Germany Plays a Vital Role In Developing Russian Markets

By Robin Munro

Staff Writer

Published: May 18, 2004 (Issue # 969)

Alexander Belenky / The St. Petersburg Times German technology maintaines a constant presence in the local market.

Germany has been the biggest Western trading partner of Russia since 1972. In 1997 it overtook Ukraine and became Russia's biggest trading partner altogether, according to the Moscow-based Delegation of German Industry and Commerce.

All types of German businesses are represented in Russia, including many small enterprises.

According to the Moscow-based Verband der Deutschen Wirtschaft's web site www.vdw.ru, Germany has been the No. 1 foreign investor in Russia in 2003, ahead of Cyprus, Britain and the United States.

CITY PARTNERSHIP

Germany was the city's leading trading partner in 2003, according to a report by City Hall's external relations committee.

Trade turnover rose 16 percent last year to $1.025 billion with exports rising 3 percent and imports 19 percent.

Germany occupied first place among importing countries to the city with imports values at $841 million while exports lagged far behind at $184 million, putting Germany fourth among export destinations for goods from St. Petersburg.

Exports were as varied as bronze, timber, machine tools, aluminum, chemicals and ships while imports included fast moving consumer goods, vehicles, paper, cardboard and optical equipment.

Germany invested only $45 million in the city last year, maintaining a trend of decreasing investment since 2001. In 2000 the Germans invested $116.5 million or 10.2 percent of all foreign investment in the city, the report said.

At the beginning of last year, accumulated German investment was $158.1 million, with $119.4 million of this direct investment.

About 400 German companies are currently registered in the Northwest region and the community's life is focused on the House of German Business in St. Petersburg where regular meetings and seminars are held and information is exchanged.

150 YEARS OF SIEMENS

German electric, communications and information technology giant Siemens began its activities in St. Petersburg in 1853, and its anniversary was celebrated in the presence of Chancellor Gerhard Schroeder and President Vladimir Putin last year.

Today Siemens has several subsidiaries in the city, including a technical support department, a programming center for communications technology, a mobile telephone center and Siemens Business Services.

According to the external relations committee's report, Siemens owns a 20-percent stake in local giant Electrosila and a 10-percent stake in the Leningrad Metal Works, or LMZ and has been involved in upgrading power and heating stations and consulting on automation of industrial processes throughout northwest Russia.

In March Siemens used a subsidiary, Demag Delaval International to obtain a 28-percent stake in the city's Nevsky Zavod, with the intention of producing electrical equipment that will be competitive in world markets.

KNAUF BUILDS UP

Knauf, a family-owned Bavarian construction material firm that is Europe's No. 1 plaster product producer, has invested more than $430 million and built 20 factories in Russia in the last 11 years, making it the leading German investor in the Russian construction industry. It employs 7,000 Russian staff.

It has not all been plain sailing; the company prevailed in court against outsider's attempts to seize company assets in Krasnodar and Nizhny Novgorod and kept operating right through the 1998 financial crisis.

Heinz Jurkowitsch, director general for Knauf in Russia and the CIS, said the company started working in Krasnogorsk in the Moscow region, producing insulation and plaster materials in 1993. It has since invested more than 100 million euros in that business, a month ago bringing the latest plant into operation that for the first time for Knauf in Russia will produce cement-based products.

"After investing more than 20 million euros in creating the most modern plant in Europe, we estimate that in the next two years we will occupy as high a position in this market segment as we do in the market for plaster products," he said in a written reply to questions.

In St. Petersburg, the company has what it describes as a "unique plant for producing construction tiles with insulating properties." In addition, metal fittings that are used for constructing interior walls, plaster products and insulating materials are produced in the city.

"Acquiring and modernising the enterprise that is today known as Pobeda/Knauf was one of the first investment projects of our company," Jurkowitsch said. 'The mutual efforts of German and Russian specialists in just a few years allowed this enterprise to be transformed into one that produced modern high-quality goods that were much in demand.(a)

Knauf opened a training center in the city last year and works closely with the city's Architectural and Construction University.

Jurkowitsch said that although the business is booming and had exceeded expectations, the company had not come to Russia purely to make profit.

"Back at the beginning of the '90s, it was not so much commercial interest, but an openhearted wish to help Russia become an effective economy and taking part in this was what motivated the directors of the firm," he said. "Today we are firmly convinced that not a single kopek, or, perhaps more appropriately, a single cent, has been spent in vain."

HENKEL CLEANS UP

German manufacturer Henkel is a leading presence in the market for fast-moving consumer goods, which has appealed to a broad section of the local population. All the conglomerate's businesses are present in Russia.

Best known for its detergents and cleaners, including Persil and Lox, Henkel also produces cosmetics under the Schwarzkopf brand and consumer adhesives.

"Henkel was one of the first multinationals to start operating in Russia," said Yulia Krasheninnikova, head of human resources for Henkel Russia. "The decision was based first of all on the huge potential of the Russian market."

In 1990, even before the break up of the Soviet Union, Henkel started a joint venture in the Saratov region. Now 100-percent Henkel owned, the factory is called Henkel South.

The company has four plants, including the Henkel-Era factory at Tosno in the Leningrad Oblast, where 850 people are employed. Krasheninnikova said the Oblast was a prime choice because of its proximity to the border and St. Petersburg with its large market for consumer goods, good infrastructure and very friendly investment climate. Local staff are some of the country's best in terms of education, skills, job attitude and company loyalty, she added.

LUFTHANSA FLIES HIGH

German airline Lufthansa has been flying to Russia since 1972 and to St. Petersburg since 1980. Today it operates 29 flights a week to the city.

Lufthansa is the leading foreign airline flying to Russia with more than 260 employees in Russia. It has 14 destinations in Russia and the CIS and carried more than 1 million passengers to or from them in 2003.

"St. Petersburg and the Leningrad Oblast are an attractive market in terms of passenger air transport,"Ilya Novokhatsky, Lufthansa's PR representative for Russia/CIS, said in a written reply to questions. "The region is a major tourist destination in Russia and large business center with many ties to Europe." Last year was the most successful yet for Lufthansa in Russia and the CIS, he added. "The number of passengers transported by Lufthansa between Russia and Germany increased by 8.14 percent compared to 2002 and reached 745,591passengers," he said. "The number of passengers transported between Germany and Russia & CIS for the same period was 1038,363 passengers. That is 10.9 percent higher than in 2002. "The seat load factor on the routes between Germany and Russia reached 68.5 percent," he added.

RETAILING WITH METRO

German grocery wholesale giant Metro Cash & Carry studied the Russian market for several years before opening its first two stores in Moscow in Nov. 2001. It is on a fast expansion course with five stores in Moscow and two in St. Petersburg and a third to open in the city this year.

Each store employs up to 400 people and up to 1200 suppliers, producers, distributors and traders are involved in the assortment of 20 000 items, both food and non-food commodities, which are available in each store, on a sales surface of 10 000 sq. m.

"We truly believe the Russian market has a big potential and once our operations in Moscow and St. Petersburg proved to be efficient we have intentions to go to the regions," said spokeswoman Yulia Belova. "Metro's format and concept in the regions does not change, however certain things are to be adapted to the needs of the particular market."

DIPLOMACY AND CULTURE

A German consulate has operated in the city since 1972 and it was there in 2000 that Putin and Schroeder began the annual German-Russian summits known as the Petersburg Dialogs.

German firms have been no less active in the cultural life of the city with natural gas giant Ruhrgas sponsoring the restoration of the Amber Room in the Catherine Palace at Pushkin. In 2000, Daimler-Chrysler sponsored the Mariinsky Theater's production of Wagner's Rheingold, which has become the main operatic event in the "Stars of White Nights" festival.

Germany, through the EU's TACIS program, has also participated in repatriating and rehousing former Soviet soldiers who were based in East Germany.

The German charities Caritas and Hamburg-based Samaritans have been active in helping the city's less well off since the early 1990s.

HISTORICAL TIES

Northwest Russia's ties with Germany go back to the 13th century when Novgorod was part of the Hanseatic League of free-trading cities around the Baltic and North Sea.

In the 19th century German industrialists played a large role in developing the country. Many German multinationals operated in pre-Revolutionary Russia, including BASF, Mercedes Benz, Siemens, Zeiss, Agfa, Hoechst, Mannesmann and Bayer.

St. Petersburg once had a large German community, which almost disappeared in Soviet times due to political and social reasons.

After World War II, East Germany was the Soviet Union's top trading partner and many city residents had ties to troops stationed there. West Germany also reached out to the Soviet Union especially after Chancellor Willy Brandt adopted his Ostpolitik. Thus in the early 1970s, West Germany dropped its hard line toward the Soviet Bloc and economic relations blossomed.

Mannesmann pipe maker took advantage of the opportunity, cutting the "deal of the century" in February 1970. Under the agreement, Mannesmann was to deliver 1.2 million tons of large-diameter pipe, and in return the Soviet Union would deliver 52 billion cubic meters of natural gas to West German gas giant Ruhrgas over 20 years. A consortium led by Deutsche Bank arranged bridging finance for the delay between the pipe and gas deliveries.

At the time, it was the largest single deal between the Soviet Union and a Western country and the biggest deal ever for Mannesmann.

MODERN ECONOMIES

Total German investment had grown to $10.5 billion in 2003, and $2.5 billion of this was direct German investment. Exports to Germany account for roughly 7.5 percent and imports for 14.3 percent of the economy, the CIA worldbook reports.

But despite Germany's high place in Russian trade, Russia occupies a small place in Germany's due to the relative size of the countries' economies.

Achim Haensel, a German employed as a senior bank adviser with the European Bank for Reconstruction and Development subsidiary KMB-Bank, which provides finance for micro, small and medium-sized businesses, is based in St. Petersburg and says the city could do more to develop and attract business. "With nearly 5 million inhabitants, a vibrant port and excellent connections to Europe, the potential for developing micro, small and medium enterprises was and is huge," he said in written answers to questions.

"I believe that the challenges for St. Petersburg are the same as for many other regions in Russia: first, being attractive to investors both foreign and domestic and, second, insuring that the local economy is sufficiently diversified. Micro, small and medium enterprises play a key role in both," he added.

"Consequently, establishing an environment favorable to the development of micro, small and medium enterprises is of strategic importance," Haensel said. "All investors, independent of size, need stability and transparency to allow for adequate planning."

The two economies are very different in size with Russia's GDP only $433 billion - just one sixth of Germany's $2,408-billion GDP last year even though Russia's population of 143.5 million is 70 percent greater than Germany's, according to the Economist Intelligence Unit.

However, recalculating GDP by using purchasing power parity paints a more balanced picture with Germany's $2,275 billion GDP only twice that of Russia's $1,198 billion GDP, according to the EIU. Nevertheless, even taking purchasing power parity into account, Germany's GDP per capita of $27,649 is more than three times Russia's $8,350, as calculated by the EIU.