* Germany is Russia's biggest European Union trade partner
* Defence firm Rheinmetall cuts profit outlook
* Mittelstand companies especially worried
By Victoria Bryan and Michelle Martin
BERLIN, Aug 7 Companies in Germany, Russia's
biggest trade partner in the European Union, are starting to
feel the pain of a deepening standoff between the West and
Moscow, with firms from defence to car manufacturing warning
about a hit to business.
Germany sold about 36 billion euros ($48 billion) of goods
to Russia last year, almost a third of the EU's total, and some
6,200 German firms are active there with 20 billion euros of
But despite active lobbying by German industry, Chancellor
Angela Merkel has backed a hard line with Moscow, supporting the
imposition of tougher economic sanctions by the EU after the
downing of an airliner last month over an area of eastern
Ukraine controlled by pro-Russian rebels.
The European Central Bank warned on Thursday that the
conflict in Ukraine poses a serious risk to the euro zone's
It is too soon for the impact of the sanctions on Germany to
appear in economic data. But companies from a range of sectors
reporting financial results in the last few days have shown how
the crisis is already hurting their profits and warned of worse
to come if the situation deteriorates.
German defence firm Rheinmetall on Thursday cut
its profit outlook for the year and said it would seek
compensation after Germany withdrew an export licence for combat
simulation equipment destined for Russia, a move which goes
beyond EU sanctions blocking future defence contracts.
The sanctions were imposed on Russia's defence, oil and
financial sectors over its support for rebels waging an
insurrection in east Ukraine.
Fraport, the operator of Frankfurt airport, warned
there could be a significant impact on it stake in St.
Petersburg airport if Russia retaliated with direct sanctions
against German investors.
Generic drugmaker Stada, which gets around 16
percent of its sales from Russia, said profits stagnated, hurt
by lower sales in Russia and a decline in the rouble currency.
Stada CEO Hartmut Retzlaff said demand for "lifestyle"
products, such as generic Viagra as well as a herbal potency
treatment called Vuka-Vuka, was down.
"Russian households are focusing on basic products for their
everyday needs," he said.
Some 300,000 jobs in Germany depend on trade with Russia,
its 11th biggest commercial partner, according to Germany's
Committee on Eastern European Economic Relations, which
represents business in Russia, eastern Europe and central Asia.
Russia responded to the tougher sanctions on Thursday by
saying it would ban food imports from countries that had imposed
them, including the United States, the EU, Australia, Canada and
Germany's economy ministry said it was looking at the
restrictions, their effect on companies and whether any action
needed to be taken.
Economic sanctions will likely hurt the spending power of
Russian consumers, crimping sales at German companies like
Adidas and Volkswagen, which are already
feeling the pain.
Adidas, which warned about lower profits last week, is
scaling back its store expansion plans in Russia because of
risks to consumer sentiment and spending as a result of the
VW's Audi luxury-car division said on Thursday that sales in
Russia slid 12 percent in July.
Tatiana Hristova, analyst at market research firm IHS
Automotive, estimated that Russia's passenger car market could
plunge by as much as a fifth this year as the impact of
sanctions filters through to hurt demand. Russian auto sales
declined 5 percent in 2013.
Threats by Russia to close its airspace to European airlines
flying over on their way to Asia could hurt German air travel
firms, including Lufthansa, Europe's largest airline
For Fraport, such a ban would mean fewer high-spending Asian
passengers flying through Frankfurt.
The German Chamber of Industry and Commerce said on Thursday
that the possible effects of tighter sanctions were causing
uncertainty amongst companies, especially the Mittelstand - the
small to medium-sized firms central to the country's economy.
That view was echoed by Anton Boerner, head of the BGA
trade association that represents around 120,000 wholesalers,
exporters and service providers. He said firms were already
investing less and placing fewer orders due to the crisis.
Tobias Baumann, head of the Chamber's Russian department,
estimates that German exports to Russia could fall by 20 percent
this year, with engineering firms being hit the hardest.
Christian Schulz, senior economist at Berenberg Bank, said
shipments to Russia accounted for around 1.4 percent of German
gross domestic product in 2012/2013 on average so a 20 percent
drop in exports to Russia would shave around 0.2-0.3 percentage
points off growth.
"That's sizeable but it's not something that would throw the
German economy back into recession," he said.
(1 US dollar = 0.7490 euro)
(Additional reporting by Ludwig Burger, Andreas Cremer, Gernot
Heller and Maria Sheahan; Editing by Noah Barkin and Erica