Relations with Russia could harm thousands of European companies

PARIS — French energy companies operating in the Russian Arctic Sea. Italian luxury shops near Red Square. German car factories in southern Russia.

As the United States and the European Union apply sanctions to penalize Russia for its invasion of Ukraine, European companies are preparing for the possibility that the punishment aimed at Moscow could hurt them as well.

The sanctions, which include preventing the government and banks from borrowing in global financial markets, blocking technology imports and freezing the assets of influential Russians, were designed to maximize the pain of the Russian economy while by inflicting as little damage as possible within the European Union, French Finance Minister Bruno Le Maire said on Friday.

But thousands of foreign companies that have been doing business in Russia for years are preparing for an inevitable economic comeback, and the war in Ukraine threatens to disrupt supply chains and bring down the European economy just as it was beginning to recover from the Covid blockade blows.

“The attack on Ukraine represents a turning point in Europe,” Christian Bruch, chief executive of Siemens Energy, a major turbine and generator producer based in Germany, said this week. “As a business, we now need to analyze exactly what this situation means for our business.”

The European Union is Russia’s largest trading partner, accounting for 37% of Russia’s global trade in 2020. Much of that is energy: around 70% of Russia’s gas exports and half of its oil exports are destined for Europe.

And while sales to Russia represent only around 5% of Europe’s total trade with the world, it has for decades been a key destination for European companies in a range of industries, including finance. , agriculture and food, energy, automotive, aerospace and luxury goods. .

Some European companies, especially in Germany, have had commercial ties with Russia for centuries. Deutsche Bank and Siemens, the huge conglomerate that is the parent company of Siemens Energy, have been doing business there since the late 19th century. During the Cold War, economic ties were seen as a means of maintaining relations across the Iron Curtain.

After the fall of the Soviet Union, Western companies came to Russia for different reasons, whether to sell Renaults or Volkswagens to the country’s growing urban middle class, or to meet the needs of a growing group of wealthy elites in search of Italian and French luxury. Others wanted to sell German tractors to Russian farmers or acquire Russian titanium for aircraft.

While some multinationals, such as Deutsche Bank, reduced their relations with Russia after its annexation of Crimea in a military operation in 2014, others have worked diligently to increase their market share in recent years and have boldly sought to expand their business in Russia. even as President Vladimir V. Putin prepared to invade neighboring Ukraine.

Last month, 20 of Italy’s top leaders held a video call with Mr Putin to talk about strengthening economic ties as Russian troops massed on the Ukrainian border and European leaders discussed sanctions.

Executives from UniCredit bank, tire company Pirelli, utility Enel and others listened for more than half an hour to Putin talking about Italian business investments and opportunities in Russia.

The call, held on January 25, angered European politicians and underscored the conflicting economic interests Europe faces as it prepares to punish Moscow with a barrage of sanctions for attacking Ukraine. A similar call scheduled for next week with German business leaders, including those from energy firm Uniper and supermarket chain Metro, was only canceled on Thursday.

But with huge economic assets at stake, European Union leaders have in recent days sought to live up to the reach of the sanctions, which have fallen short of the more sweeping economic repression some supporters of the Ukraine demanded.

At one point during frantic negotiations this week, Italy’s officials sought to have goods produced by its luxury industry excluded from any sanctions package. They also advocated for tougher sanctions that omit major crackdowns on Russian banks, much like Austria, whose Raiffeisen Bank International has hundreds of branches in Russia, diplomats said.

More notable is the omission of sanctions that would harm Russian energy imports into Europe, in which a phalanx of influential energy companies from Paris to Berlin hold major interests. Nor did the allies shut down the Russian economy to the global payments system known as SWIFT, which is used by banks in 200 countries, drawing condemnation from critics who said European leaders were placing interest economic above Ukraine’s human toll.

This is a comfort for European countries whose companies have a strong presence in Russia.

In France alone, 35 of the 40 largest French companies listed on the country’s CAC 40 stock exchange have significant Russian investments, from Auchan supermarkets on the streets of Moscow to the liquefied natural gas operations of French energy giant TotalEnergies in the Yamal Peninsula, above the Arctic Circle. All but two of the 40 companies listed on the Frankfurt DAX index have investments in Russia.

About 700 French subsidiaries operate in Russia in a variety of industries employing more than 200,000 workers, according to the French finance ministry.

While Mr Le Maire promised that the impact of the sanctions on the French economy would be minimal, the blow to some French businesses was far from clear.

Among the most exposed is the French carmaker Renault, which has two factories in Russia and is the first carmaker there thanks to a partnership with Avtovaz, which makes the Lada the most popular car in Russia. Russia is Renault’s second largest market after France.

Last week Luca de Meo, the company’s chief executive, warned that escalating tensions between Russia and Ukraine could lead to “another supply chain crisis” for the company.

The problem has already hit Volkswagen, which said on Friday it would suspend operations for several days next week at two electric vehicle manufacturing plants in eastern Germany as deliveries of crucial parts from the west of Ukraine were interrupted by the fighting.

Volkswagen could also be hit by sanctions against Russia, where since 2009 it has had a plant in Kaluga that employs around 4,000 people producing its Tiguan and Polo models, as well as the Audi Q8 and Q9, and the Skoda Rapid. Mercedes-Benz has a plant outside Moscow, while BMW works with a local partner. All three have invested in the Russian market and a growing group of consumers who can afford their cars.

This week, however, as Russia strafed Ukrainian cities and world leaders moved to impose sanctions, Volkswagen said the impact on its business in Russia would be “continually determined by a crisis team.”

BMW said “the policy sets out the rules under which we operate as a business” and that “if the framework conditions change, we will assess them and decide how to deal with them.”

And then there are the banks.

Raiffeisen Bank from Austria, UniCredit from Italy and Société Générale from France are among the banks that have substantial ties to Russia. Italian and French banks had bad debts of about $25 billion in Russia at the end of last year, according to data from the Bank for International Settlements.

France, Italy and Germany were the main European powers urging not to cut Russia off from the SWIFT global payment system. Eliminating Russia would make it difficult for European creditors to receive money from Russian sources – or to pay for Russian gas, on which these countries have come to depend, especially in Europe’s current energy crisis.

Despite efforts to downplay their own countries’ pain, European officials have acknowledged that the situation is likely to get worse before it gets better.

“It will not be possible to prevent sectors of the German economy from being affected,” German Economy Minister Robert Habeck said on Thursday.

“The price of making peace possible, or getting back to the diplomatic table,” he said, “is that we at least get the economic sanctions bitten.”

Liz Alderman reported from Paris and Melissa Eddy from Berlin.

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