Germany has revoked its approval for Rheinmetall AG to construct a military training centre near Moscow amid growing sanctions from the European Union and the US on Russia for its support for the rebels in eastern Ukraine.
The permission has been withdrawn ''in the light of the European Union sanctions,'' German vice chancellor Sigmar Gabriel, who is also the economy minister, said.
The move is a step ahead of last week's sanctions agreed by the EU which excluded already signed deals.
The EU blocked Russian state-owned banks from selling shares or bonds in European stock markets and also to restrict sales of arms and certain technology and equipment used by the oil industry following the downing of a Malaysian airplane by the Russian-backed rebels over Ukraine on 17 July.
Subsequently, the US also has announced sanctions targeting Russia's energy, finance and defence sectors.
The Dusseldorf-based Rheinmetall Group is Europe's foremost supplier of army technology and automotive modules and systems.
The Group won the $134 million contract in 2012 to build a combat simulation center in Mulino in the Volga region, 360 km east of Moscow and planned to construct more such facilities in other parts of the country.
The Mulino center, scheduled to open later this year, is intended to train about 30,000 military personnel annually. The simulators are designed to create 3D battlefield for 700 soldiers and provide training on laser fire and tactical aspects.
The German government had stalled the deal in March following the conflict in Ukraine between government forces and Russian-backed rebels.
Rheinmetall said the company had "been in talks with the government for some time to find a solution."
The government is exploring possible compensation options for Rheinmetall, according to Tanja Alemany, economy ministry official. The most valuable part of the contract had not yet been delivered,
Although the project is well on schedule, it is believed that the company has not shipped the most valuable part of the deal to Russia.
According to some analysts, the impact of the government's decision on Rheinmetall is likely to be moderate considering the overall size of the company's defence business.
Other German companies affected by the sanctions include sports gear giant Adidas AG and automobile parts supplier Continental AG.
Following the EU sanctions, a low-cost airline operated by Russian flag carrier Aeroflot, Dobrolyot has grounded its flights due to termination of lease agreements.
However, neighbour France, which has a $1.6-billion deal in hand from Russia for two helicopter carriers is pushing ahead with the contract.
Germany is hoping for a change in the French attitude.
"This decision is a signal to our European partners, including France and the UK," said Hans-Peter Bartels, chairman of parliament's defence committee.
The first French warship is due for delivery in October and the French president Francois Hollande has hinted the prospect of cancelling the second order.
In a television interview on Sunday, Gabriel said that tough new economic sanctions against Russia will hurt the German economy but they are necessary for the sake of peace in Europe.
Meanwhile, Russia's deputy minister of defence said yesterday that Reinmetall's refusal to continue the project will not affect commissioning terms.
''Rheinmetall holds no more than ten per cent in the project. Lawsuits will follow if the German side breaches the contract,'' the official said.