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European business already feeling chill of Ukraine crisis

AFP

Germany's construction sector is less optimistic over the economic outlook for the next six months, according to the Ifo economic institute's recent business climate indexGermany's construction sector is less optimistic over the economic outlook for the next six months, according to the Ifo economic institute's recent business climate index

Germany's construction sector is less optimistic over the economic outlook for the next six months, according to the Ifo economic institute's recent business climate indexGermany's construction sector is less optimistic over the economic outlook for the next six months, according to the Ifo economic institute's recent business climate index

Even before sanctions against Moscow start to bite, European companies doing business in Russia have been feeling the pinch and many fear worse to come, CEOs and analysts said Thursday.

Falling consumer confidence in Russia and a drop in the ruble have also dampened business for many European companies amid the months-old crisis.

"Of the major European countries, Germany is most exposed to the Russian risk," said Holger Schmieding, chief economist at Berenberg Bank.

Amid a mounting standoff with Russia over the Ukraine crisis, the EU opted this week for economic sanctions against Moscow.

The punitive measures coming into force Friday limit access for several Russian banks to Europe's financial markets and ban some exports, mainly in the defence and energy sectors.

But for many companies, business in the Russian market had already been suffering for months, said the VDMA German federation of machine-tool makers.

Russia is a major client for German electricity plants, gas turbines and agricultural machines.

Machine-tool exports to Russia dropped by over 17 percent in the first quarter, well ahead of sanctions, and overall German exports fell by 14 percent in the January-to-April period.

German machine-tool makers are set to miss their production growth target for this year, said the VDMA.

The sanctions now imposed on banks will potentially make it more difficult for Russian companies to access funds and invest in new machinery.

"The conflict with Russia doesn't affect only bilateral trade," warned VDMA chief economist Ralph Wiechers. "It hampers demand in many important markets for our industry."

- 'Heavily exposed' -

As many German companies released quarterly earnings this week, Jennifer McKeown of Capital Economics said that "while the (German) economy on aggregate is not at risk, particular companies are heavily exposed".

Sports goods maker Adidas, for one, warned Thursday that it will miss its financial targets for this year and next.

Among other factors, it blamed the weakness of the ruble and worsening consumer sentiment in Russia, one of its main markets with annual sales of one billion euros ($1.34 billion).

Its stock plunged more than 15 percent Thursday on the news.

German retail giant Metro, one of the main foreign employers in Russia, also expressed its "concern" over East-West tensions Thursday.

- 'Cost of uncertainty' -

Oxford Economics said that while US and European sanctions "remain relatively narrow in scope" and their "their direct impact appears limited, their indirect impact may be substantial".

"Sanctions are likely to have a broad 'chilling' impact on Russia's access to external finance which will put pressure on the country?s fragile balance of payments position. This in turn risks a weakening currency, higher interest rates and a negative impact on economic growth.

"GDP is now likely to shrink this year, with a further impact in 2015."

Carmakers would be among the first to suffer under a Russian recession, especially makers of economy models such as Ford and Opel, predicted German auto sector expert Ferdinand Dudenhoeffer of the University of Duisburg-Essen.

Renault of France said this week it was unable to assess the possible impact of sanctions on its business.

Those likely to be directly hit by sanctions were even more reluctant to make any prediction.

French oil giant Total, which is currently building a new gas liquefaction site in Russia, deemed it "premature" to say anything about a possible effect, while energy company EON and Wintershall, a BASF subsidiary very involved in Russia, declined to comment.

At Siemens, which sells two billion euros worth of trains and gas turbines a year to Russian clients, company boss Joe Kaeser didn't see any major impact on this year's results, but would not be drawn on his outlook for 2015.

And energy giant BP, which teams up with Rosneft in Russia, this week expressed concerns about its business there and its financial results.

Marcel Fratzscher, head of Germany's DIW economic research institute, said that "the biggest cost factor (for European economies) is the uncertainty", rather than foregone business now.

At a time when the eurozone is still recovering from recession, he said, the uncertainty "could rapidly spread from specific sectors to the economy as a whole."

Date created : 2014-07-31