Many former Soviet republics have an abundance of mineral resources, as well as large markets with huge economic potential and little by the way of competition. However, any legal framework enabling businesses to access these countries is, in most cases, almost impossible to find, meaning that foreign investors are wary of entering them.

However, according to the fDiMarkets data, German investors increasingly appear to be unworried by such a lack of legal guidance, and are now the most active in the countries that make up the Commonwealth of Independent States (CIS), setting up 695 greenfield ventures between 2003 and 2011 and investing more than $30bn in new projects, overtaking both the US and the UK in the process.

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German investors are not necessarily less risk averse than those from other countries. They are, however, better prepared to conduct business in CIS countries. Hermann Schmitt, a partner at international law firm White & Case, says that such an approach can be seen in Germany's attitude towards investing in Russia. “They [German investors] have a very practical, hands-on approach to doing business in Russia and follow a thorough due-diligence process,” he says.

A head start

The first wave of sizeable foreign investments in CIS countries came shortly after the collapse of the Soviet Union in 1991. Here, again, German businesses were among the most active. “Our investors, especially those coming from [East germany], had acquired knowledge of how to operate in these markets a long time before 1991,” says Jens Bohlmann, a spokesperson at the Moscow-based German-Russian Chamber of Commerce.

Nevertheless, it was in 1991 that the number of German companies entering the former Soviet republics increased rapidly, with large, influential corporations being at the forefront of the investment drive. “Companies such as Deutsche Bank and Siemens started operating here quickly after our country gained independence,” says Dariusch Eftikhar, representative of the German Chamber of Commerce for central Asia, in charge of Uzbekistan.

The rich history of German investors entering Soviet states that Mr Bohlmann refers to goes back to 1952, with the establishment of the Committee on Eastern European Economic Relations (OA) – a West German economic representative organisation that operated throughout the Soviet Union and eastern Europe – as well as joint ventures in sectors such as natural gas transmission and shoe manufacturing, which were operative during times when eastern Europe was all but closed to investments from non-communist countries. “Our trade relations had been established hundreds of years ago, and the knowledge of conditions over here definitely helped,” says Mr Bohlmann. 

OA, a pioneer in terms of regional business community co-operation, was joined over the years by an array of West German-led organisations focusing on fostering business relations between West Germany (and, post-1990, Germany) and the former Soviet republics. Every country in the CIS has had at some point a German chamber of commerce, and in many cases – such as Belarus, Russia, Kazakhstan and Uzbekistan – a strong network of German business associations and industry organisation exists. Their activity can be seen as another reason why German investors are more willing to tap Eastern markets.

A home comfort

 “Our chambers of commerce do not serve for socialising and lobbying, but to offer services needed by businessmen entering new markets. Among other things, we help with location research and provide information on taxes. That definitely differentiates us from similar organisations from other countries," says Tobias Baumann, head of department for Russia, eastern and south-eastern Europe, Turkey and central Asia at the Association of German Chambers of Industry and Commerce. 

Mr Baumann’s organisation serves as the coordinating institution of the many national chambers of commerce, and has branches as far as Novosibirsk in Siberia and Almaty in Kazakhstan. The fact that German entities in CIS countries serve as a port of call for foreign investors is confirmed by investors from other countries often signing up for a membership. “Quite a few of our members are from other countries in western Europe and we even have 18 Russian companies that belong to our organisation,” says Mr Bohlmann.

Often non-German companies decide to join German business associations simply because similar bodies from their countries are either dormant or non-existent. “Our aim was not to create a European-wide business body. It was intended to be German. [But] investors from other countries asked whether they could join us, since they could see a good platform of co-operation here,” says Dr Klaus Bayer, chairman of the German-Belarusian Chamber of Commerce.

At times, when foreign companies are affected by events in local politics, German business associations attempt to find a resolution to any problem. “As long as we have no doubts that the company in question is facing problems, solely because of the pressure imposed by local businessmen or politicians, we try to help,” says Mr Baumann.

Ideal match

Significantly, despite German companies dominating FDI into CIS countries in terms of the number of projects, when it comes to capital expenditure they fall behind the US, Japan, South Korea and China. “German investments are often related to the manufacturing of goods rather than to capital-intensive sectors, such as oil and gas, banking, real estate, telecommunication and others. There are of course German investments in capital-intensive areas, too, but to a lesser extent,” says Mr Hermann.

As fDi Markets data shows, the most popular sectors for German investors into CIS countries between 2003 and 2011 were financial services and industrial machinery, equipment and tools, and the biggest investors are trade and retail company Metro AG (104 projects) and electrical engineering company Siemens (29 projects).

Given that many of the former Soviet republics rely on mining and agriculture and German industry specialises in producing industrial machinery for these sectors, it is little surprise that many German companies are eager to enter these markets. “Our companies have know-how and established reputations when it comes to projects connected with heavy machinery and infrastructure, and that is exactly what is needed in the East,” says Mr Baumann.

The long trade history between Germany and CIS countries, not to mention the fact that German companies are so active in the industrial machinery sector, means that the western European behemoth's activity in the former Soviet states is something of a natural progression. And, now that there is such a strong German presence in these countries, it makes it easier for their compatriots to follow. “To some extent we can see the 'snowball effect'. German businessmen come here because they see that many fellow countrymen operate here successfully,” says Mr Eftikhar.