The Wall Street Journal: 2. May 2014

German Businesses Urge Halt on Sanctions Against Russia

Vocal Opposition Has Helped Keep Merkel From Endorsing Broader Penalties on Moscow

By
MATTHEW KARNITSCHNIG

BERLIN— Angela Merkel is carrying a clear message from Germany's business lobby to the White House: No more sanctions.

Several of the biggest names in German business—including chemical giant BASF BAS.XE +0.42% SE, engineering group Siemens AG SIE.XE -0.71% , Volkswagen AG VOW3.XE -1.08% , Adidas AG ADS.XE +0.78% and Deutsche Bank AG DBK.XE -0.24%—have made their opposition to broader economic sanctions against Russia clear in recent weeks, both in public and in private.

As a result, Germany's position on additional, tougher sanctions is unlikely to shift, barring a dramatic escalation of the conflict in Ukraine—a message Ms. Merkel is expected to deliver to President Barack Obama when they meet in Washington on Friday, officials in Berlin say.

As the Ukraine crisis has worsened, German officials have faced a barrage of telephone calls from senior corporate executives, urging them not to take steps that would damage business interests in Russia, people familiar with the matter say.

Until now, Western sanctions have targeted individuals and companies, but the U.S. is pushing for broader sanctions that could hit entire Russian sectors if the situation escalates.

In public, some German corporate chieftains have warned against escalating the measures.

"If there's a single message we have as business leaders, then it's this: sit down at the negotiating table and resolve these matters peacefully," Eckhard Cordes, a former Daimler AG executive who now heads the Ostauschuss, German industry's lobbying arm for Eastern Europe, told a recent conference in Berlin.

BASF Chief Executive Kurt Bock, whose company is a close partner with Russia's state-owned gas giant OAO Gazprom, recently admonished European politicians to consider the costs of sanctions and warned that unwinding the measures is often difficult. "It's up to politicians and historians to determine efficacy of boycotts, but I have my doubts," Mr. Bock said in an interview with the daily Süddeutsche Zeitung.

Herbert Hainer, chief executive of Adidas—which outfitted Russian athletes in the Soviet era and operates more than 1,000 retail outlets in the country—has suggested the West should have done more to engage Mr. Putin. "One has to wonder if someone like Putin shouldn't have been included in the process much earlier, instead of waiting until it was too late," he said.

In most countries, it would be highly unusual for corporate executives to inject themselves into geopolitics and matters of national security with the forcefulness that a number of German business leaders have. But many of Germany's largest companies have substantial Russian operations, built in some cases over decades, and worry that tough economic sanctions would rob them of a key growth market when their home market—Europe—is stagnant.

That has led to intense pressure on Berlin. Germany's chancellor has repeatedly criticized Russia for its actions in Ukraine and warned the Kremlin it would face serious consequences if it doesn't change course. Yet Ms. Merkel has stopped short of endorsing broader economic sanctions, opting instead to impose travel bans and asset freezes on individuals with close ties to the Kremlin.

"Merkel is coming knowing that she faces a heavy debate with the Americans," said John C. Kornblum, a former U.S. ambassador to Germany who also previously served as U.S. assistant secretary of state for European affairs.

U.S. companies, which have less at stake in Russia compared with their European competitors, are expressing their concerns about further sanctions more privately with the Obama administration. American companies have stressed in Washington that proposed sanctions on broad sectors of the Russian economy, if pursued unilaterally, would cause Russian state-dominated industries to back out of deals with U.S. firms and open the market to competitors from Europe and elsewhere. Business officials in Washington say International Business Machines Corp. IBM -1.50% , for instance, has urged the Obama administration to take as multilateral of an approach as possible to further penalties.

"The concern for business is that if it becomes a fragmented approach, with the U.S. going out in front of the Europeans, it won't be effective," said Myron Brilliant, executive vice president for international affairs at the U.S. Chamber of Commerce. "And we are worried about the boomerang effect of getting caught in the crossfire."

U.S. business dealings in Russia include Boeing Co. BA -0.43% 's contracts with state-controlled airlines and Exxon Mobil Corp.'s XOM -0.98% Arctic venture with state-controlled oil giant OAO Rosneft. This week, the U.S. imposed sanctions on Rosneft's chief, Igor Sechin, as well as Sergei Chemezov, head of a state conglomerate that includes aircraft production and Russian titanium used to build Boeing planes.

Exxon Mobil said it is pushing ahead with its plans to drill in Russia's Arctic seas—its biggest opportunity to discover oil and gas—though deteriorating relations between Moscow and the U.S. have increased the risks.

White House spokesman Jay Carney said the administration was continuing to hold "informational conversations" with American companies over Russian sanctions. The White House has urged top U.S. executives to scrap plans to go to the coming St. Petersburg International Economic Forum, which Mr. Putin formally hosts.

On Thursday, PepsiCo Inc. PEP -0.37% said Chief Executive and Chairman Indra Nooyi canceled plans to participate in the forum. The company, though, said that the change of plans was due to a scheduling conflict rather than political tensions and that other executives from the snack-and-beverage giant would attend.

Germany isn't alone in Europe in its reluctance to take a harsher line with Moscow. Italy and Greece also have resisted a more aggressive response because of the potential impact on their economies. Some of Washington's closest military allies, including Japan, Egypt and Israel, also are cautioning the Obama administration against taking steps that could permanently rupture Mr. Putin's ties to the West, according to Asian and Middle East officials.

But Germany's size and economic weight make its voice especially crucial. Without Berlin's backing, U.S. attempts to box in Russia through sanctions and other measures will be hampered.

Some 6,200 German companies, from industrial giants such as Volkswagen to small family-owned machine-makers, are active in Russia, more than those in the rest of the EU combined. Many of those companies, both in public and behind the scenes, have warned that any sanctions affecting trade with Russia could cost tens of thousands of German jobs and hit the economy hard, officials in Berlin say.

"There's no question that Germany's economic interests would be best served by avoiding sanctions," said Klaus-Jürgen Gern, an economist at the Kiel Institute for the World Economy, a leading German economic institute.

German economic growth could decline by as much as two percentage points if harsh sanctions were leveled against Russia, according to an analysis by the Kiel Institute led by Mr. Gern. Under current economic forecasts, that could push Europe's largest economy into recession.

A breakdown in Germany's trade relations with Russia could cost as many as 300,000 German jobs, according to the German government.

Germany's bilateral trade with Russia is relatively modest, at €76 billion ($105.4 billion) in 2013, and Russia accounts for about 3% of German exports. But Germany derives one third of both its gas and oil from Russia. The latter point is critical, Mr. Gern said, because a loss of access to Russian oil would hit the German economy hard. A $20-per-barrel increase in the price of crude alone would shave about one percentage point off German growth, according to the institute's analysis.

Many big German companies were active in the Soviet Union and began an aggressive expansion into Russia and its neighbors after the fall of communism. German industry's focus on heavy engineering made it well-suited to service a vast region hungry to modernize everything from its railroads to its energy sector.

Russia itself accounts for a fairly modest, though not inconsequential, proportion of total revenue for most big German companies. What the figures don't reflect is the importance of Russia as a growth market.

Just days after Russia annexed Crimea, Siemens Chief Executive Joe Kaeser visited Mr. Putin at his residence outside Moscow, posing for the cameras with the Russian leader.

While Ms. Merkel has censured Russia's actions in Ukraine, Mr. Kaeser described the geopolitical crisis as "temporary turbulence."

One reason German companies have been more vocal on German foreign policy is that their home market has waned in importance. Siemens, for example, generated less than 15% of its €77 billion in global revenue in Germany last year, compared with 28% in the Americas.

That dynamic has made some German companies less beholden to their own governments than in previous decades.

"You're dealing with a global German industry that barely hangs onto its German identity, while at the same time using it to its advantage to do business in places like Russia," Mr. Kornblum said.

Deutsche Bank would suffer little direct impact from economic sanctions against Russia, but Jürgen Fitschen, the bank's co-CEO, recently warned against taking further punitive measures against Moscow, arguing that the broader economic damage could be substantial.

Volkswagen, which sells about 300,000 vehicles in Russia and considers the country its key European growth market, has also urged against a rash response. ""We're counting on everyone in the East and the West to handle this situation with prudence," Volkswagen Chief Executive Martin Winterkorn said recently.

Ms. Merkel's efforts to build a united front at home against Russia have been further undermined by her predecessor as chancellor, Gerhard Schröder.

Mr. Schröder, who is the chairman of Gazprom's Nord Stream AG pipeline subsidiary and a personal friend of Mr. Putin's, traveled to St. Petersburg this week to celebrate his 70th birthday. He was photographed embracing Mr. Putin upon the Russian president's arrival.

Though Mr. Schröder's affinity for Russia and Mr. Putin are well known, the symbolism of the party as German soldiers were in the custody of pro-Russian forces in Ukraine drew harsh criticism from some in Germany.

The party, organized by Nord Stream, underscored the close ties between Gazprom and Germany's business community. Several German executives, including representatives from BASF's gas subsidiary, Wintershall, and German power company E. ON SE, attended the party, as did Germany's ambassador to Russia.

Philipp Missfelder, the foreign affairs speaker for Ms. Merkel's center-right bloc in parliament, also joined the celebration.

—William Mauldin, Mike Esterl and Jay Solomon 

contributed to this article.