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Russia Sanctions Exact Their Pound of Flesh – from Germany

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Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

The elegant sanction spiral the US and the EU are imposing on Russia has not been, let’s say, welcome by German business tycoons. But they can’t fight it directly. They have to do it indirectly, by evoking dire consequences.

So, over the weekend, Daimler CEO Dieter Zetsche told the public that business in Russia had been booming, with sales still up 20% in the first half, “but now the momentum is going down.”

Even before the start of the Ukrainian fiasco, the Russian economy was in “a difficult phase,” and the sanctions leave it “further impaired,” he said. “This impacts the Russian car market and thus also Daimler.” Russia is a smallish but important market for Daimler, as is the case with many German companies – last year, it was the 13th largest destination for German exports. But car sales in Europe have been abysmal. And Daimler had been counting on Russia as one of the bright spots.

As good soldier of Germany AG., he cannot publicly attack the government’s foreign policy. Domestic policies, however, such as the introduction of the first minimum wage, are a fair target for these seasoned, ultra-wealthy warriors [Extortion Over Minimum Wage In Germany: BMW, Daimler, VW Threaten to Offshore Production].

Attacks against foreign policy must be indirect. And so he said what they all say, that it was “very clear,” there is “the primacy of politics,” he said. “The economy has to adapt to the conditions set by government policy – independent of the direct consequences.”

And the direct consequences are not good for Daimler. The company has deep connections in Russia, including equity investments, such as a 15% stake in Russian truck builder Kamaz. And it’s assembling trucks in Russia under the Mercedes-Benz and Fuso brands. Other German companies are similarly involved, and the sanction hurt.

This phenomenon has already shown up in the Ifo Institute’s Business Climate Index, which has been dropping since March, and in its Business Expectation Index, which has been dropping since the beginning of the year. All four sub-indices – manufacturing, construction, wholesaling, and retailing – have taken a hit.

Now the media-savvy and always on the forefront economist Hans-Werner Sinn, president of the Ifo-institute, chimed in with a piece in the Wirtschaftswoche. The sanction spiral against Russia and the conflict in the Ukraine have already damaged the German economy. “The economic recovery that began in the second half of last year and continued until winter seems to take a longer break now,” he said. And Ifo’s growth estimates last month of 2.0% for this year and 2.2% for next year? Forget that. They’ll have to be lowered.

“The assumption that the second quarter of 2014 compared to the first, grew by 0.3% is no longer tenable given the current state of things. More likely is zero growth.”

And for the third quarter? “The currently estimated growth of 0.4% will likely have to be revised down. That will significantly reduce the annual growth forecasts for 2014 and 2015.”

The sanctions exact their pound of flesh. In Q1, Germany enjoyed a bout of growth of 0.8%, the fastest in three years, in part due to the unusually mild winter weather. At the time, it sparked a lot excitement, now obviated by events. Even though the Bundesbank a month ago raised its annual forecast for Germany by 0.2 percentage points to 1.9%, it too saw stagnation in Q2. And now Q3 and Q4 are looking increasingly iffy.

But Sinn was quick to point out, by drawing a fearsome parallel, that Germany won’t re-plunge into the kind of economic hole that it had plunged into during the Financial Crisis, he said. He had his reasons: “First, the domestic economy is supported by a considerable increase in consumption; secondly, the service sector is very solid; and thirdly, the Ifo indicator, compared to the earlier periods, softened only moderately. Thus, there is no resemblance to the disaster of 2008.”

But precisely by bringing up the “disaster of 2008,” he reminded Chancellor Merkel – and for that matter, President Obama – what politics could do to the economy, if the political leaders continued to storm down the road of economic sanctions. It was a warning by Germany AG, echoing Daimler CEO Zetsche: the German economy lives and dies by its exports, and it cannot afford an economic conflict with Russia.

European Council President Van Rompuy had a dream: the sanctions “should have a strong impact on Russia’s economy” but only “a moderate effect on EU economies.” But the Association of German Chambers of Commerce and Industry (DIHK) warned that exports to Russia would dive 17%, after having dived 16.9% in April, when the sanctions began their handiwork, and 17.5% in May. Read….  Sanction Spiral Successful: German Exports to Russia Plunge

 

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Mon, 08/04/2014 - 16:58 | 5045754 falak pema
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the coming wind down of Pax Americana and USD is in the cards. 

But it will take another decade or two.

We are in transition phase but we know where the world is going : towards a decline of Anglo saxon preeminence.

A rise of multilateral emergence. In this scenario the German model is the best compromise. It cannot but gain momentum as its fundamentals are better aligned.

Whatever the tug and pull during the on going geo poltical reset, the debit side of US past hegemony is now clear for all to see. 

Both inside its corridors of power as outside, in its surrogate Empire, the US word is now contested as there is no clarity in the vision, no efficiency in the action and no trajectory to invert the current incoherent dynamics.

The model is now like Lady of Shalott's mirror, as the curse of fiat debt is upon it. 

Mon, 08/04/2014 - 16:14 | 5045472 pashley1411
pashley1411's picture

Germany has had tremendous economic interests in Russia for hundreds of years.     If anyone thinks the community-organizer-in-chief is going to change that, they are delusional.

Mon, 08/04/2014 - 16:12 | 5045439 Blazed
Blazed's picture

Ethno-mafia Shylocks are doing their thing, globally.

Mon, 08/04/2014 - 15:52 | 5045279 Renfield
Renfield's picture

<<But precisely by bringing up the “disaster of 2008,” he reminded Chancellor Merkel – and for that matter, President Obama – what politics could do to the economy, if the political leaders continued to storm down the road of economic sanctions. It was a warning by Germany AG, echoing Daimler CEO Zetsche: the German economy lives and dies by its exports, and it cannot afford an economic conflict with Russia.>>

I am Joe's complete lack of surprise.

Capital is beginning to flex its muscle. Wars must be financed, and I think the sun is setting on the financial era.

Mon, 08/04/2014 - 15:50 | 5045278 giggler321
giggler321's picture

"Mr. EU" says bend over "Mr. Germany"; the spanking starts now but first you must pay us...

Mon, 08/04/2014 - 15:35 | 5045169 JohninMK
JohninMK's picture

The US really couldn't give a shit about the downstream damage to EU companies or economy can it?

Shame about the Daimler car assembly plant in Russia then.

http://rbth.co.uk/business/2014/07/11/daimler_planning_to_set_up_mercede...

http://wardsauto.com/plants-amp-production/daimler-decide-russian-car-as...

Plus the German Government has stopped the €100 million ($134 million) joint project between Russia’s Defense Ministry and German automotive components and defense equipment manufacturer Rheinmetall, Sueddeutsche Zeitung reported on Monday.

http://en.ria.ru/russia/20140804/191703927/Germany-Hampers-Russian-Deal-...

Or the poor Polish farmers, this is 870000 tons of fruit/veg a year. They think meat could be next. Smuggling into Bellarus next?

The agriculture chamber of Greater Poland Voivodeship blames Polish politicians for recent Russia’s ban on imports of fruits and vegetables from Poland. “The political bias of Polandin the Ukrainian conflicy backfired with economic consequences. Unbalanced statements of some of Polish politicians led to a response by the vRussians. Direct victims of such economic and agricultural restrictions are Polish agricultural producers.

http://en.ria.ru/business/20140803/191674408/Russias-Embargo-Threatens-P...

But of course it is nothing to do with politics or even Ukraine, it is all about the money

Vadim Kolyuzin, a professor at the Academy of Military Sciences, does not see realpolitik in the American sanctions. "Moscow is not involved in the events in Ukraine and in the Syrian situation it also limited itself to political measures," he says. According to Kolyuzin, the U.S. Treasury's decision is based solely on economic reasons. Data collected by the Stockholm International Peace Research Institute (SIPRI) says that Russia is the world's second largest arms and military technology exporter. Its total export sales in 2013 were $13.2 billion, and by the beginning of February 2014 export orders on Russian military production reached $40 billion. Russia is also conquering new markets, which in the past were completely dependent on the U.S., such as Latin America. In recent years Venezuela and Brazil's collaboration in the field of military technology has become just as important for Russia as that of China, India and Algeria. http://rbth.co.uk/defence/2014/07/30/why_sanctions_against_arms_companies_are_in_the_interests_of_us_produ_38647.html) If they can't buy from Russia........ The Russian Foreign Ministry said on Monday that NATO has revived its 'Cold War'-type propaganda against Moscow to justify the alliance’s military buildup and defense spending.

In a Sunday interview with French newspaper Midi Libre, Head of NATO Rasmussen said the alliance would draw up new defense plans in the face of alleged "Russia's aggression" against Ukraine, and again encouraged NATO countries to increase their defense spending.

http://en.ria.ru/world/20140804/191719809/Russia-Says-NATO-Revives-Cold-... Some more Russian counter sanctions Russia's Rospotrebnadzor is working on documents banning the import of Kentucky Gentleman Bourbon whiskey from the U.S. into Russia. "We are in the process of issuing a document banning the import of this product into Russia," the Rospotrebnadzor press service told Interfax on Monday. "This alcohol-containing drink was found to contain phthalates, which are capable of causing functioning and later organic changes in the central and periphery nervous system and endocrine system, and also cancer and futility problems in men and women," Rospotrebnadzor reported on its website. http://rbth.co.uk/news/2014/08/04/rospotrebnadzor_decides_to_ban_import_of_kentucky_gentleman_whiskey_38738.html) The Russian Central Bank has officially announced the creation of a national payment card system to rival existing international operations such as Visa and MasterCard. The new system will not be based on Sberbank’s PRO 100 network, as previously reported, but will be created from scratch. The Russian Central Bank has decided to create a national payment card system - a competitor to Visa and MasterCard - from scratch, without using existing structures. The new system should start working in 2015 and the first cards with the emblems will be issued in a year and a half. According to a Central Bank press office announcement on July 29, the national payment card system will be based on its own platform. "The decision is final: The technological foundation will be its own, however, developments made in Russia and abroad will be taken into consideration," Vice President of the State Duma's Financial Market Committee Anatoly Aksakov told the Itar-Tass news agency. The decision to create this system was made after the Visa and MasterCard international payment systems blocked operations with cards issued by the Russian banks included on the U.S. sanctions list in May 2014 http://rbth.co.uk/business/2014/08/04/russian_central_bank_to_create_its_own_domestic_payment_system_38751.html) Not sanctioned yet but this could get really heavy, titanium (Russia and China largest producers), tin, rare earth etc etc Many consumers have no idea that the things they use every day – be it a French car or an American smartphone – contain a bit of Russia. RBTH looks at four products that require the use of Russian materials.
http://rbth.co.uk/business/2014/08/02/how_did_russia_power_your_smartphone_and_shape_your_car_38703.html) Icing on the cake
China may become first foreign buyer of S-400 anti-aircraft system http://rbth.co.uk/news/2014/07/10/china_may_become_first_foreign_buyer_of_s-400_anti-aircraft_system_38104.html)
Mon, 08/04/2014 - 17:52 | 5046083 Bunghole
Bunghole's picture

Great reading some non-msm sponsored propaganda

Mon, 08/04/2014 - 15:21 | 5045110 Uchtdorf
Uchtdorf's picture

This is all kabuki. The elites are secretly preparing to bring in Russian troops to control the angry white men in America. Chinese troops, too.

Mon, 08/04/2014 - 15:14 | 5045074 WTFUD
WTFUD's picture

Keep the home fires burning.

Mon, 08/04/2014 - 15:02 | 5045021 laomei
laomei's picture

And to do my part, I have been buying more russian imports and eating more imported russian food (their ice cream is the best hands down).  In the past few weeks I have been enjoying Cuban exports, Iranian exports, Russian exports, we did a Palestinian owned diner and we even stopped in at a state-owned North Korean place.  Please obama, sanction more places so I can discover them.

Mon, 08/04/2014 - 14:32 | 5044911 moneybots
moneybots's picture

"(DIHK) warned that exports to Russia would dive 17%, after having dived 16.9% in April, when the sanctions began their handiwork, and 17.5% in May."

 

Paging Mr. Smoot.  Paging Mr. Hawley.

Mon, 08/04/2014 - 14:31 | 5044908 Aussiekiwi
Aussiekiwi's picture

It is not just the immediate effects that need to be considered, there are long term problems that will become evident years down the road as Europe displays to Russia that it is an unreliable business partner, this realisation will move European countries to the bottom of the list for joint ventures and other regional developments.

Mon, 08/04/2014 - 14:12 | 5044806 USisCorrupt
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Don't Worry be HAPPY !

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