German businessmen are going to the St Petersburg International Economic Forum (SPIEF), Russia’s premier investment forum that kicks off tomorrow.

In fact, German business never left Russia. Following the invasion of Ukraine hundreds of foreign businesses working in Russia said they would leave. In reality only one in ten made the exit. And once you drill into it, those like Apple, that shut down their franchises in Russia, actually continued to sell – just their products went via the traders in Turkey et al and their business didn’t stop at all. Everything just went back to the 1990s set up where intermediaries did everything.

Of those companies that didn’t leave, no country didn’t leave more than the Germans. And Germany had literally ten-times more registered businesses in Russia than any other European country.

When I first arrived in Russia I, and the Russians, assumed that their natural business partner would be the Americans. They are supposed to be the entrepreneurial risk-takers. As it turned out, the American firms are extremely risk adverse. From conversations with many Russian businessmen, they all complained that their US counterparties insisted on lengthy and complicated contracts and talks would go on for months. The Russians found all this a bit silly as they pointed out in the 90s those contracts were not enforceable anyway as everything had collapsed.

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It soon became clear the people to do business with were the Germans. They were happy to simply sign an MoU and send some money to get started. If things worked well then they rapidly scaled up. It turned out that the Germans and Russians share a very similar mentality, which is not obvious at first glance.

And it worked very well indeed. The US is dominated by mega-corporations, but Germany’s economy is made up of the Mittelstand, thousands of small- and medium-sized enterprises (SMEs) some of which are not that small, employing dozens of people and with a turnover in the millions and tens of millions of euros. These companies are lean, nibble and entrepreneurial. And they are always looking for new markets. Russia was a paradise of unploughed fields hence the inflow of all these German companies. And thanks to the barriers to entry, as Russia was and is a hard market to work in, the upside is that also makes it extremely profitable. From the Russian side, thanks to the Soviet legacy, Russian businesses have an unslakable thirst for high quality specialist machinery. Vorsprung durch Technik. Throughout the last thirty years since the collapse of the USSR I think half of all Russia’s imports for that entire period has been machines.

While these firms have continued to work, what is new here is that the leading businessmen are openly participating in SPIEF. This is yet another sign that the resolve to “just increase the pressure on Russia a little more so it will collapse,” is crumbling. The rhetoric coming out of Brussels is as tough as ever – the 21^st sanctions package is in the works and may target the scandalous Irish exports of aluminium to Russia – but on the ground, European businesses continue to do as much business with Russia as they can. Die Welt wrote a piece about the German delegation that included an interesting survey: two thirds of German business would like to see commercial ties restored, especially the gas. The more reserved panellists said that shouldn’t happen until after the fighting in Ukraine stops.

It’s gonna happen. We seem to be in silly season already and there are endless pieces about the “turning point” in the Ukraine conflict and how Russia’s economy is about to collapse. But this is all wishful thinking. A careful reading of the battlefield reports shows that the AFU is not taking “hundreds of kilometers” of territory back. What they are taking is “grey zone” territory that has few Russians in it. The AFR advances have slowed down, but that appears to be because they are coming up against the Defensive Line in Donbas.

As for Russia’s budget woes those are real too, but again, the budget deficit is only 2.5% of GDP – well below the EU’s excessive deficit threshold of 3% -- while the number of European countries in the Excessive Deficit Club continues to grow with most of the biggest countries now members. That is another reason why the Germans are in SPIEF: they very badly need to make more money.

Russia’s Ministry of Finance (MinFin) has just done a deal with the oligarchs who are going to “voluntarily” contribute RUB300bn to the budget to help close the gap. Given the deficit is likely to be RUB4 trillion this year, that is not very much, but it is part of MinFin’s plan to squeeze a little out of everything and spread the load. It can’t afford to simply borrow everything as the cost of servicing the OFZ bonds is getting very expensive. When you add in the other stuff like dividends then it seems that Russian Finance Minister Anton Siluanov is going to cobble together a package to cover the short fall. For instance, the oil companies are earning excess profits already. Gazprom paid a whopping RUB51 per share in 2022 or RUB1.2 trillion all by itself. In the pre-sanctions era it used to pay out a mere RUB8 per share much to the annoyance of its shareholders and invest the rest in never-ending production and transport projects. This year we can expect the same sort of big state-owned company dividend payments from anyone who is making money.

Personally, I would love to go to SPIEF again. It’s White Nights in St Pete at the moment and the whole city is out on the streets deep into the night with most of the bars and cafes remaining open well into the small hours. And Russia’s elite throw parties so the whole event becomes a big social do. The metals oligarch Prokhorov used to throw one of the most famous open door parties every year until he quit Russia. And the talks and sessions at the conference are also fascinating as the discussions are surprisingly frank and realistic.

2008 was a vintage year and the high point of Russia’s move towards becoming a liberal modern economy. That year Professor Sergey Guriev was in charge of the economic blueprint and Medvedev was president. Guriev told me he filled the programme out with liberal reforms and massive privatisation plans and Medvedev didn’t change a word. Then the Great Financial Crisis happened and all that had to be abandoned.

Not sure what will come out of this year’s event, but we may look back and say it was a milestone in the reestablishing ties with Russia. Who knows. After all, the economy could collapse too. But I still think that Ukraine is closer to the edge than Russia.

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