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Germany Blocks Rheinmetall Sale of Russian Combat Center

Aug. 4 (Bloomberg) -- German Vice Chancellor Sigmar Gabriel withdrew permission for Rheinmetall AG to build a military training center east of Moscow as France prepares to hand over the first of two warships to Russia’s navy.

The government’s approval has been dropped “in light of European Union sanctions,” the German Economy Ministry, which Gabriel runs, said in an e-mail to Bloomberg News.

Germany’s cancellation and France’s plan to fulfill an order for two helicopter carriers worth $1.6 billion highlight EU divisions as the bloc seeks to force President Vladimir Putin to end support for separatists in eastern Ukraine.

The EU agreed last week to bar Russia’s state-owned banks from selling shares or bonds in Europe and put restrictions on oil and military industry exports. The U.S. followed with penalties against three Russian banks and a state-owned shipbuilder. Rheinmetall is among German companies including sporting-goods maker Adidas AG and car-parts supplier Continental AG being impacted by the deepening sanctions.

The German government is discussing possible compensation options with Rheinmetall, Tanja Alemany Sanchez de Leon, an Economy Ministry spokeswoman, told reporters today in Berlin. The most valuable part of the contract had not yet been delivered, she said. Rheinmetall spokesman Peter Ruecker confirmed the government talks and said the company had been informed in writing about the decision about 2 months ago.

Unthinkable

Lawmakers from Chancellor Angela Merkel’s party are pressuring the government to prevent France from delivering the Mistral carriers to Russia under a 2011 contract. French President Francois Hollande held out the prospect of canceling the sale of the second carrier. The first is due for delivery in October.

“The French are about to provide Russia with valuable support for military operations with the planned delivery of the two warships and against the backdrop of the war in Ukraine, that’s completely unthinkable,” Karl Lamers, the deputy defense committee chairman from Merkel’s Christian Democratic Union, said by phone on Aug. 1.

Germany would welcome a change in the French position on the sale of the warships, Georg Streiter, German government deputy spokesman, said today.

The blocking of the training center deal, which marked Rheinmetall’s entry into the Russian market in 2012, is a blow to its efforts to tap regions where defense budgets are still growing. The contract for the center in Mulino, 222 miles east of Moscow, has a value of more than 100 million euros ($134 million), and the Dusseldorf-based company had planned to build further such facilities in the country.

Shares Drop

Rheinmetall fell as much as 47 cents, or 1 percent, to 44.34 euros and was down 0.4 percent as of 2:19 p.m. in Frankfurt, giving the German company a market value of 1.77 billion euros. The stock dropped as much as 6.5 percent on March 20, after the government had temporarily halted the deal.

Daimler AG Chief Executive Officer Dieter Zetsche said in an interview published over the weekend that companies must bear the consequences of political decision-making.

“The EU brought us more than 60 years of peace,” Zetsche told the Bild am Sonntag newspaper. “Peace and stability and every measure that supports them are more important than everything else.”

In Russia, EU sanctions have grounded the discount arm of state-controlled airline OAO Aeroflot after suppliers annulled aircraft leasing, servicing and insurance contracts with the unit. The carrier’s destinations had included Simferopol, the regional capital of the Crimea, which was annexed by Russia in March.

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Alan Crawford at acrawford6@bloomberg.net Chad Thomas

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