeline system (capacity: 120 billion cubic meters). The two strands of the Nord Stream1 pipeline can transport 55 billion cubic meters of gas directly from Russia. The commissioning of the Nord Stream 2 Baltic Sea pipeline remains controversial.
Today, Germany buys 16 percent of Russian gas exports, a fairly stable share over the years – and together with Italy and France almost half of the supplies concentrated in Europe and Eurasia. According to the International Energy Agency (IEA), in 2020 Germany took around a third (56 billion) of the 168 billion cubic meters of natural gas that Russia supplied to Europe. With domestic consumption of 87 billion cubic meters in the same year, this is a high proportion. The second most important source of natural gas for Germany is Norway, followed by the Netherlands.
Natural gas dependencies are mutual
Especially with gas, a short-term substitution is not possible. Unlike oil. The EU is also Russia’s largest customer (48 percent), of which Germany, the Netherlands and Poland account for the largest quantities. China purchases far more oil than gas, accounting for 31 percent of Russia’s export volume. A situation that Moscow intends to change soon with a targeted growth strategy.
Except for natural gas imports, where there is a substantial German dependency, Russia does not play a major role in either exports or imports. At the same time, energy experts point out that the dependencies for natural gas are reciprocal – due to the fact that it is tied to the existing pipeline network.
Even Russia cannot open up alternative export markets in the short term, although it has been working intensively on this for several years. In 2019, the first gas pipeline to China went into operation. According to the IfW, in 2012 only 0.1 percent of the Russian production flowed there; In 2020 it was already five percent and eleven percent for Asia as a whole.
The first “Power of Siberia” gas pipeline to the Chinese province of Heilongjiang is expected to reach full capacity by 2025, where it will mainly replace coal as an energy source. At the same time, another tube via Mongolia is being planned. Moscow also wants to open up new gas markets beyond Europe by expanding its liquid gas capacities. According to the IEA, Russia’s energy strategy, adopted in 2020, aims to export about the same amount of liquid gas by 2035 as it does today via pipelines.
Importance of Russia trade for Germany
The People’s Republic is already the most important trading partner for Russia’s foreign trade and is increasingly consolidating this position. In 2020, Russia completed more than 18 percent of its foreign trade with the Middle Kingdom. Germany is the second most important trading partner at 7.4 percent. This is followed by the Netherlands, which plays a major role as a trading center for raw materials.
Almost a quarter of Russia’s imports come from China and around ten percent from Germany – before the sanctions were imposed it was twelve percent. In terms of exports, China (14.6 percent), the Netherlands (7.4 percent), Great Britain (6.9 percent) and Germany (5.5 percent) take fourth place. According to the customs administration, Russia’s imports from Germany rose by 22 percent in the first nine months of 2021, and exports by 29 percent.
While Russia as a whole increased its imports by more than a quarter from 2015 to 2020, exports fell slightly, according to the GTAI economic service. This was due to the slump in oil and gas, the export value of which fell by a third. Mineral fuels accounted for as much as $142 billion of the total export volume of $337 billion.
The question of dependencies on Russia always becomes relevant when there is speculation about tightening sanctions against Russia – as is the case now in view of the threatening situation for Ukraine on the border with Russia. As early as 2014, the IfW considered the importance of trade with Russia for Germany and most EU countries to be limited – with the exception of natural gas. In addition, Russia is just as dependent on the income from the raw materials business as it is on the import of technology-intensive goods from the West. The Russian economy would therefore suffer much more severely than the western economies from tougher sanctions.
How much has the business climate cooled?
Proponents of a tougher stance on Russia also argue that the 2014 sanctions will only affect a tiny part of the Russian economy anyway. The potential for a broader range of financial, technological and investment tools is considered to be much greater. So far, a rather narrow trade segment has been directly affected: in the case of export bans, it is primarily military goods and equipment for the development of offshore, fracking or underwater fields in the oil industry, as well as all products from Crimea. Counter-sanctions imposed by Moscow affect imports of certain foods.
In retrospect, according to a 2018 investigation, the sanctions had a more indirect trade-dampening effect: through US financial sanctions against key Russian financial institutions and energy companies, the list of which grew over time. Accordingly, the Russian banking system was weakened, and the uncertainty about which financial relationships are permissible at all made financing for export transactions with Russia more difficult.
Germany bears a heavier burden than others in this development, so the conclusion. Of the $4 billion in trade lost each month, exports from sanctioning countries accounted for $1.8 billion, or 45 percent, and Russia for 55 percent. The EU suffers 92 percent of the damage, with Germany taking the lion’s share at 38 percent, or $667 million in trade losses per month. Ex-IfW boss Markus Felbermayr put the “very unequally distributed” costs of sanctions for Germany at around 0.2 percent of economic output – in France it is much less.
The extent to which the business climate has cooled can also be seen from the investments made by German companies. The Eastern Committee regrets the increasing cuts in investment programs and underlines the importance of Russia for the German energy transition. According to the Bundesbank, net direct investments in Russia had already fallen to around 2.1 billion euros in 2019 – 36 percent less than in the previous year. Bureaucratic obstacles, sanctions from the EU and the USA and protectionism are given as the reason for the decline.
This article is first at capital appeared.