Russia sanctions hurt some German businesses, but support for Merkel's policies solid so far

MAGDEBURG, Germany – Huge machines hum smoothly at the Vakoma company's modern factory in eastern Germany, overseen by blue-suited workers. But politics are making the ride bumpy for the family-owned firm, which does a lot of business in Russia.

Germany is a political and business crossroads between eastern and western Europe, and some of its high-value exporters are suffering from the Western sanctions imposed on Russia. It's one of several reasons why German economic growth faded this year from among the highest in Europe to almost nothing.

Businesses may be holding on for now, avoiding layoffs in the hopes that things will get better. But with Chancellor Angela Merkel suggesting no end is in sight for the sanctions, the pressure on some companies is growing.

In the case of Vakoma, its industrial drives, vacuum pumps and compressors to order are often custom-made, a process that takes several years of planning. Around 90 percent of its goods are exported, and some 60 percent of those exports go to the former Soviet Union.

"A lot of our projects that we have developed over years are now on hold and simply aren't being decided on," managing director Gerhard Krossing said at his company's new factory, in which it invested 15 million euros ($18.7 million).

Last year, Russia was the No. 11 recipient of German exports, and with the sanctions it has slipped to No. 13. Overall exports to Russia were down 16.6 percent in January through August, compared with the same period last year, to 20.3 billion euros ($25.3 billion). Vehicle and machinery exports saw the strongest falls, and while the direct impact on the overall economy so far is limited, some sectors and companies are feeling the pain.

Krossing noted a trend among clients to repair existing machinery rather than make big new investments, and says his company has focused more strongly on developing new markets — winning new clients in Germany, among other places. He didn't give figures detailing the impact on business.

"We want to continue cultivating our old clients, because we assume there will be a new stage after this difficult period," he said.

When that time will come is uncertain.

In her bluntest comments to date on the conflict, Merkel made clear last month after talks with Russian President Vladimir Putin that sanctions won't be lifted any time soon.

"Old thinking in spheres of influence, in which international law is trampled underfoot, will not win out," Merkel said. "I am convinced that it will not win out, however long and arduous the way there and however many setbacks it brings."

"We will impose economic sanctions against Russia as far and as long as they are necessary," she said.

German industrial leaders have been largely supportive of Merkel's course so far. Despite the slowdown in growth this year, the economy is in good shape, with low unemployment.

But that support could be tested in coming months as the outlook is not improving. On top of the pain from sanctions, German exporters are facing a downturn in demand for their goods in key markets, such as fellow eurozone countries as well as developing countries like China.

"We have to be aware that the slump in exports for some sectors to Russia is not a temporary phenomenon, but really permanent or one that will last many years," said Marcel Fratzscher, the president of the German Institute for Economic Research, a Berlin-based think-tank.

He noted further trouble can be expected by the sharp drop in the value of the Russian ruble, which has fallen over 30 percent against the euro this year. "That means that German exports too will become less and less affordable for many Russian companies."

While standing firm on sanctions, both Merkel and Foreign Minister Frank-Walter Steinmeier have taken care to keep open channels of communication, talking frequently by phone with their Russian counterparts. The same day Merkel spoke out against Russia's actions, Steinmeier cautioned that "we have to watch that we don't turn what opportunities there are to talk into scenes for a showdown."

The comments by Steinmeier, in whose center-left party the 1970s "Ostpolitik" tradition of detente with the eastern bloc is a proud tradition, raised speculation about a rift in the conservative-led coalition government.

However, Olaf Boehnke, who heads the Berlin office of the European Council on Foreign Relations, a multinational think-tank, said he believes Steinmeier and Merkel "are still trying to play a good cop, bad cop game" and points to disillusionment and frustration with Russia in the foreign minister's party.

As for the possibility of further economic sanctions, "the German government is well aware of what sacrifice it is demanding from German business," Boehnke said. The business community "is on board, but it can't be overburdened forever."

A pair of recent polls found Germans' support for EU sanctions against Russia around the 60 percent mark. A Nov. 25-27 survey of 1,289 people by Forschungsgruppe Wahlen for ZDF television found 58 percent in favor — up from 52 percent a month earlier — and 36 percent opposed. It gave a margin of error of plus or minus 3 percentage points.

Germany's two most popular politicians, the poll found, were Merkel and Steinmeier.

____

Moulson reported from Berlin.