Navigating Sanctions Impact on German Companies: A Changing Landscape
- Businesses face significant need for guidance amidst sanctions and EU regulations
New surveys reveal a slight decrease in the level of consulting effort needed by German companies to deal with EU sanctions against Russia and Belarus. However, the number of companies reporting a "medium" level of demand for consulting services in the third year after the Russian attack on Ukraine has increased. This suggests that, while many businesses have adapted to the sanctions, significant ongoing support is still required [DIHK].
Geopolitical tensions aren’t slowing down any time soon, with US sanctions against China and vice versa making their mark. These sanctions can indirectly affect German companies participating in international trade. To prepare for potential trade barriers, 35% of the surveyed chambers reported that companies in their jurisdiction are setting up dual supply chain loops - a parallel organization of supply chains for EU-US and EU-China trade [DIHK].
Beyond sanctions, escalating military conflicts also pose threats to global supply chains. Take, for instance, the Houthi militia's cargo ship attacks in 2024, which underscore the vulnerability of supply chains in the event of conflict escalation. The report warns that an intensification of conflicts could significantly impact global supply chains and security [DIHK].
Cross-border trade is growing more intricate due to escalating geopolitical tensions, trade restrictions, and extensive reporting and documentation requirements for internationally active companies. Regulations such as the EU's carbon border adjustment mechanism (CBAM), the German and future European supply chain law, and the EU directive for deforestation-free supply chains are causing effort and consulting demand for companies [DIHK]. Since CBAM came into effect in 2023, it requires a surcharge for CO2-intensive imports from third countries without an emissions trading system.
Insights to Navigate the Challenges
- Adapt to regulatory compliance and due diligence: Companies must implement robust compliance systems and due diligence processes to meet evolving sanctions and Anti-Money Laundering (AML) regulations. This includes thorough monitoring of transactions to identify red flags for sanctions evasion.
- Invest in sustainability: Despite regulatory uncertainty, companies should continue to strengthen their sustainability efforts. This could involve improving resource efficiency, reducing emissions, and adhering to Corporate Sustainability Reporting Directive (CSRD) requirements.
- Embrace diversification strategies: To mitigate risks associated with geopolitical tensions and potential trade barriers, companies may need to diversify their supply chains and markets. This involves strategic partnerships, risk management practices, and redesigning logistics for economic resilience.
German companies face a tough road ahead, but many are adapting by investing in compliance, sustainability, and strategic risk management. This will help position them for long-term resilience in an ever-evolving global trade landscape.
- The increase in EU sanctions against Russia and Belarus, as well as the potential trade barriers from US sanctions against China, necessitate a need for advice and ongoing support for German enterprises, especially in the area of documentation that adheres to fragmented regulations.
- In light of the escalating conflicts and the vulnerability of supply chains, German companies should consider implementing diversification strategies, such as setting up dual supply chain loops for EU-US and EU-China trade, and redesigning logistics to ensure economic resilience.
- As the EU rules and regulations evolve, such as the carbon border adjustment mechanism (CBAM) and the EU directive for deforestation-free supply chains, German businesses must prioritize compliance and due diligence, including thorough monitoring of transactions for red flags related to sanctions evasion and adhering to sustainability reporting requirements.
