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Waldemar W is accused of providing components for Orlan-10 unmanned aerial vehicles used by Russian forces in Ukraine

A German businessman has been detained for allegedly providing electrical components to Russia that were used to make Orlan-10 drones deployed in the war in Ukraine, in a case that highlights the problem of sanctions evasion by western technology groups.

Waldemar W, a German citizen of Russian origin, was remanded in custody after federal prosecutors obtained an arrest warrant in an investigation where he is suspected of violating Germany’s law on foreign trade, said the country’s attorney-general on Tuesday.

The case underscores the mounting scrutiny that western exports of high-tech goods to Russian companies have been subjected to since the start of Russia’s full-scale invasion of Ukraine in February 2022. Investigators are increasingly focusing on the use of third countries to get around export bans aimed at starving President Vladimir Putin’s military of the products it needs to sustain its war against Ukraine.

Prosecutors said Waldemar W — German authorities never divulge the surname of suspects in criminal cases — ran two companies in the western state of Saarland that deal in electronic components.

They said that in 26 instances between January 2020 and March 2023, he exported such components to a company in Russia that produced military gear and materiel, including the Orlan-10 drones being deployed by Russia in Ukraine.

They said the components he sold, with a total value of about €715,000, were an integral part of the Orlans and are on the EU’s list of goods placed under sanctions.

A study by the Royal United Services Institute from late last year called the Orlan-10 Russia’s “most successful UAV”, describing it as a “platform that sits at the heart of the country’s warfighting capabilities”. It said it enabled the Russian army to “rain accurate fire down on Ukrainian formations”.

Rusi said Russian companies closely associated with the St Petersburg-based Special Technology Center, the Russian manufacturer of the Orlan-10, had “drastically increased imports of critical western-manufactured components” since Russia’s invasion of Ukraine began.

The German prosecutors’ statement said Waldemar W evaded EU sanctions by importing the goods from abroad and then exporting them to Russia through a company he controlled in the southern German state of Baden-Württemberg.

The components were sent to two dummy civilian companies registered in Russia, which then passed them on to an arms manufacturer, in close consultation with the accused.

Prosecutors said that after the start of the Ukraine war, the accused started to send the goods to Russia with the help of sham beneficiary companies in third countries such as Dubai and Lithuania.

The US and EU have also pushed countries such as the United Arab Emirates to halt exports of critical goods to Russia, amid fears they were becoming hubs for the shipment of items that could be repurposed to help Russia’s war effort.

In June the EU adopted a new sanctions package against Russia that was in part aimed at clamping down on widespread sanctions evasion through third countries.

The new anti-circumvention framework allowed the EU to prohibit exports of sensitive dual-use and high-tech goods and technology to third countries that had been identified as having persistently failed to prevent supplies of such goods from the EU to Russia.

German wages rose at a record annual pace of 6.6 per cent in the second quarter, boosting consumer spending power but fuelling concerns about inflation being pushed up by rising labour costs.

The increase, which compared with wage growth of 5.6 per cent in the previous quarter, was the highest since collection of the data began in 2008. 

It took German annual wage growth above the country’s consumer price inflation rate — 6.5 per cent in the period — for the first time since 2021.

“Real wages have declined for three years. Now they are at least stagnant,” said Enzo Weber, head of research at the Institute for Employment Research in Nuremberg.

The figures raise hopes that a rebound in German consumer spending could support the country’s economy, which has shrunk or stagnated for the past three quarters, as household incomes start to catch up with the cost of living.

“For the economy it is good news as we need some degree of catch-up in wage growth to support the consumption recovery,” said Oliver Rakau, an economist at consultant Oxford Economics. “While real wages are finally turning positive, they remain well below pre-pandemic trends.”

Second-quarter pay for German workers was boosted by increases in the minimum wage and one-off bonuses awarded by many companies to cushion the impact of higher inflation, according to the federal statistical office. 

The lowest paid fifth of the workforce enjoyed the highest wage rises, as their pay rose 11.8 per cent following last October’s increase in the minimum wage to €12 an hour. The maximum monthly earnings for tax-free, part-time “mini” jobs also rose from €450 to €520.

The fastest wage growth was in sectors hit hardest by the pandemic, rising 12.6 per cent for hospitality workers, 11.9 per cent in the arts, entertainment and recreation sectors and 10 per cent in transport and warehousing.

The figures could increase concern among European Central Bank policymakers about the risk of a wage-price spiral, in which high inflation pushes up labour costs and so feeds more price pressures. This could tip the balance in favour of a 10th consecutive rate rise at the ECB governing council’s next meeting on September 14, analysts say.

Melanie Debono, an economist at consultant Pantheon Macroeconomics, said Germany’s wage growth “will definitely push the ECB towards a September rate hike”.

However, many of the factors behind the rise in German wages were “one-time events”, such as the increase in the minimum wage and bonuses, Weber said, adding: “This is not enough for a wage-price spiral.”

The GfK market research group said on Tuesday that its German consumer confidence index fell from minus 24.6 to minus 25.5 this month as people’s income expectations declined. Despite rebounding from record lows during last autumn’s energy crisis, the index remains well below consistently positive pre-pandemic levels. 

The ECB has predicted companies will absorb the cost of higher wages by reducing profit margins. Dirk Schumacher, an economist at French bank Natixis, said this looked likely, adding: “Weak consumption will in fact imply that corporate margins will absorb some of this.”

While U.S. stocks have soared, those of Chinese companies have tumbled. Some investors are sensing an opportunity.

Investors in Chinese stocks used to bet on growth. Now, they are hunting for bargains.

Portfolio managers say that investors who are still eager to get exposure to China are increasingly turning to value investing. That is a style of stock picking that focuses on finding shares trading below what they are really worth—based on several different measures—rather than looking for companies with big growth potential.

The shift in emphasis from growth to value reflects the stark change of fortunes for China’s economy, which is faltering after years of breakneck growth. Exports and manufacturing have weakened this year, the housing market is in a funk and consumer prices have moved into deflationary territory. While U.S. stocks have surged this year, the MSCI China Index, a broad gauge of Chinese shares, is down more than 7%.

“During economic down cycles when everyone’s more pessimistic, investors turn to deep-value stocks, meaning stocks with relatively low valuations but with good cash flows and dividend payouts, and we’ve been seeing that in China since last year,” said He Xi, portfolio manager of Nous Capital China Value Fund.

Growth stocks in China performed better than value stocks for decades, said Nuno Fernandes, partner and equity portfolio manager at Boston-based GW&K Investment Management. But since February 2021, they have started to do a lot worse, he said.

The downturn in China’s economy and its stock market means even companies that once seemed natural growth plays are attracting value investors.

Alibaba Group, the giant Chinese internet company, was one of the major success stories of China’s decadeslong economic boom. But its U.S.-listed shares have lost almost two-thirds of their value since the end of 2020, when Beijing launched a yearslong regulatory crackdown on internet companies. Its shares are now trading at a price of around 10 times forward earnings, according to FactSet. Walmart’s shares trade at around 23 times forward earnings.

“Alibaba is now both a value stock and a growth stock,” said Colin Liang, a portfolio manager focused on China at Redwheel, an asset manager.

Ryan Cohen, known as a meme-stock investor for his bets on GameStop and other companies, has taken a stake worth several hundred million dollars in Alibaba, The Wall Street Journal previously reported. He wants the company to buy back stock, which would help increase the price.

Fund managers said social-media giant Tencent is another example of a stock with both growth and value characteristics. The company’s stock-market value jumped by half in 2020 but has tumbled since then. It lost a quarter of its value last year, and is now trading at a price of around 17 times earnings.

“These are very high quality businesses that are very undervalued at this point versus what we consider to be their intrinsic value,” said Matt Wacher, chief investment officer for Morningstar Investment Management, Asia-Pacific.

Assets at funds that focus on Chinese value stocks rose by $2 billion in the second quarter to hit around $11 billion, according to data from Morningstar. Investor flows into these funds were worth around 18% of their assets, the biggest percentage move into Chinese value funds since late 2016.

The debate between value investors and growth investors goes back at least a century, and appears to be explained in part by genetic predispositions. Some investors prefer the safety of companies that have reliable earnings, plenty of cash and stable business models; others get excited about finding tomorrow’s success stories today.

The risk for investors who favor cheap stocks is ‘the value trap,’ a term for stocks that look too cheap to ignore—but stay that way even after you buy them.

Foreign investors have become much more cautious about investing in China this year. Small investors inside the country are also nervous.

Chinese regulators attempted to stem the stock market’s slide with a series of measures announced on Sunday, including a big cut to stamp duty, the tax charged on each stock trade. That sparked a big rally when Chinese stocks opened on Monday, but most of the gains had fizzled out by the closing bell. Investors and analysts say clearer steps are needed to address China’s biggest problem—its faltering economy.

But despite its problems, China is still likely to be one of the fastest-growing major economies in the world this year, ensuring that plenty of investors are still looking for the best way to play the country’s $12 trillion stock market.

Some foreign fund managers are buying value stocks because their investment mandates force them to have some China exposure but they want to take a conservative approach to hitting those targets, said Ken Wong, Asian equity portfolio specialist at Eastspring Investments. They will do that by investing in value stocks or the shares of state-owned enterprises, he said.

“Can you completely avoid investing in China? No, you can’t. Investors will park their assets into value or SOE stocks until the signs are pointing in a more positive direction,” he said.

If China’s economy starts to improve, investors will shift back to growth stocks, said Wong. The economy is likely to undershoot the government’s official 2023 growth target of roughly 5%, according to economists at Barclays, Citi and UBS, all of which have recently cut their estimates for China’s economic growth.

Proposal for grace period is further sign of financial strain on China’s property sector

Country Garden has requested a 40-day grace period for a renminbi bond maturing next week, in the latest sign of distress at one of China’s largest private property developers.

The request came just a day ahead of Country Garden’s first-half results and underscored the intensifying financial strain on the Chinese real estate sector, even after top officials pledged greater support for the cash-strapped industry last month.

The lack of more concrete stimulus to bail out the ailing sector has piled downward pressure on developers’ Hong Kong-listed shares, which have fallen by about a third this year alongside a string of missed payments on dollar bond obligations.

Underscoring concerns over the sector’s liquidity crisis, China Evergrande shares fell almost 90 per cent when they resumed trading for the first time in 17 months and as the developer delayed a crucial restructuring meeting with creditors on Monday.

Country Garden, which has liabilities of almost $200bn, asked creditors to approve a grace period of 40 days for a bond with Rmb3.9bn ($530mn) outstanding principal coming due on September 4. A meeting to vote on the proposal will be held no later than August 31, according to a private filing to investors through the Shanghai Stock Exchange.

Country Garden, once considered among the Chinese developers least likely to default, missed interest payments of $22.5mn on two $500mn international bonds earlier this month.

But traders said that the central government took onshore obligations far more seriously and that creditors would be under pressure to extend the maturity date of the renminbi bond coming due on Monday.

“The bondholders don’t want Country Garden to default, they want to discuss better terms, but they couldn’t get 50 per cent approval for a full extension, so they have to go for a grace period,” said a Hong Kong-based bond trader at one Chinese broker.

The trader added that creditors would “probably be willing to give them the grace period, but all of this is just kicking the can down the road”.

News of the grace period request, which was first reported by Bloomberg, pushed shares in Country Garden up about 9 per cent in afternoon trading in Hong Kong, but the company’s stock is still down about 50 per cent this year, reflecting a loss of some $17bn in market capitalisation.

Separately on Tuesday, Country Garden Services, the developer’s real estate management affiliate, reported first-half results, revealing that profits fell 11 per cent year-on-year to Rmb2.35bn.

If the new grace period for Country Garden’s renminbi debt is approved, investor attention will turn to early September, when the grace period for the recent missed payments on international bonds expires.

“The big question is whether they stay current on their [dollar] bonds now,” the trader said.

Europe’s biggest economy is sliding into stagnation, and a weakening political system is struggling to find an answer

BERLIN—Two decades ago, Germany revived its moribund economy and became a manufacturing powerhouse of an era of globalization.

Times changed. Germany didn’t keep up. Now Europe’s biggest economy has to reinvent itself again. But its fractured political class is struggling to find answers to a dizzying conjunction of long-term headaches and short-term crises, leading to a growing sense of malaise.

Germany will be the world’s only major economy to contract in 2023, with even sanctioned Russia experiencing growth, according to the International Monetary Fund.

Germany’s reliance on manufacturing and world trade has made it particularly vulnerable to recent global turbulence: supply-chain disruptions during the Covid-19 pandemic, surging energy prices after Russia invaded Ukraine, and the rise in inflation and interest rates that have led to a global slowdown.

At Germany’s biggest carmaker Volkswagen, top executives shared a dire assessment on an internal conference call in July, according to people familiar with the event. Exploding costs, falling demand and new rivals such as Tesla and Chinese electric-car makers are making for a “perfect storm,” a divisional chief told his colleagues, adding: “The roof is on fire.”

The problems aren’t new. Germany’s manufacturing output and its gross domestic product have stagnated since 2018, suggesting that its long-successful model has lost its mojo.

China was for years a major driver of Germany’s export boom. A rapidly industrializing China bought up all the capital goods that Germany could make. But China’s investment-heavy growth model has been approaching its limits for years. Growth and demand for imports have faltered.

Instead of Germany’s best customers, Chinese industries have become aggressive competitors. Upstart Chinese carmakers are competing with German incumbents such as VW that are lagging in the electric-vehicle revolution.

More broadly, the world has become less favorable to the kind of open trade that benefited Germany. The shift was expressed most clearly in then-President Donald Trump imposing tariffs not only on imports from China but also those of U.S. allies in Europe. The U.K.’s 2016 decision to leave the European Union and Russia’s annexation of Crimea in 2014, leading to EU sanctions, also signaled a shift toward a more hostile environment for big exporters.

Germany’s long industrial boom led to complacency about its domestic weaknesses, from an aging labor force to sclerotic services sectors and mounting bureaucracy. The country was doing better at supporting old industries such as cars, machinery and chemicals than at fostering new ones, such as digital technology. Germany’s only major software company, SAP, was founded in 1975.

Years of skimping on public investment have led to fraying infrastructure, an increasingly mediocre education system and poor high-speed internet and mobile-phone connectivity compared with other advanced economies.

Germany’s once-efficient trains have become a byword for lateness. The public administration’s continued reliance on fax machines became a national joke. Even the national soccer teams are being routinely beaten.

“We’ve kind of slept through a decade or so of challenges,” said Moritz Schularick, president of the Kiel Institute for the World Economy.

In March, one of Germany’s most storied companies, multinational industrial-gas group Linde, delisted from the Frankfurt Stock Exchange in favor of maintaining a sole listing on the New York Stock Exchange. The decision was driven in part by the growing burden of financial regulation in Germany. But also, Linde, whose roots go back to 1879, said it no longer wanted to be perceived just as German—an association that it believed was depressing its appeal to investors.

Germany today is in the midst of another cycle of success, stagnation and pressure for reforms, said Josef Joffe, a longtime newspaper publisher and a fellow at Stanford University.

“Germany will bounce back, but it suffers from two longer-term ailments: above all its failure to transform an old-industry system into a knowledge economy, and an irrational energy policy,” Joffe said.

“I think it’s important to remember that Germany is still a global leader,” German Finance Minister Christian Lindner said in an interview. “We’re the world’s fourth-largest economy. We have the economic know-how and I’m proud of our skilled workforce. But at the moment, we are not as competitive as we could be,” he said.

Germany still has many strengths. Its deep reservoir of technical and engineering know-how and its specialty in capital goods still put it in a position to profit from future growth in many emerging economies. Its labor-market reforms have greatly improved the share of the population that has a job. The national debt is lower than that of most of its peers and financial markets view its bonds as among the world’s safest assets.

The country’s challenges now are less severe than they were in the 1990s, after German reunification, said Holger Schmieding, economist at Berenberg Bank in Hamburg.

Back then, Germany was struggling with the massive costs of integrating the former Communist east. Rising global competition and rigid labor laws were contributing to high unemployment. Spending on social benefits ballooned. Too many people depended on welfare, while too few workers paid for it. German reliance on manufacturing was seen as old-fashioned at a time when other countries were betting on e-commerce and financial services.

After a period of national angst, then-Chancellor Gerhard Schröder pared back welfare entitlements, deregulated parts of the labor market and pressured the unemployed to take available jobs. The controversial reforms split Schröder’s Social Democrats, and he fell from power.

Private-sector changes were as important as government measures. German companies cooperated with employees to make working practices more flexible. Unions agreed to forgo pay raises in return for keeping factories and jobs in Germany.

Germany Inc. grew leaner. Meanwhile, the world was demanding more of what Germans were good at making, including capital goods and luxury cars.

China’s sweeping investments in industrial capacity powered the sales of machine-tool makers in Bavaria and Baden-Württemberg. VW invested heavily in China, tapping newly affluent consumers’ appetite for German cars.

Schröder’s successor, longtime Chancellor Angela Merkel, presided over years of growth with little pressure for further unpopular overhauls. Booming exports to developing countries helped Germany bounce back from the 2008 global financial crisis better than many other Western countries.

Complacency crept in. Service sectors, which made up the bulk of gross domestic product and jobs, were less dynamic than export-oriented manufacturers. Wage restraint sapped consumer demand. German companies saved rather than invested much of their profits.

Successful exporters became reluctant to change. German suppliers of automotive components were so confident of their strength that many dismissed warnings that electric vehicles would soon challenge the internal combustion engine. After failing to invest in batteries and other technology for new-generation cars, many now find themselves overtaken by Chinese upstarts.

A recent study by PwC found that German auto suppliers, partly through reluctance to change, have suffered a loss of global market share since 2019 as big as their gains in the previous two decades.

More German businesses are complaining of the growing density of red tape.

BioNTech, a lauded biotech firm that developed the Covid-19 vaccine produced in partnership with Pfizer, recently decided to move some research and clinical-trial activities to the U.K. because of Germany’s restrictive rules on data protection.

German privacy laws made it impossible to run key studies for cancer cures, BioNTech’s co-founder Ugur Sahin said recently. German approvals processes for new treatments, which were accelerated during the pandemic, have reverted to their sluggish pace, he said.

Germany ought to be among the nations winning from advances in medical science, said Hans Georg Näder, chairman of Ottobock, a leading maker of high-tech artificial limbs. Instead, operating in Germany is getting evermore difficult thanks to new regulations, he said.

One recent law required all German manufacturers to vouch for the environment, legal and ethical credentials of every component’s supplier, requiring even smaller companies to perform due diligence on many foreign firms, often based overseas, such as in China.

Näder said his company must now scrutinize thousands of business partners, from software developers to makers of tiny metal screws, to comply with regulation. Ottobock decided to open its latest factory in Bulgaria instead of Germany.

Energy costs are posing an existential challenge to sectors such as chemicals. Russia’s war on Ukraine has exposed Germany’s costly bet on Russian gas to help fill a gap left by the decision to shut down nuclear power plants.

German politicians dismissed warnings that Russian President Vladimir Putin used gas for geopolitical leverage, saying Moscow had always been a reliable supplier. After Putin invaded Ukraine, he throttled gas deliveries to Germany in an attempt to deter European support for Kyiv.

Energy prices in Europe have declined from last year’s peak as EU countries scrambled to replace Russian gas, but German industry still faces higher costs than competitors in the U.S. and Asia.

German executives’ other complaints include a lack of skilled workers, complex immigration rules that make it hard to bring qualified workers from abroad and spotty telecommunications and digital infrastructure.

“Our home market fills us with more and more concern,” Martin Brudermüller, chief executive of chemicals giant BASF, said at his annual shareholders’ meeting in April. “Profitability is no longer anywhere near where it should be,” he said.

One problem Germany can’t fix quickly is demographics. A shrinking labor force has left an estimated two million jobs unfilled. Some 43% of German businesses are struggling to find workers, with the average time for hiring someone approaching six months.

Germany’s fragmented political landscape makes it harder to enact far-reaching changes like the country did 20 years ago. In common with much of Europe, established center-right and center-left parties have lost their electoral dominance. The number of parties in Germany’s parliament has risen steadily.

Chancellor Olaf Scholz and his Social Democrats lead an unwieldy governing coalition whose members often have diametrically opposed views on the way forward. The Free Democrats want to cut taxes, while the Greens would like to raise them. Left-leaning ministers want to greatly raise public investment spending, financed by borrowing if needed, but finance chief Lindner rejects that. “We need fiscal prudence,” Lindner said.

Senior government members accept the need to cut red tape, as well as for an overhaul of Germany’s energy supply and infrastructure. But party differences often hold up even modest changes. This month the Greens lifted a veto of Lindner’s proposal to reduce business taxes only after they extracted consent for more welfare spending. As part of the deal, the government agreed to pass another law drafted by one of Lindner’s allies, Justice Minister Marco Buschmann, to trim regulation for businesses.

Scholz recently rejected gloomy predictions about Germany. Changes are needed but not a fundamental overhaul of the export-led model that has served Germany well throughout the post-World War II era, he said in an interview on national TV recently.

He cited the inflow of foreign investment into the microchips sector by companies such as Intel, helped by generous government subsidies. Scholz said planned changes to immigration rules, including making it easier to qualify for German citizenship, would help attract more skilled workers.

But Scholz has struggled to stop the infighting in his coalition. The government’s approval ratings have tanked, and the far-right populist Alternative for Germany party has overtaken Scholz’s Social Democrats in opinion polls.

“The country is being led by a bunch of Keystone Kops, a motley coalition that can’t get its act together,” Joffe said.