German insists trade subordinate to politics in Russia row

German finance minister Wolfgang Schäuble has insisted Berlin's economic interests are subordinate to political policy in the ongoing stand-off with Russia over Ukraine.

In an interview with German public television Mr Schäuble brushed off lobbying efforts of German business leaders and economists – that sanctions must be avoided at all costs – saying the crisis with Russia was “primarily about international law, which must be adhered to”.

“It is of secondary importance if this costs us something in economic or business terms,” said Mr Schäuble, when asked about sanctions. “Russia has far more to lose in the medium term than the West – Europe and the US.”

Just what Germany has to lose remains a matter of heated debate. Every German news report on the deteriorating situation in eastern Ukraine is matched by another detailing the potential economic cost to Germany of a stand-off with Russia.

Export-driven economy
With €19 billion in direct investment, Germany has Europe's greatest economic ties with Russia. Russian energy imports, accounting for more than a third of Germany's total energy mix, are vital for Germany's crucial manufacturing sector. Halting Russian imports of these products, from cars to cement, would see Germany's export-driven economy transformed into its Achilles' heel.

Despite the risk, Chancellor Angela Merkel is hardening her line towards President Vladimir Putin, telling him on Sunday that massing troops on Ukraine's eastern border was "no contribution to deescalation".

“Merkel has come around to the idea of economic sanctions and is now working all the levers so that she has a free hand for this,” said Ulrich Speck, visiting scholar at the Carnegie Europe think tank in Brussels. Pushing an OSCE observer mission won over her coalition partners, the traditionally Russia-friendly SPD.

Defence minister Ursula von der Leyen has done the media rounds, arguing the Ukraine crisis demonstrated Nato was clearly “not just a military but also a political alliance”. The arrival into the debate of Mr Schäuble, an architect of German unification and the new Europe, indicates Dr Merkel is pulling out the big guns.

“With 70 per cent of Germans against sanctions, she has to turn around opinion,” said Mr Speck “She has to convince them that, in this case, international law is more important than economic interests.” That means setting aside the “change through trade” strategy, particularly beloved of the SPD, that commerce would drive democratic transformation in a win-win for Germany.

Dr Merkel still has some way to go: the SPD, nursing its shattered illusions about Russia, accused Ms von der Leyen yesterday of provoking Moscow with her Nato remarks. Prominent business and economic voices, meanwhile, continue to rail against sanctions. The Ifo economic institute argues that a trade boycott would hit Russia much harder than the EU in the short term – but that Germany would be hardest hit of all EU member states.

EU imports from Russia account for 15 per cent of its GDP, according to Ifo-compiled figures, while exports in the other direction account for just one per cent of the bloc’s total GDP. However, German exports to Russia account for 1.4 per cent of GDP and an estimated 350,000 German jobs depend on Russian trade.