How can Germany increase investments in Russia while EU economic sanctions against Russia are still in place?

Question

According to Wikipedia EU economical sanctions against Russia are still in place:

The sanctions by the European Union and United States continue to be in effect as of May 2019. In July 2018, the EU announced the extension of sanctions until February 2019.

However, this does not seem to be an deterrence for German (and also to France's) investments in Russia according to Moscow Times:

German businesses invested more than €3.3 billion ($3.7 billion) in Russia last year, reaching the highest levels in a decade and exceeding numbers not seen since Russia’s annexation of Crimea in 2014, according to data from the Russia-German Chamber of Commerce cited by the Financial Times.

German corporates are not alone in increasing their cooperation with Russian firms. Bilateral trade between France and Russia grew by 11% to $17 billion last year and French firms currently have $20 billion invested in Russia, FT reported.

This is rather counter-intuitive since one should expect that economic sanctions to act as a deterrence for investments.

Question: How can Germany increase investments in Russia while EU economic sanctions against Russia are still in place?

Answer 1

Obvious answer: the sanctions don't cover everything. And they probably don't have enough signalling effect on what they don't cover. However, that it took 5 years to reach 2014 levels again, is also not negligible, i.e. the sanctions were not entirely toothless either.

There is probably more to be said about the world economic context in which this happened, the cooling of US-Europe relations under Trump with a little trade warring in there, the threat of Brexit, etc. But the influence of those effects on Europe investing more in Russia are probably hard to quantify.

Answer 2

In their answer, Fizz has already provided the main reason:

Obvious answer: the sanctions don't cover everything.

Still, it's surprising that investments have already reached the level which the had before the sanctions were introduced.

I looked for information on who is investing in Russia. In April German business newspaper Handelsblatt published an article Warum die deutsche Wirtschaft immer mehr Geld in Russland ausgibt, which tries to explain what is driving the investments. Several sectors and large companies are mentioned:

• Daimler builds (or has built) a car factory in Moscovia because of Russian pressure (import substitution!). If Daimler wants contracts to supply the public sector with Mercedes-Benz cars, it has to assemble them locally. VW is also investing in Russia.

• Wintershall and Uniper, which are active in the oil&gas sector, are mentioned. They are members of the consortium that is building Nord Stream 2, a contentious gas pipeline through the Baltic Sea.

• Other companies invest in Russia as labor costs have fallen significantly due to the devaluation of the Russian ruble. For example, the labor costs in the textile industry are no longer higher than in China.

• Some companies had been working on projects in Russia that were related to the soccer world cup and want to stay in the market. (Siemens is cited with planning a high-speed rail connection.)

Note: I have omitted the reason Russia is an important market with more than 140 million consumers, as I don't see how this constitutes a change.

Answer 3

It bears looking at what exactly is being sanctioned. It is mentioned in the Wikipedia article you linked:

On 16 February 2015, the EU increased its sanction list to cover 151 individuals and 37 entities. Australia indicated that it would follow the EU in a new round of sanctions. If the EU sanctioned new Russian and Ukrainian entities then Australia would keep their sanctions in line with the EU.

This is the latest announcement concerning EU-imposed sanctions. There is an EU list of 151 individuals and 37 entities (mainly companies)

• who cannot enter (individuals) or do business with the EU,
• whose EU-based assets and accounts are frozen and cannot be accessed,
• with whom EU-based individuals and entities are forbidden to do business.

There’s a tiny bit more:

On 31 July 2014 the EU introduced the third round of sanctions which included an embargo on arms and related material, and embargo on dual-use goods and technology intended for military use or a military end user, a ban on imports of arms and related material, controls on export of equipment for the oil industry, and a restriction on the issuance of and trade in certain bonds, equity or similar financial instruments on a maturity greater than 90 days (In September 2014 lowered to 30 days)

On 18 December 2014, the EU banned some investments in Crimea, halting support for Russian Black Sea oil and gas exploration and stopping European companies from purchasing real estate or companies in Crimea, or offering tourism services.

On January 2018 the EU sanctioned entities who participated in the construction of the Crimea Bridge: Institute Giprostroymost, the firm which designed the bridge; Mostotrest, which has a contract to maintain the bridge; Zaliv Shipyard, which built a railroad line to the bridge; Stroygazmontazh Corporation, the main construction company that built the bridge; a subsidiary of Stroygazmontazh called Stroygazmontazh-Most and VAD, which built the roadway over the bridge, as well as access roads.

These were all individual occurrences of the search phrase EU, which is pretty much consistently used throughout the article in place of the long form or a placeholder. I cannot rule out the possibility of having missed something.

However, all things considered the sanctions only cover 37 entities on its main sanction list from 2015, an unenumerated number involved in the construction of the Crimea bridge and a couple of tightly defined business areas (military, oil production, financial stuff and stuff related to Crimea). This is far from the entire volume of trade Russia and the EU had. All other business areas are currently not restricted by European sanctions (although some might be by Russian countersanctions).

The lists and business areas are not set in stone. They can be amended or reduced by EU decisions at any point in time as the EU governments see fit. Thus, there is a potential danger of current investments being halted tomorrow—that risk has greatly reduced since 2015 (note that no new significant round of sanctions has been imposed since that was not tied to a specific event like the bridge building).

Businesses not on either sanction list and not operating in the sanctioned areas are of course free to conduct business in all legal ways they see fit.

Germany and France are two of the EU’s largest economies. Thus follows that they were affected by the sanctions most in absolute terms but also that investments from these countries in Russia can rise most in absolute terms when businesses no longer fear additional sanctions.

Answer 4

Germany has enacted sanctions on a few, specific sectors of trade with Russia, and so far it stands by them. There is a vast, ongoing trade e.g. in the energy sector. Shutting that down on short notice would hurt both Germany and Russia badly, so neither side does it. (Arguably, Nord Stream 2 is a problem because it allows Russia to maintain gas sales to Germany if the route through Ukraine is blocked by renewed war.)

German companies try to make profits for their shareholders. They are supposed to use legal ways only, and most do not break the law, but they are not required to go beyond that and forego possible profits.

Answer 5

Nationwide sanctions against Russia are very limited and concern mostly weapons and dual-use goods (stuff which can be used to make weapons), some financial services and products (money laundering, etc.) and provision of services related to deep sea oil exploitation.

The remaining sanctions concern specific physical persons and companies which are accused of outright crimes or of implementing the restrictive measures of the Putin regime. Those are listed e.g. here (among others as the list is international), but these sanctions obviously don't concern Russian people and companies which did nothing wrong.