Energy, investments and exports, the damage of the sanctions in Germany

The intense economic relations between Germany and Russia already make it possible to foresee a strong impact of the sanctions on the main European power, especially in the energy field, although they also endanger business investments and exports.

Russia represents 2.3% of German foreign trade and according to the Federal Statistical Office (Destatis) in 2021 German imports from Russia grew 54.2% -mainly due to the increase in gas prices- to reach 33,100 million euros.

Exports grew 15.4% to reach 26.6 billion euros.

Since 1993 Germany has had a deficit in the trade balance with Russia, except for the year 2020, when there was a sharp drop in gas and oil prices, which represent 59% of German imports from that country.

According to the economist Volker Nitsch, a professor at the Technical University of Darmstadt, the effects that the sanctions may have on the German economy cannot be seriously quantified at the moment.

“The effects will be the result of the concrete restrictions that have been imposed, the great uncertainty that exists and the likely measures against Russia,” Nitsch said.

“The repercussions can vary a lot from sector to sector. First of all, the big companies may have the resources to avoid them,” he admitted.

Germany was one of the countries within the European Union (EU) that has been most reluctant to restrict the access of Russian banks to the international transmission system known as Swift.

And it is that a complete exclusion could have led to a total collapse of trade – importers would not have been able to pay their invoices and exporters would not have been able to collect them.

The solution that was reached will allow to maintain, at least in theory, a certain commercial flow, which was key for Germany, above all in relation to the energy sector.

“Germany wants first and foremost imports of raw materials from Russia to remain possible,” Nimtsch explained. The central issue is gas and, to a lesser extent, coal and oil.

However, and despite the formula that was found regarding the Swift, Jonathan Hackenbroich, of the European Council on Foreign Relations, maintains that Germany is preparing for a possible cut in relations with Russia in the energy sector.

Hackenbroich maintains that the harshest sanction against Russia is not related to the Swift but to the restrictions on the Central Bank, which will find it difficult to contain inflation and the panic of citizens due to the fall of the ruble.

The sanctions related to the Swift, according to Hackenbroich, increase the pressure and are an important political signal.

“Europe is preparing for a long-term economic war. Germany’s decision to support central bank sanctions means that it has the possibility of an energy supply cut-off by Russia,” Hackenbroich said.

According to a study by the Kiel Institute of World Economy (IfW), except for gas imports, where there is a certain degree of German dependence, Russia does not play a determining role in imports or exports.

The same study indicates that dependence on gas is mutual since Russia cannot open other markets in the short term, although it is making efforts in this direction.

On the other hand, it is clear that, regardless of what happens to gas supply, some German companies will be affected and Economy Minister Robert Habeck has said that they will receive aid similar to that received by those that have been seen hit by the repercussions of the pandemic.

Specifically, the companies that invested in the Nord Stream II gas pipeline, which was supposed to transport gas from Russia to Germany through the Baltic and whose commissioning has been halted, may have lost their investment.

Also companies that have investments in Russia or those for which the Russian market is important – such as car manufacturers – may be affected to a greater or lesser extent.

“In the short term the consequences will be drastic because in some sectors there will be not only restrictions but a complete interruption of business,” admitted the president of the employers’ association, the Confederation of German Industry (BDI), Siegfried Russwurm.

However, Russwurm acknowledged that it is too early to say what the long-term consequences will be for German companies.