German Exporters Fire Warning Shot About Russia “Sanction-Spiral,” Banks At Risk

Wolf Richter's picture

Wolf Richter

It took a while. But it had to come, the public warning shot – after what must have been a ferocious lobbying campaign behind closed doors. No one in Germany is allowed to get in the way of the sacrosanct exporters. The German economic model, to the chagrin of neighboring countries, is based on them.

It wasn’t as bombastic as US Secretary of State John Kerry’s blast to lawmakers that the Ukrainian debacle could “get ugly fast,” and “in multiple directions,” but it had the heft of the German export industry.

Anton Börner, president of the German Association of Exporters (BGA), which represents 120,000 companies, the lifeblood of the economy, warned at a press conference in Berlin that further escalation of the crisis in the Ukraine could hit exporters very hard. He said that the BGA expected exports to rise 3% to €1.13 trillion and imports 2% to €914 billion for a trade surplus of €215.6 billion – the highest in history. But “if the crisis in the Crimea escalates further,” these wondrous forecasts of endlessly growing exports and surpluses “could turn very quickly into a mal-calculation.”

The sanction spiral

Further intensification of “the most serious political crisis in Europe since the end of the war in former Yugoslavia” would degrade bilateral economic relations between the EU and Russia. He warned not to underestimate the drag of secondary and tertiary effects on the world economy. “Russia itself, Europe, Germany, and the whole world have a lot to lose,” he said. “But if there’s a sanction-spiral, Germany has the most to lose.”

About 6,200 German companies were trading with Russia or had invested there. The bilateral trade volume was over €76 billion last year. And German companies have invested €20 billion in Russia. The “sanctions-spiral” that is currently gaining momentum could have “unforeseen consequences,” especially for Russia, he said. They’d be “painful for the German economy, but life-threatening for the Russian economy.”

And there’d be a price to pay, not only of economic nature, but also of political nature, he warned.

Better than pushing someone into a corner

“We merchants are always in favor of keeping a communication channel open,” he said. Within the Western world, Germany had the best connections to Russia, politically, diplomatically, economically, and culturally. So it would have to play a decisive mediator role, Börner said. “Talking is better than pushing someone into a corner.”

Given the “inexperienced and opaque” Ukrainian government, there were additional uncertainties – another reason to deescalate the crisis. The EU would need to integrate Russia and Putin in the decision-making processes, “at eye level and as part of the solution.” Putin should be given the “widest possible understanding for his situation,” but at the same time, it should become clear that unilateral changes of international contracts and borders would “lead his country to the sidelines.”

And the banks?

It isn’t just German exporters that are fretting, and lobbying with all their might. Russia, with an economy that is already stagnating, and dogged by vicious bouts of capital flight, has $732 billion in foreign debt. Relatively little of it is sovereign debt, but nearly $700 billion is owed by banks and corporations – most of them owned or controlled by the Kremlin. Oil major Rosneft and gas mastodon Gazprom owe $90 billion combined to foreign entities; the four state banks Sberbank, VTB, VEB, and Rosselkhozbank owe $60 billion. Some of this debt matures this year and next year.

US banks are marginally involved. Between Bank of America, Citigroup, JPMorgan, and Wells Fargo, they have only $24 billion on the line. But European banks and insurance companies are up to their dirty ears in this suddenly iffy and potentially toxic Russian debt.

When it comes due, it will have to be rolled over, and some of the companies will need to borrow more, simply to stay afloat. Alas, the current sanction regime of visa bans for the elite, asset freezes, and trade restrictions could make that difficult. Then there’s the threat, now more broadly but still unofficially bandied about, that Russian companies should simply default on this $700 billion in debt in retaliation for the sanctions.

Some European banks, including some German banks, might crater. Even the possibility of a major loss would further rattle the confidence in these banks with their over-leveraged and inscrutable balance sheets and their assets that are still exuding whiffs of putrefaction. And this sort of fiasco, as the financial crisis has made clear, has an unpleasant way of snowballing – and taking down the already shaky global economy with it.

During the financial crisis, German exports collapsed, banks toppled and got bailed out, and the economy experienced its two worst quarters in the history of the Federal Republic. No politician in Germany has any appetite to re-experience that. And the banking industry, with its powerful and long tentacles winding their way through the hallways and doors of the German government, has been assiduously at work, quietly and behind the scenes, to whittle any sanctions down to irrelevance.

Washington’s defaulting on an agreement with Russia about Ukraine’s future, and the prospect of NATO troops in Ukraine, convinced Putin and much of the Russian elite that there’s no point in negotiating with the US. Big risks lie ahead. Read.... From Now On, No Compromises Are Possible For Russia

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yellowsub's picture

In Russia, they sanction you!

Walt D.'s picture

Remember what happened last time Russia defaulted on its debt?

Someone needs to put Kerry back in his stable. He could take the lead role in the remake of Mr. Ed.

He thinks Putin's first name is Wilbur!

Bioscale's picture

Don't forget on China. If the West starts fighting Russia in any sense, China will speak and act. Then there will be consequences for all. Wink wink US dollar.

China is the known unknowns. But what about the unknown unknowns that will came up, and this might be huge. If Merkel does anything against business at home, Germans will speak.

Luckhasit's picture

It's called chess not checkers.

cbaba's picture

Economies will be affected seriously, but for European/US banks, if Russia defaults on 700 billion depth, either the FED or ECB comes for help, prints $700 bilion and give it to banks.


Flying Wombat's picture

The Failure Of German Leadership:  Merkel Whores For Washington

Dr. Paul Craig Roberts

TrulyStupid's picture

When they owe the banks 730 Million, the banks have them over the barrel.

When they owe the banks 730 Billion, its the banksters whose ass is over the barrel.

Freddie's picture

Germany has a lot of investments in Russia.  Not a good place to be if they piss off Russia.

SmittyinLA's picture

Russia could do the unthinkable and pay off the debt in fiat today out of petty cash with our fiat, and then NOT take it anymore and only accept "real money" as in goods or services for their oil, gas and food exports.

Perhaps we need to increase our leverage over Putin by draining our Stretegic Petroleum Reserve leaving us with no reserve cushion in the event of a Russian boycott.



SmittyinLA's picture

time to turn loose the Serbs 

kellycriterion's picture

Conceding Crimea or even eastern Ukraine won't solve the stay Global vs back to Trading Block issue. Imperialism 2.0 is too expensive.

Remember those exaggerated accusations the communists would hurl at Wall Street? Well after the collapse of the Soviet Union the banking cartels blew past those like a fighter jet on a strafing run.

Gunter's picture

Well, I am in Germany. It is certainly time now to take Russian language lessons. Not an hour per week, better full time.

Anusocracy's picture

I would think Russia has a good deal of respect for Germany.

Other European countries, not so much.

angel_of_joy's picture

Respect is greatly stimulated by a good beating...

RMolineaux's picture

At last, a voice of reason.  The German leadership must take cognizance of the economic consequences of jumping on the US sanctions bandwagon.  The result wil be a sanctions regime with very little teeth.  That will be all to the good, while the world waits for the usurper regime in Kiev to destroy itself, as it has done once already.

Freddie's picture

The Europeans, especially the Germans, should have screamed bloody murder at the ZATO, USSA, EU, oligarchs, nazis, State Dept, McCain, Obama, Kerry plan to overthrow the Ukraine.

You better speak up now because Putin does nopt get mad - he gets even.  The scum looted the Ukraine and F'ed over the Ukrainian people.   This was a robbing and looting of a country.

slightlyskeptical's picture

It was the influence of the west that kicked off this whole set of events. If everything was hunky doory then why did they stir the pot?

cossack55's picture

They thought Putin was Gaddafi?  They thought Putin was Mursa?  They thought Putin was Sadam?  They thought Putin was Chamberlain?  They thought Putin was Obama?

Vampyroteuthis infernalis's picture

that Russian companies should simply default on this $700 billion in debt in retaliation for the sanctions.

There is your end game. Banksters in the west take it up the ass!!

fooshorter's picture

Until a central bank steps and nationalizes the losses via haircurst ya know for greater good... 


They had this planned out for a while, the elite know what they are doing, systemically taking down russia, now that the plan is in motion there is no stopping it 


Just keep stacking gold (which has been doing gangbusters) and pray for the innocent in ukraine, so much is fucked up about this...

old naughty's picture

Oligarchs playing a decisive role...

ThisIsBob's picture

As the 1% have since Adam.