Dark clouds have been gathering over the Russian business of German engineering powerhouse Siemens, as the Kremlin and the company's former partner, leading Russian businessman Alexey Mordashov, seem to be getting ready cut into Siemens’ near monopoly on heavy engineering in Russia. 

The Kremlin has had harsh words for Siemens in the last few weeks, but more worrying for the German company is its long time partner Power Machines has asked the government for financial aid to develop its own competing technology and looks set to try and break the engineering firm’s virtual monopoly over heavy engineering products.

Siemens probably has one of the best and closest relations to the Kremlin of any foreign company working in Russia. The relationship was brokered by Gerhard Schroeder, the former German chancellor and subsequent buddy of President Vladimir Putin, who would personally attend meetings between Siemens’ CEO and Putin when they were discussing business.

And that relationship has been extremely lucrative. Russian turbine technology is not a patch on the German version, and as part of a massive overhaul of the power sector in the boom years Siemens’ turbines have been installed in an estimated 80% of Russian power stations.

On top of that, as part of the extensive Kremlin investment into infrastructure, which is admittedly still in the early stages, Siemens has provided much of the technology to run the high-speed rail links between Russia’s major cities. The journey time between Moscow and the northern capital of St Petersburg has been cut from the old overnight trip on the famous Krasnaya Strelka (Red Arrow in Russian) train to a mere three hours on the new Sapsan (Peregrine falcon). With the World Cup looming the plan was to build similar links between Moscow and more than half a dozen regional capitals that are hosting football games, almost all in the European part of Russia to the left of the Ural mountains that mark Europe’s eastern border, at a cost of tens of billions of dollars.

All this business and more seems to be in danger now as Germany gets caught up in the rapidly escalating tensions between Moscow and Washington.

Deputy Prime Minister of Russia Arkady Dvorkovich said on April 13, two days before the US airstrikes on Syria but a week after Germany had expelled four Russian diplomats in solidarity with the UK over the spy poisoning scandal there, that Siemens, “cannot be a reliable partner of Russia, but the company has time to correct the situation” in the context of the sanctions.

This was the second roasting Siemens has received from the Kremlin in under a year, during which it also fell foul of EU sanctions on western companies doing business in Crimea and came close to pulling out of Russia altogether.  

Interavtomatika, a Russian company in which Siemens owns a 47.5% stake, was supplying Siemens-made gas turbines to the Russia-annexed and sanctioned Crimea peninsula, which was the first time a western company broke the injunctions on doing business there since Russia annexed the Ukrainian peninsular in 2014.

The company claimed ignorance and Siemens threatened to press charges against parties that had moved two gas turbines "against its will" to the annexed peninsula in violation of international sanctions.

German Chancellor Angela Merkel is trying to sail the tricky path between the clashing Cyanean rocks of backing her western allies and maintaining good business ties with Russia. Germany has literally ten times more companies registered in Russia than its European peers (partly as a result of Schroeder’s efforts), and these are major revenue earners.

Trade between Russia and Germany increased by 23% in 2017 reaching $50bn, according to the data from the German-Russian Chamber of Commerce (AHK). That is despite Russia-EU trade having fallen by around a third since EU sanctions were imposed on Russia in 2014 to €228bn as of the end of 2016, although the trade deficit between the EU and Russia appeared to be closing somewhat in 2017.

However, even the German relationship with Russia has soured in the last three years and the number of German companies working in Russia has fallen from a peak of over 6,000 to just under 5,000 now.

Siemens is also feeling the heat. While Merkel was careful not to join the US, the UK and France in the bombing raid on Syria last weekend, she did release a statement fully backing the decision.

And her middle of the road policy is not going down well at home either. The “Grandmaster of Compromise,” as Bloomberg columnist Leonid Bershidsky called her this week, is seen as either too tough or too soft on Russia by the broad spectrum of Germany’s coalition political parties.

But booting German companies out of Russia will not be easy for the Kremlin. Despite the falling number of German companies working in Russia they still employed over 270,000 people in 2017, making them one of the country’s biggest employers, and they generated over $50bn in turnover. What is notable in this relationship is the turnover generated by German companies in Russia is the same, even slightly higher, than the volume of trade between the two countries. In general the rule of thumb is $8 of trade leads to $1 of turnover and/or investment when emerging markets open up. With the US, the gap between investment and trade volumes is even wider than this norm.

What will really worry Siemens is the bid by Power Machines, the “Russian Siemens”, to enlist state help to eat into Siemens’ market share. The owner of the company Alexey Mordashov called on the government to finance investment into new technology at his firm so Russia can build its own turbines and other heavy products.

Siemens was working in a joint venture with Mordashov-owned Power Machines, and the two even jointly sued two subsidiaries of the Russian state technology agency Rostec in September 2017 in the Moscow Arbitrage Court claiming a "blatant breach of Siemens' delivery contracts, trust and EU regulations."

"Without state support, without preferences in the domestic market, which is key for us, we simply cannot survive," Mordashov said on April 12, Vedomosti reported. Power Machines has been operating at a loss since 2015, and in 2017 lost $167.5mn.

Despite being one of Russia’s best and most liberal businessmen Mordashov and his company were included in the Kremlin Report list of Russian businessmen that could be subject to new sanctions.

"The famous history of gas turbines [the Crimean turbine scandal] once again emphasises that Russia needs its own technology. Power Machines is ready to commit itself to making this technology,” Mordashov said earlier in April, according to Vedomosti. Mordashov is playing on the plain need to supply equipment and investment into power for the Crimea that the Ukrainian government ignored, but now can’t be bought from Siemens. Currently much of the peninsular’s power is brought from Russia by cable.

And there is more business on the horizon. The government has a plan to modernise its thermal power stations starting in 2020 that will send the demand for more turbines soaring. In general developing domestic analogues to western higher tech products is part of the Kremlin’s overall strategy as it clearly anticipates a long drawn out war of, hopefully only, words with the west for the rest of Putin’s next six years in office, if not longer.