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Wall Street Journal / Life - Entertain

Russia’s Trade With the West Surges Even as Sanctions Mount

Trade has surged between Russia and its main Western antagonists even as relations have deteriorated, raising questions about the long-term impact of economic sanctions on Moscow.

A reach stacker carries a shipping container in a storage area at the Freight Village Vorsino transport and logistics center operated by TransContainer PJSC in Kaluga, Russia, on April 9.

BERLIN—Trade has surged between Russia and its main Western antagonists even as relations have deteriorated, raising questions about the long-term impact of economic sanctions on Moscow.

The U.S. and Europe’s largest nations, including France and Germany, saw exports to and imports from Russia skyrocket in 2017 after three years of decline. Both now stand at their highest levels since 2014, the year Russia invaded Ukraine and annexed Crimea, prompting the U.S. and its European allies to impose curbs.

The turnaround could be short-lived. After Washington this month unveiled fresh sanctions against senior Russian government officials and companies in the latest U.S. retaliation against Moscow’s election meddling, markets tanked in Russia and several Western companies with operations there began reconsidering their investments.

As Russia emerged from recession to post 1.6% growth in gross domestic product last year, total trade between the EU and Russia rose 17.9% from 2016, to $285.8 billion. The U.S. saw its trade with Russia rise by 12.5% that year.

Investment from some European countries has also risen sharply.

But last year’s renaissance still poses serious questions about the effectiveness of such punitive measures. While sanctions can inflict much damage in the short term, their potency wanes as businesses, and in some cases governments, work to circumvent the barriers and rebuild economic ties.

In the wake of the Ukraine crisis, the U.S. and the European Union imposed sanctions on Russia that targeted the defense, energy and financial sectors, as well as specific individuals involved in or benefiting from Crimea’s annexation. Russia reacted with a ban on Western food imports.

There are three types of Western sanctions: The first ones restrict access to Western financial markets and services for Russian state-owned companies in the banking, defense and energy sectors. The second type bans exports to Russia of special high-technology oil-exploration and -production goods. The third forbids the exports of special military and dual-use goods to Russia.

Initially, the sanctions worked, compounding the effect of weak oil prices and accelerating a sharp drop in the ruble’s exchange rate. In 2015, trade between the EU and Russia fell more than 25%.

The rebound in commercial activity is particularly jarring because political relations between the two sides markedly deteriorated last year. Accusations of Russian meddling in the 2016 U.S. presidential election have been poisoning the rapport between Washington and Moscow. European countries and the U.S. recently expelled scores of Russian diplomats after the U.K. blamed Moscow for the attempted killing of a former Russian double agent using nerve gas.

Relations could worsen even more after Western criticism of Russian policy in Syria intensified following the latest chemical-weapon attack there this week. President Donald Trump on Wednesday warned Russia of reprisals for shooting down missiles fired at Syria, but adding in another tweet that “Russia needs us to help with their economy.”

But Burkhard Dahmen, chief executive of Germany’s plant-construction and mechanical-engineering company SMS Group GmbH, said “our business hasn’t suffered from the sanctions.” SMS has closed more than a dozen deals there since 2017.

France, Germany and Italy registered the sharpest increases in trade with Russia last year at 26.5%, 19.5% and 17.3%, respectively.

In one example of how the sanctions’ potency seemed to wane over time, China briefly overtook Germany as Russia’s top supplier of machinery and capital goods in 2016 but lost its position again a year later, Germany’s VDMA engineering association said.

“The dust has settled,” said VDMA’s Monika Hollacher. “Businesses can now better assess which export license they should apply for and which ones don’t stand a chance.”

Vehicles are displayed at a ceremony for the laying of a cornerstone at a new Mercedes-Benz plant in Esipovo, outside Moscow, in June 2017.

​This is particularly true in such countries as Germany and Italy, which have a long history of trading with—and investing in—Russia as well as decades-old institutions dedicated to promoting the relationship.

Founded in 2000, the German-Russian Strategic Working Group for Businesses and Finances brings together business and government representatives. Disbanded in 2014, the group met again for the first time in June 2016, when companies and institutions signed 10 contracts.

The group met again in September and another meeting is scheduled for this year.

“There’s no contradiction to Germany’s foreign policy,” said Beate Baron, spokeswoman for the German economics ministry. “The dialogue with Russia should continue. Part of the German-Russian Strategic Working Group’s purpose is to achieve this even in difficult times.” ​

In France, the Franco-Russian Economic, Financial, Industrial and Trade Council was suspended in 2015 but was reinstated a year later by Emmanuel Macron, France’s economy minister at the time and current president. Further south, an Italian-Russia task force of government and business figures created in 2002 met in Yekaterinburg in October to discuss joint opportunities in the construction, engineering and energy sectors.

Trade is only the most visible aspect of the economic links between Europe and Russia. Another one is investment, which doesn’t appear in import-export statistics. German direct investment in Russia surged to $1.08 billion in the first three quarters of 2017 from $274 million in all of 2016, according to Bank of Russia statistics. France’s investments in Russia rose to $524 million during the same period from $438 million.

This partly reflects an improvement in the business climate in Russia, with oil prices normalizing, local labor costs dropping and the ruble recovering. In the World Bank’s 2018 Doing Business Index, Russia climbed to 35 out of 190, up from 92 in 2014.

German auto maker Daimler AG is currently building a €250 million assembly plant in the Moscow region, while rival BMW AG is expected to announce next year that it will build a new Russian plant near Kaliningrad. Volkswagen AG , Germany’s largest car maker, and Russian partner GAZ PJSC last year extended their cooperation until 2025.

Some European companies have taken on Russian business even when those ties threatened established relationships with U.S. partners. Last year, Germany’s PSI AG , which provides enterprise software, received an order from Gazprom that had one condition attached to it: That PSI’s software should no longer depend on the presence of databases by U.S. giant Oracle Corp. PSI duly obliged and brought forward its own plans to become independent from Oracle by three to five years because of this specific request, PSI said.

French car maker Renault SA, the largest foreign investor in Russia, saw sales there rise by 12% in 2017 and said it expected the Russian car market to grow by close to 10% this year—10 times faster than the French and European markets. Renault produces more than 80% of its cars sold in Russia locally.

French oil giant Total SA has major interests in Russia, including a flagship liquefied natural gas export project. The company said the sanctions imposed by the EU and the U.S. hadn’t materially affected its activities in Russia.

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