Relations with Russia can harm thousands of European companies

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PARIS – French energy companies operating in the Russian Arctic Sea. Italian luxury boutiques near Red Square. German car factories around the Russian south.

As the United States and the European Union impose sanctions to punish Russia for invading Ukraine, European companies are bracing for the possibility that the punishment slated for Moscow could hurt them too.

The sanctions, which, among other things, prevent governments and banks from borrowing from global financial markets, block technology imports and freeze assets of influential Russians, were designed to damage the Russian economy as much as possible while causing as little damage as possible to 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 bracing for an inevitable economic setback, and the war in Ukraine threatens to disrupt supply chains and weaken the European economy just as it is recovering from the flogging of the Covid lockdowns began to recover.

“The attack on Ukraine marks a turning point in Europe,” said Christian Bruch, the CEO of Germany-based Siemens Energy, a major manufacturer of turbines and generators, this week. “We as a company now have to analyze exactly what this situation means for our business.”

The European Union is Russia’s largest trading partner, accounting for 37 percent of Russia’s world trade in 2020. Much of that is energy: about 70 percent of Russia’s gas exports and half of its oil exports go to Europe.

And although sales to Russia account for only about 5 percent of all Europe’s trade with the world, it has for decades been a key destination for European companies across a range of sectors, including finance, agri-food, energy, automotive, and aerospace and luxury goods.

Some European companies, especially in Germany, have maintained business relationships with Russia for centuries. Deutsche Bank and Siemens, the conglomerate of the parent company of Siemens Energy, have been active there since the end of the 19th century. During the Cold War, economic ties were seen as a way of maintaining relationships across the Iron Curtain.

After the fall of the Soviet Union, Western companies came to Russia for a variety of reasons, whether to sell Renaults or Volkswagens to the country’s growing urban middle class or to cater to a growing cadre of wealthy elites seeking Italian and French luxury. Others wanted to sell German tractors to Russian farmers or buy Russian titanium for planes.

While some multinationals, such as Deutsche Bank, went out of business in Russia following the annexation of Crimea in a military operation in 2014, others have worked diligently to increase their market share in recent years and have boldly attempted to expand their Russian business even as President Vladimir V. Putin prepared to invade neighboring Ukraine.

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

The heads of UniCredit Bank, tire maker Pirelli, state energy company Enel and others listened for over half an hour as Mr Putin discussed Italian business investments and opportunities in Russia.

The call, which took place on January 25, angered European politicians and underscored the conflicting economic interests facing Europe, which is now moving to hit Moscow with a barrage of sanctions for attacking Ukraine. A similar call scheduled for next week with German business leaders, including energy group Uniper and supermarket chain Metro, was only canceled on Thursday.

But with enormous economic assets at stake, European Union leaders have in recent days attempted to walk a fine line on the scope of sanctions, which have fallen short of the broader economic crackdown some Ukraine supporters have been calling for to have.

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

More notable is the removal of sanctions that would hurt Russian energy imports into Europe, in which a phalanx of influential energy companies from Paris to Berlin are instrumental. Allies also haven’t barred the Russian economy from SWIFT, the global payments system used by banks in 200 countries, and have condemned critics who said European leaders were putting economic interests ahead of the human toll in Ukraine.

That is some consolation for European countries whose companies have a large corporate presence in Russia.

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

According to the French Ministry of Finance, around 700 French subsidiaries in Russia are active in various sectors and employ over 200,000 workers.

While Mr Le Maire promised the sanctions’ impact on the French economy would be minimal, the damage to some French companies was far from clear.

Among the most exposed is French automaker Renault, which has two factories in Russia and is the leading automaker there through 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.

This problem has already hit Volkswagen, which said on Friday it would halt operations at two factories in eastern Germany that make electric vehicles for several days because supplies of key parts from western Ukraine were disrupted by fighting.

Volkswagen could also face sanctions against Russia, where it has had a factory in Kaluga since 2009, employing around 4,000 people and producing the Tiguan and Polo models, as well as the Audi Q8 and Q9 and the Skoda Rapid. Mercedes-Benz has a plant outside of 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.

But this week, as Russia shelled Ukrainian cities and world leaders imposed sanctions, Volkswagen said the impact on its business in Russia was “continuously being managed by a crisis team.”

BMW said “politics set the rules within which we operate as a company” and “if the framework conditions change, we will evaluate them and decide how to deal with them.”

And then there are the banks.

Austria’s Raiffeisen Bank, Italy’s UniCredit and France’s Société Générale are among the banks with strong ties to Russia. According to data from the Bank for International Settlements, Italian and French banks had about $25 billion in outstanding claims in Russia at the end of last year.

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

Despite efforts to minimize the pain for their own countries, European officials conceded the situation was likely to get worse before it got better.

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

“The price of facilitating peace or returning to the diplomatic table,” he said, “is that we at least give economic sanctions some bite.”

Liz Alderman reports from Paris a Melissa vortex from Berlin.

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