Frankfurt-Moscow: a new Ostpolitik?

Europe and Russia share economic problems but also interests. A merged superbourse can be a giant step towards the future.

Ernesto Gallo Giovanni Biava
27 January 2015

The Russian economy is being hit hard by several trends. Oil prices are falling, with the Brent price arond $50 dollars per barrel and even lower; the rouble is depreciating, mainly because of western financial speculation; and trade sanctions are exerting further pressure. At the same time, Germany - both an important trading partner of Russia, and increasingly an adversary over Ukraine - is not in safe waters either. 2014 ended with the economy growing at a modest 1.5%, while 2015 bagan with the European Central Bank’s announcement on 22 January of a new tranche of quantitative easing (QE) which German financial authorities have tenaciously opposed.

The fact that the European Central Bank (ECB) has withstood German scepticism about QE is a sign of an emerging weakness in Berlin’s international position. This is not hard to understand. After all, how can Germany be expected to thrive in a struggling eurozone - which faces even more strains after the election victory of Syriza in Greece - and in the context of sanctions to one of its main trading associates? In the longer run, how can Germany prosper without the financial instruments now possessed by both the United States and east Asia?

Looking east

The west's financial markets are dominated by Wall Street and London, while in east Asia the establishment in November 2014 of the “Connect” system between Shanghai and Hong Kong exchanges lays the ground for the equivalent of Wall Street in the Asia-Pacific. There are other stock markets boasting a long tradition, such as Tokyo, or a powerfully rising presence, for example Sydney, Toronto, and Mumbai. Among the world’s largest economies, only the eurozone and Russia seem to be lagging behind.

The Frankfurt stock exchange (the Deutsche Börse, or DB) has a market capitalisation of slightly more than $1.7 billion, which is comparable to Shenzhen (China’s third largest stock market) or Mumbai (which has two major bourses). This is much less than might be expected of an institution located at the heart of the eurozone, and in the city which should represent its financial core (Frankfurt is also the seat of the ECB’s headquarters).

Since the early 2000s, Frankfurt has made several attempts to merge with other major western exchanges (Paris’s Euronext, London’s LSE, and eventually New York). They all failed, and Germany’s main equity market was left far behind (in comparison with the size of exchanges like Euronext). The latter - comprising the bourses of Paris, Amsterdam, Brussels, and Lisbon - is twice as big as Deutsche Börse, yet its former chairman complained on 5 January about its own lack of competitiveness in the global environment.

Moscow's stock exchange (MICEX) had a market capitalisation of just over $500 million before the present crisis, far too little for a country with aspirations to be a great power. In the context of the newborn Eurasian Economic Union (EEU), there has been talk about promoting Kazakhstan's former capital Almaty, rather than Moscow, as the bloc’s financial hub.
Taken together, the relative weakness of the German and Russian stock markets suggests that an alliance - or even a merger - of the two would benefit both. Could Frankfurt look east instead of west?

Financial cooperation between Germany and Russia is not a new idea. Before the outbreak of the global crisis, on 21 December 2006, DB and MICEX actually signed a "cooperation agreement". Their cooperation gained momentum over the years, and benefited from the relatively smooth relations between the west and Russia in the early 2010s; the two exchanges signed a "letter of intent" on 16 November 2012 in the presence of Angela Merkel and Vladimir Putin.

In those years, Russia saw Germany as a reliable player with which to deepen a strategic partnership and penetrate western markets, while Germany was interested in the opportunities of a country in full, if tumultuous, economic expansion. The outbreak of conflict in Ukraine then sealed off any further cooperation. DB spent much of 2014 seeking to expand in east Asia (where it is small by comparison with Shanghai-Hong Kong, Tokyo, and even Sydney and Shenzhen) and Africa (where countries such as China have an edge). In this financial environment a German-Russian capital market would make sense. A merger or alliance between the two stock exchanges might even be a stepping-stone towards reconciliation between the two European powers and, in a broader sense, between the European Union and Eurasia.

A new start

Some German politicians and leaders, including the ex-chancellors Helmut Schmidt and Gerhard Schröder) have called for a more conciliatory approach towards Russia. They cite the fact that economic sanctions on Russia are also hurting Germany, several central European member-states (Austria, Czech Republic, Hungary, Slovakia), and by extension the EU as a whole.
Germany’s foreign secretary, Frank-Walter Steinmeier of the Social Democratic Party (SPD), has consistently supported dialogue and compromise with Russia. In an interview with Der Spiegel on 23 December 2014, he said: "We need to make a new start at some stage. I have already suggested that we explore the option of a dialogue between the European Union and the Eurasian Economic Union. That would allow us to talk both about economic synergies and about how we deal with conflicts of interest.”

In the views of such figures, the new start would mean not giving in to Putin’s requests but promoting a kind of new Ostpolitik - referring to the opening to the Soviet bloc pursued by the West German government of Willy Brandt in the 1970s - in which firmness and realism go hand-in-hand with deep understanding of Russia’s politics and history.

 A new start is indeed badly needed. Russian and German fragilities on their own make a fresh rapprochement between Moscow and Berlin desirable. On a wider stage, the EU and Russia have at some point to restart cooperation across a range of shared interests - security, diplomacy, business, culture, and education. A recharge would also boost the EU’s self-confidence and independence from decisions which are often taken in Washington and enjoy little European support. The creation of a common financial hub would be an opportunity to become more independent from American and Chinese dominance in global exchanges. Will European and Russian leaders take note?

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