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10 November 2015

European solidarity with Russia

“Business as usual” much? 

Although Crimea and a large part of the Donbas remain under Russia’s control, European businesses would like to return to business as usual when it comes to their relations with Russian companies. A telling example is Gazprom and its Nord Stream 2 project which also enjoys political support.

The Nord Stream 2 project involves the construction of third and fourth gas pipelines from Russia to Germany via the Baltic, with a capacity of 55 billion m3 a year which is double that of the current pipeline. New European Pipeline AG renamed Nord Stream 2 will take charge of the construction of the trunk line. Its shareholders are: Gazprom – 51 percent, E.On – 10 percent, BASF/Wintershall – 10 percent, Shell – 10 percent, OMV – 10 percent and Engie – 9 percent. The consortium has already submitted an application to connect the new pipelines with the infrastructure of the European Union. The Germans and the companies involved argue that this is a regular business deal. Politicians from Central and Eastern Europe such as the Polish President and the Prime-Minister of Slovakia claim otherwise. They believe that Nord Stream 2 is another blow to the interests of the countries of the region and the energy policy of the European Commission.

The project could be justified by BASF’s belief in the development of Germany as a market for the distribution of Russian gas in Europe. A new hub for supplies from the East is a vision that justifies the evolving symbiosis of German and Russian companies investing in gas infrastructure, more about which can be found below. In this way the project is political and incompatible with the energy policy of the European Commission aimed at reducing dependence on gas supplies from Russia. It also undermines the principles of EU law which does not allow for the creation of monopolies. The development of Nord Stream 2 would mean that Gazprom enjoys special privileges in Europe which are off limits to other businesses. Moreover, Brussels still declares that it intends to stabilize gas transit via Ukraine which generates revenues equivalent to around 7 percent of GDP of the country. This was the aim of the arbitration talks between Gazprom and Naftogaz as regards the winter package, which ended in an agreement to ensure supplies to and via Ukraine this winter. Hence, Nord Stream 2 is an economic project with far-reaching political consequences. It must be stated with a high degree of certainty that Russia takes advantage of the hopes of Western Europeans for economic gain in order to achieve its own political goals. This is the logic behind the activities of Gazprom which I elaborated on in There Is Method in Gazprom’s Madness.

However, before Brussels changes its mind, Gazprom is making way for new deliveries on the European market and is exchanging assets with the German company BASF. The companies are to finish their transaction by the end of 2015. Though agreed upon and approved by the European Commission in December 2013, for political reasons, it was not implemented in 2014. Under the agreement, the Wintershall company, a subsidiary of BASF, will transfer gas distribution together with gas storage in Germany, to Gazprom. Wintershall trades in gas and has 20 percent of the share of the German gas market. In addition to the transport network, Gazprom takes over (as a 100-percent shareholder and owner) gas storage facilities which have so far belonged to Wintershall, including the largest Rehden storage facility in Europe near Bremen, with a capacity of 4.4 billion m3. Russians will have stakes in two smaller storage facilities: one in Jemgum in the Lower Saxony region and another in Haidach, Austria. This storage facility has a capacity of 2.6 billion m3. The agreement also envisages the acquisition of half of the shares of Wingas, WIEH and WIEE as well as Astora – the operator of storage facilities. In return, Wintershall is to receive a share in the Urengoy Siberian gas field belonging to Gazprom. 

Gazprom is discussing deliveries with operators from the Benelux countries, developing a network of gas filling stations in Central and Eastern Europe and promoting the increased use of gas in electricity generation and transport. On the other hand, European firms and politicians from Western Europe are crowding around Gazprom. Engie, OMV, BASF and others present Gazprom as a reliable, long-term supplier. In this way they undermine the policy of the European Commission which provides for diversification of gas supplies to the European Union and diminishing dependence on imports from Russia.

Russian President Vladimir Putin speaks of a purely business-oriented project. He argues that the focus is on meeting the demands for energy resources primarily in Northern Europe, given the decline in extraction in the United Kingdom and Norway as well as the current growing demand for commodities in this part of Europe. Putin claims the project is not aimed at depriving anyone of transit capacities, labeling such assertions ‘political speculation’. German Chancellor Angela Merkel speaks in an identical vein. She admits that the European Union has undertaken steps aimed at diversification of the energy market but she adds that gas supplies from Russia can be trusted, since Russia is a reliable supplier. According to Merkel, there is no danger as far as the Nord Stream 2 project goes. Vice-Chancellor Sigmar Gabriel holds regular meetings with representatives of Gazprom. He discusses conditions and prospects for developing cooperation in the European gas market during these meetings. A month prior to the signing of the agreement on the expansion of Nord Stream by shareholders, Gabriel met Gazprom director, Alexey Miller, where they spoke of the need to look for new, direct routes for Russia to supply gas to Europe. On October 8, a working group was held in which he participated personally alongside Gazprom in Berlin.

Europe’s response to Gazprom’s project is a success for Putin, demonstrating that countries supporting Nord Stream 2 apply double standards - demanding European solidarity on climate and immigration policies on the one hand, and wading ever deeper into particularism in gas relations on the other, while also undermining the consensus worked out by the European Commission. The Energy Strategy of the European Union postulated by the EC includes items on the co-financing of infrastructure and standards applied in gas contracts which are the most important items in the Polish expounded concept of the Energy Union. One can find other beneficial provisions, such as rejecting clauses that perpetuate the dominant position of Gazprom in Central and Eastern Europe, as well as the EC’s assistance in gas negotiations.

An additional issue is that proponents of Nord Stream 2 express solidarity with their old friends from Russia, and may opt for lifting economic sanctions against Russia in January 2016. A decision to ease or lift sanctions may be reinforced by the relative calm on the Ukrainian front and the growing tension in the Middle East. However, this disloyalty will come back to haunt the entire Community. The reaction of Central and Eastern Europe might be to retreat into deeper integration and to consent to hand over energy competences to the European Commission, as symbolized by the notion of the Energy Union put forward by former Polish Prime-Minister Donald Tusk, or into energy particularism à la the Germans, which is symbolized by the policy in this sector conducted by Hungarian Prime-Minister Victor Orban who, against the will of Brussels, backed South Stream then Turkish Stream and agreed to the expansion of the Paks nuclear power plant by Rosatom in exchange for loans and discounted gas. If more countries opt for separatism, the European Union risks progressive disintegration of community policies not only in the energy sector, but also in other areas such as the abovementioned immigration policy and the domino effect will be difficult to suppress.

The European Commission is the last bastion of the common energy policy in the gas sector. Its representatives headed by Vice-President of Energy Union, Maroš Šefčovič, maintain their support for gas transit via Ukraine and projects which reduce dependence on energy supplies from Russia. However, the purpose of their policy is undermined by the actions of the countries which unofficially support Nord Stream 2. Their collaboration with Russia destroys the credibility of European institutions since it shows that they may have an impact only under the condition that the interests of those most mighty are not threatened. And the common energy policy works best when it is carried out at the expense of the weakest as, for example, in the area of an ambitious climate policy advocated by Germany. Since Central and Eastern Europe agreed to emissions reduction targets costly to their industry, Western European countries must also give something back. For example, by safeguarding respect for the letter of the European law when it comes to Gazprom which should not be able to count on preferential terms. Seeing the antitrust investigation against Gazprom to the end and ensuring that it abides by European law could also restore the credibility of the Community. The supervision of gas contracts and other activities as suggested in the energy strategy of the European Commission could also be helpful to this end. It could also be a stimulus for modernization for the Russian gas sector which, according to Moscow, is to be liberalized. If European solidarity is to survive, a return to business as usual with Russia is out of the question, especially in the gas sector. 

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