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David Crossland
Frankfurt, Aug 6: Germany is Russia's largest creditor but largely immune to its giant neighbour's financial woes.
Economists say the prospect of turmoil and political instability in Russia cannot fail to worry Germany, but it has led markets to exaggerate its perceived vulnerability. Analysts insist Europe's largest economy is too strong to be dragged down by Russia.
They see no need to cut their German growth forecasts as trade links between the two countries are too small to warrant it. Germany exports more to Poland than it does to Russia.
The main risk for Germany lies in its heavy credit exposure but analysts here see no danger of a debt default in the short- term and say the Bonn government, not the private sector, would bear the brunt of a Russian failure to service its debts.
Germany holds 40 per cent of Russia's estimated $150 billion foreign debt.
``Russia is more susceptible to a decline in German demand than Germany is to the Russian crisis,'' said managing director Peter Danylow of Frankfurt, Aug 6: Germany is Russia's largest creditor but largely immune to its giant neighbour's financial woes.
Economists say the prospect of turmoil and political instability in Russia cannot fail to worry Germany, but it has led markets to exaggerate its perceived vulnerability. Analysts insist Europe's largest economy is too strong to be dragged down by Russia.
They see no need to cut their German growth forecasts as trade links between the two countries are too small to warrant it. Germany exports more to Poland than it does to Russia.
The main risk for Germany lies in its heavy credit exposure but analysts here see no danger of a debt default in the short- term and say the Bonn government, not the private sector, would bear the brunt of a Russian failure to service its debts.
Germany holds 40 per cent of Russia's estimated $150 billion foreign debt.
``Russia is more susceptible to a decline in German demand than Germany is to the Russian crisis,'' said managing director Peter Danylow ofGermany's East West Trade Committee, a body set up by German industry associations.
``Germany cannot be really vulnerable because Russia accounts for just two to 2.5 per cent of German foreign trade. It's an interesting trade partner but definitely not our main one, not even in Eastern Europe.''
Danylow urged the Russian government to refrain from hitting foreign investors harder than domestic firms in its bid to raise tax revenues. ``That is a dangerous development as it diminishes Russia's attractiveness as an investment location.''
The fall of the Iron Curtain has created a political and economic buffer zone between Germany and Russia and removed Germany's status as a front line state, economists say.
At the same time, the risk of contagion within Central Europe has lessened as Poland, the Czech Republic and Hungary now depend less on Russia for trade than they do on the European Union.
German banks are by far the biggest lenders to Russia and had a credit exposure of $29.88 billion there atend-June 1997, four times the $7.55 billion exposure of US banks, according to figures from the Bank for International Settlements.
That is still significantly smaller than German bank lending to Asia which totalled $47.2 billion at end-June 1997.
And the sanguine response of German banks and industrialists so far shows they see the problem as manageable. The banks' reaction to the Asian crisis showed they would be prepared to take tough action if they saw a sharp increase in Russian risk.
But in fact, recent comments from top bankers indicate they still view Indonesia as a bigger problem than Russia. Germany's largest bank Deutsche Bank, which last year set aside 1.4 billion marks in provisions to shield itself from Asian loan losses, said last week it saw no need to increase its provisions for Russia.
Dresdner Bank, the country's second largest, said it was adding a further 250 million marks to its risk provisions for 1998 to take account of heightened risks in Asia, especially Indonesia.
Dresdnersaid its loan exposure to Russia, at 680 million marks, was 60 per cent covered by risk provisions.``What banks have lent to Russia amounts to only a tiny amount of their net assets,'' said head of financial markets research Claudia Buch at the Kiel-based IFW economic institute.
The head of Wintershall, a unit of BASF which operates a gas joint venture with Russia's Gazprom said recently the turmoil was overstated and he did not think Russia's woes would hurt Germany more than Asia did.
``The belief that the development from a planned to a market economy would take place in a straight line was unrealistic,'' Herbert Detharding told Die Welt newspaper at the end of June.
``There have got to be waves. But the direction is right and it is clearly going towards a market-oriented and democratic Russia.''
Any risks of a Russian debt default are unlikely to emerge before 2002, said senior economist Herbert Bruecker at the Berlin-based DIW research institute.
Russian annual repayments on its externaldebt are set to rise sharply to about $20 billion from 2002 under current debt agreements and that could pose a problem given the current weakness of Russian economic growth, Bruecker said.
``At present there is no risk but repayment obligations will accumulate from 2002 and this could cause risks,'' he said.
Bruecker added that most of Germany's credit exposure was covered by German state guarantees and that any major loan defaults would therefore stretch the Bonn budget. Senior economist Lothar Hessler at HSBC Trinkaus & Burkhardt, said he saw no need to revise his forecast for 2.5 per cent growth in German gross domestic product this year to take account of Russia.
Eckhard Schulte, an economist at the Industrial Bank of Japan in Frankfurt, agreed, saying: ``The true extent of the exposure has been totally exaggerated.''
In 1997, German exports to Russia totalled 16.4 billion marks ($9.27 billion) while imports were 17 billion. Total German exports to Central and Eastern Europe, including Russia,amounted to 92 billion marks, with imports totalling 75 billion marks.
The main imports from Russia are gas, oil and raw materials, and deliveries so far have been unaffected by the crisis. And even if they were, Germany could switch to purchasing them from other sources, analysts say.
``There is no dependence on energy or raw materials supplies from Russia,'' said Danylow. ``Germany diversified its procurement in that area after the oil price shock in the early 1970s.''
German exports to Russia are primarily plant and equipment, electrical engineering technology, cars, chemicals and drugs. The emergence of a wealthy business elite in Russia has also boosted German exports of consumer goods ranging from food to high-quality textiles and even vodka.
Economists expect German exports to Russia to slow in the course of 1998 after rising sharply in the opening months.
``In the first months of the year we had high growth rates and are still seeing relatively brisk trade but I would be surprised if itstays that way. There has to be an impact from the crisis,'' said Danylow.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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