Germany Marches East - Russia Moves West, Putins Energy Diplomacy

By: Andrew_McKillop

ITS THE GAS, STUPID
LUBMIN, Germany, Nov 8, 2011 — Chancellor Angela Merkel and outgoing president Dmitry Medvedev met in the village of Lubmin on Germany's Baltic coast to inaugurate the 7.4 billion euro natural gas pipeline that links Germany directly with Siberia's vast gas reserves. The 1220-kilometre Nord Stream pipeline, claimed as the world's longest continuous underwater pipeline, will in its first year bring about 27.5 billion cubic metres of gas, but by end-2013 will double in capacity. French prime minister Francois Fillon and his Dutch counterpart Mark Rutte also attended the Lubmin ceremony in a sign of the political importance of Europe's newest energy link: the keywords used by all these European political leaders were "strengthening the security of European energy supplies".

Germany imported around 35 billion cubic metres from Russia in 2011, over 60% of its gas imports and some 40% of its total gas consumption, of 99 bn cubic metres, while its domestic gas production continuing to shrink sharply, to about 15 bn cubic metres in 2011 but its consumption continued sharply growing. Germany is set to become, like a string of east European FSU and ex-Warsaw Pact countries, almost totally dependent on Russian gas.

Of course this assumes Germany will continue a moratorium on developing either its probably large shale gas resources, or its existing and proven coalseam gas reserves. Its environmentally motivated decision to close all its hard coal mines by or before 2018, also claimed to follow a European Commission ruling on removing subsidies to "declining industries", can further raise its dependence on either Russian gas, or Russian coal for electric power generating. Germany's Energiegewende alternate energy plan, the most ambitious in Europe may also raise gas dedendence in the short-term, and if it fails, also in the longer-term.

GERMAN ENERGY DEPENDENCE
Germany's total energy imports, of about 202 million tons oil equivalent per year (2010) place Germany out in front of all other European countries by energy imports - at about 70% more than the second and third-largest energy importers, Italy and France.

Dependence on Russian oil is less total than its gas dependence, but over 40% of Germany's total oil imports of about 2.8 million barrels/day, slightly more than its total consumption, are Russian, with a single pipeline, the Druzhba line through Belarus carrying about 22% of Germany's total oil imports. Imported oil covers more than 93% of national consumption. Seen in this light, Germany's decision to "sit out" and refuse participation in the NATO-led Libyan war of 2011, because Libya is the only sizeable non-Russian supplier of oil to Germany is easy to understand, but Russian influence on the German decision to stay neutral cannot be excluded.

Russia also supplies around 25% of Germany's hard coal (also called energy coal) needs.  Germany's coal import dependence is however set to rise from its current rate of around 45 million tons/year, covering 77% of German total coal consumption, unless its national Energiegewende alternate energy plan succeeds or the decision to totally halt hard coal mining by 2018 is abandoned, or if Germany moves to developing unconventional gas supplies. If Germany increases its coal imports, Russia is likely to be the main provider of additional supplies.

The Russian whip hand on Germany, in Putin's velvet glove, is therefore clear to see: anytime the Kremlin wants, it can shut down Germany the same way it can tell Ukraine and Belarus who is the boss. This is known inside Germany. Its corporate and political response has followed suit.

NOT ONLY PRAGMATISM
The US view, and that of some European leaders but not of Italy and France is that Germany has allowed itself to drift—and has been maneuvered—into critical overdependence on Russian energy. Before Nord Stream was inaugurated, US tenors of a tough stance on Putin's "irredentist" probing into Europe were claiming this project could signal that a point of no return is coming.

From the outside, and among vocal political factions - but not inside the ruling parties - Germany faces a risk-fraught future through its huge dependence on hydrocarbon supplies from a politically and strategically problematic Russia ruled by dangerously active president Putin. The critique goes on to say this is due to inadequate national energy planning, to corporate strategies of chasing profits and stakeholder value, and getting closer to the real accusation  - to strategic choices by economic groups and inside governmental circles who want to link with Russia. Putin's now strong hand on the thinking and behaviour of German elites, it is claimed, was shown many times in their joint statements, at meetings between prime minister Putin and former German chancellor Gerhard Schroeder, where they used all possible arguments to defend the Nord Stream pipeline project, made easier for Schroeder by his 1 million euro-per-year consulting pay from the Nord Stream consortium.

Pro-Russian interest groups in the energy sector and a large number of government officials insist that Russia is a reliable energy supplier to Europe in general and to Germany in particular, by contrast with Arab suppliers of both oil and gas. Russian supply disruptions do not shake that dogma which ignores or dilutes politically-motivated cut-offs of Russian energy deliveries to Latvia, Lithuania, Poland, the Czech Republic, Belarus, Ukraine and Moldova, in the past 10 years. All, apart from Poland, are small or tiny economies, but more important for Germany's political and corporate strategists of German-Russian economic interdependence, and perhaps integration, they have little or no financial, industrial or technological clout. Russia has no need for them, but it needs Germany.

Their argument continues: no energy buyers act on the assumption that Russia has a potential to blackmail its customers because, otherwise, they would insist on a significant price reduction for Russian oil, gas and coal to compensate for the costly measures that would be needed to forestall any possible interruption in supply. Instead of a risk premium, they would demand a "blackmail rebate", which Russia most certainly does not offer. Importer countries would work round-the-clock to develop any other reliable sources of energy and new customers for gas exports, like China or India or Japan would not even express an interest in doing business with Russia. Even the Baltic States, which have repeatedly warned against Russia's influence, have made no effort to cut their 100% dependency on Russian gas and oil, nor have other major dependent countries like Turkey, with 75% of its gas coming from Russia. Why should Germany be different ?

More discreet and lower on rhetoric, German energy, electricity, petrochemicals, steel and other energy-intensive corporations, like Germany's financial chiefs have moved fast to seal and ever-growing web of relations with Russia. From upstream joint ventures, to capital raising in Russia, and downstream operations in Europe and overseas, the German corporate sector has already shifted and adapted to heavy Russian influence, sometimes dominance, across the spectrum. The benefits cut both ways.

GERMAN AND RUSSIAN REVENGE
The worst-possible scenario for the "Atlantic elites" is that Germany hands itself over to Russian dominance in return for a few barrels of oil, tons of coal and shipments of gas: in fact about 80 billion euro-per-year of Russian energy imports. With that dominance, the scare scenario continues, Putin will use his German bridgehead to push the USA out of Europe, along with its small-size British running dogs, and achieve what Stalin was never able to do. Germany can get its revenge for its defeat in 1945, against the Allies of the time which included the USSR, while Putin's Russia gets its revenge for the 1989 collapse of the Soviet Union, its loss of East Germany, and other satellites in Europe.

Dream on.

Russian and German corporate strategy, and the friends in government of major energy and industrial, banking and finance companies have a different strategy and - for them - much simpler goals. The Nord Stream project is still claimed by some backwoods US Republicans as a "game changer" but its corporate ownership tells another and truer story.

Russia's Gazprom holds 51% of Nord Stream, while German energy companies E.On Ruhrgas and Wintershall each hold 15.5%. Dutch company Nederlandse Gasunie and France's GDF Suez hold 9% each. Downstream from this gas supply, the price of which will be set by these players with no need to say who pays how much, except in carefully written corporate releases, the goal is value adding and supply to captive markets inside Europe, such as gas import dependent Britain which decided to exploit its North Sea reserves so fast the UK ran out of gas - fast.

E.On and other major German electricity companies with close relations to Russia, starting with RWE, are critical to all three of Germany's major political parties - the Socialists, Christian Democrats and Greens. Whatever additional profits they get from using Russian gas - exporting it to other buyers, converting it to electricity or chemical products - means more coporate revenues and more jobs for Germans. And more contributions to the funds of German political parties.

Nord Stream has high-level political backing in Germany: former chancellor Schroeder immediately moved to work for the consortium when he left office in 2005. This was only one, if big and heavily mediatized project: others, much further away from the headlines, including joint Russian-German operations outside Europe show a much more powerful reality.

Often through Gazprom on the Russian side, Russia has woven a complex web of alliances with  German financial, energy, industrial and technology corporations, This extends to offshore funds and joint ventures operated out of the Cayman Islands, to onshore financial operations in New York, Berlin and Moscow, ranging from mainstream banking entities like Deutsche Bank to specialty energy banking entities such as Moscow's Alpha Bank, which sometimes operate together far outside the energy sector, such as Greek bond trading. No sector has been ignored. From energy, steelmaking and the automobile sector, Russian-German finance, energy, resource and industrial operations have powered up for more than a decade. German politics, as in the USA and any other "liberal" market capitalist society operates through the corporate dog wagging the political tail and Russian-German corporate thinking on energy, resource and economic development strategy has in many instances converged: German politicians, as in the USA, are only responding like glove puppets to their owners' hands. 

The surprise may come from a likely imminent step up in Russian-German action outside Europe as Putin takes back direct control in the Kremlin. This in part is driven by much sharper thinking, in Russia and Germany, on the commercial, economic and strategic threat - and promise - of China and India using Russia's FSU partners in Central Asia. Here we can expect the action oriented Putin, and Germany's pragmatic corporate and financial leaders to operate a new and energetic EurAsian strategy. When chancellor Merkel departs, highly possible in 2013, a new chapter will unfold in the Russian-German plan for EurAsia.

For the Germans, this is Drang nach Osten, the March to the East, while for Russia it is the eternal quest to conquer the West while protecting itself from Asian hordes.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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