Of all the countries of the European Union, Germany was one of the most economically dependent on Russia at the start of the full-scale invasion of Ukraine. As a consequence, the challenge of overcoming this dependency is particularly acute for Germany, according to a joint report by experts of the Center for the Study of Democracy (CSD) and the Friedrich Naumann Foundation, a German foundation close to the Free Democratic Party of Germany.
Germany was the first Western nation to establish strategic economic cooperation with the communist USSR, dating back to the late 1960s when it struck a deal, famously known as 'gas-for-pipes.' Since then, Russian-German trade relations have essentially been a barter system involving energy resources in exchange for heavy industrial products, electrical equipment, pharmaceuticals, and other high-value goods. Russia has served as Germany's primary supplier of energy resources, accounting for 35% to 40% of the overall import volume of oil, gas, and coal. It was assumed that strategic economic cooperation would have political implications, influencing the country's direction and its integration into the European trade and political landscape.
According to the authors of the report, leading German companies have actively contributed to the deepening of Russian-German cooperation in the energy sector. They attribute a pivotal role in strengthening Gazprom's position to Wintershall Dea, 33% of which is still owned by Mikhail Fridman’s LetterOne. Even before the merger with Dea, Wintershall had collaborated extensively with Gazprom and played an active role in the development of the Nord Stream pipelines. In a similar fashion to the gas sector, Russia managed to integrate itself into Germany's oil infrastructure over the years. The state-owned Rosneft acquired oil assets in a number of years, ultimately becoming the third-largest player in the oil refining market.
In other key industrial sectors, such as chemicals, construction, and food, the development relied on the assumption that cooperation between the two countries in the energy sector would persist, and electricity prices would remain relatively low. For instance, the chemical giant BASF consumed 48 terawatt-hours of natural gas in 2021, comparable to the total consumption of countries like Bulgaria. Given this years-long dependency on fuel that has been supplied from Russia, it is not surprising that BASF's CEO, Martin Brudermüller, warned of the 'disruption of the entire German economy' in the event of a halt in supplies from Russia, as the report's authors note.
Even the annexation of Crimea did not spur the German authorities to reconsider this model. German exports to Russia decreased but not dramatically, while exports of Russian energy resources to Germany only increased. The share of Russian gas in the total German imports of this fuel type increased from 34% to 49% in the 2010s. Although the import of Russian oil decreased slightly (by 7% from 2014 to 2021), Germany remained the largest purchaser of Russian oil in the EU. The annexation of Crimea and the war in eastern Ukraine did not lead the German political class to reconsider the established model. At that point, it became apparent that the policy of 'change through trade' could also work in reverse.
At the same time, German companies, including Siemens, Bayer, Henkel, BMW, Mercedes-Benz, Volkswagen, and Unipro, deeply integrated themselves into the Russian market. According to data from the Russian-German Chamber of Foreign Trade cited by the report's authors, by the start of the Ukraine war, 4,500 German enterprises were operating in Russia, employing 200,000 workers. Their combined annual turnover in the last decade amounted to 50-60 billion euros. After the war's outbreak, only 25% of major German companies with business in Russia declared they would leave the country, and only a few actually did so, according to the authors' analysis based on data from the Leave Russia project.
Among those who did leave were giants like Aldi, Deutsche Bank, Lufthansa, and Mercedes-Benz. However, among those who stayed, there are equally significant players: Volkswagen Group, Metro, BMW, Wintershall Dea, Bosch, Bayer, Havi, Knauf, Claas Group, BSH, Liebherr, and SAP. Some of them are close to ceasing operations, and SAP, a software enterprise resource planning provider, announced the termination of support for its Russian clients after the report's publication. These 12 companies listed are among the top 100 in Russia in terms of revenue, with some earning not just a fraction but a significant percentage of their overall revenues in Russia.
According to the authors of the report, the significant dependence on a single market has driven German companies to actively support the softening of Berlin's position on sanctions. Among the companies that have refrained from radically curtailing their activities in Russia are Metro, Knauf, and die Claas Gruppe, as previously mentioned. The first two have justified their position by citing their responsibility towards their thousands of employees, with Metro employing 15,000 in Russia and Knauf having 4,000 workers. die Claas Gruppe, on the other hand, chose not to comment. Notably, Metro continues to collaborate with Sberbank in expanding the 'Fasol' network, despite the fact that the state-owned bank is subject to the most stringent sanctions imposed by the US and EU. The largest German producer of construction materials, Knauf, has faced allegations in the German media not only for continuing to operate numerous branches but also for allegedly providing company-branded minibuses to transport its mobilised employees to military enlistment offices. The largest German manufacturer of agricultural machinery die Claas Gruppe did not close its plant near Krasnodar.
Nevertheless, outside of the energy sector, the role of Russian-linked companies in Germany's economy has never been substantial. In 2019, they accounted for less than 2% of the total turnover of all foreign businesses operating in Germany. Moreover, the lion's share was generated by a few dozen of the largest companies, which the authors of the report describe as 'negligible.' After Germany imposed state control over the German assets of Rosneft and Gazprom and applied sanctions to Russian financial institutions, 'Russia’s presence has lost its strategic significance.' Only the possibility of using the remaining companies to circumvent sanctions against Russia poses risks.
At the same time, German companies oriented towards the Russian market have not completely disengaged from it. The export of German goods to Russia has significantly decreased in all categories except medical products, which are not subject to sanctions. The report’s authors note that some of the decline in volume, including semiconductors, explosives, and other dual-use items, continued to reach Russia through third countries. Deliveries of dual-use goods from Germany to Turkey and countries in the South Caucasus and Central Asia during 2022, on average, grew by 170% per month compared to the previous year. The peak was observed in December, with under-sanctioned goods accounting for 36% of Germany's total exports to these countries.
The authors of the report contend that many German companies have been intentionally circumventing sanctions, taking advantage of the fact that, as the authors describe, the sanction measures still lack a 'legal framework.' European companies are obliged to demand from their contractors that the products they supply do not end up in Russia, but they are not held responsible for how they get there in reality. The authors insist on the need to improve measures to monitor compliance with the sanctions, but recognise that it will not be possible to completely cut off supplies to Russia.
The report concludes by suggesting that Germany's policy of "change through trade" (Wandel durch Handel), which Germany has followed since the 1970s in its interaction with the USSR (and after its collapse — with Russia) and other non-democratic regimes, has run its course. They argue that Germany must now not freeze but sever its ties with Russia to prevent the latter from leveraging them in the future. (For more on how Germany is saying goodbye to Ostpolitik, see the article by Alex Yusupov, Director of the Friedrich-Ebert-Stiftung (FES) Russia Programme). However, it is worth noting that this policy was not always flawed and, for a long time, had a positive impact on Russia's European integration. The question of when and why the 'change through trade' principle started working in reverse requires separate consideration and will be particularly relevant when, and if, the vector of Russian-European relations shifts in the opposite direction, opening a new window of opportunity for integration.