German economic crisis: Angela Merkel dealt huge blow as Russia punishment backfires

Angela Merkel says EU budget delay is a ‘serious problem’

Brussels slapped sanctions on the Kremlin in 2014 when Vladimir Putin ordered the annexation of the Crimean region of Ukraine. And there have been growing calls for stricter measures to be introduced this week in response to the detention of Russian opposition leader Alexei Navalny, including the suspension of the Nord Stream 2 gas pipeline project.

Russia imports mainly industrial goods from the EU but exports almost exclusively raw materials

Jasmin Gröschl

But German business leaders have warned of a looming economic crisis with companies there among the hardest hit by the fall-out from the sanctions.

The Munich-based Ifo Institute said the true impact of the Russian sanctions on the German economy was revealed in a survey of 862 companies.

Bosses said the sanctions had created a much higher bureaucratic burden which hampered trade with Russia along with additional controls, trade bans and inadequate financing options.

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They said currency fluctuations, Russia’s efforts to replace imported goods, increased standards, political and economic uncertainty, loss of trust and reputation, rules for local suppliers and increased competition from third countries had also created significant problems when dealing with Russian firms.

Ifo foreign trade experts Jasmin Gröschl and Feodora Teti said: “Machine and car manufacturers, chemicals and electronics as well as logistics are most frequently affected.”

Around half of all companies who took part in the survey said they would benefit from a lifting of EU sanctions.

Ms Gröschl said: “Russia is unilaterally dependent on the EU as a supplier and buyer, while Russia plays a subordinate role for the EU as a trading partner.

“Russia imports mainly industrial goods from the EU but exports almost exclusively raw materials such as gas and oil.”

The survey found firms in former East Germany were more severely affected than those in the west.

The company survey of the Ifo Institute on behalf of the Chamber of Commerce and Industry Düsseldorf was carried out in September 2020 and 862 German companies took part.

The results were published as MEPs looked set to support a resolution calling for the EU to halt the completion of the Nord Stream 2 gas pipeline taking Russian natural gas to Europe, in response to Mr Navalny’s arrest.

The prominent Kremlin critic was detained at the weekend and later jailed for alleged parole violations after flying back to Russia for the first time since being poisoned by a military grade nerve agent.

Angela Merkel, who has continued to back the pipeline despite criticism elsewhere in the EU, said her view of the project had not changed despite the Navalny case.

A draft of an EU resolution, which is not binding but carries political weight, seeks an immediate stop to construction of the German-Russian Nord Stream 2 pipeline.

It says: “The European Parliament calls on the EU and its member states to critically review co-operation with Russia in various foreign policy platforms and on projects such as Nord Stream 2, the completion of which the EU must stop immediately.

“The EU should devise a new strategy for the EU’s relations with Russia, centred around support for civil society, which promotes democratic values, the rule of law, fundamental freedoms and human rights.”

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Nord Stream 2 is designed to double the capacity of the existing undersea Nord Stream gas pipeline from Russia to Germany to 110 billion cubic metres per year, more than half of Russia’s overall pipeline gas exports to Europe.

Led by Russia’s Gazprom with Western partners, the pipeline is more than 90 percent complete and scheduled to operate from early 2021.

The project has split the EU, with some members saying it will undermine traditional gas transit state Ukraine and increase the bloc’s energy reliance on Russia.

(Additional reporting by Monika Pallenberg)

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