In 2006, the Russian authorities cited environmental transgressions in order to exclude the Western companies. Agreements were cancelled that had been concluded in the 1990s, when Russia was down and almost out, and no longer appeared advantageous. But these manoeuvres, pushed through by the Kremlin, created widespread concern about the future. In the West, parallels were seen between the dismemberment of Yukos and Sakhalin II. The London Economist[9] cited an old KGB adage: ‘Give me the man, and I shall find you the crime.’
The European Union, after having worked on the European Energy Charter for the last fifteen or so years, has not made much headway with the Russian authorities. The Eurocrats of Brussels aim for reciprocity, hoping to repeat the experience of the 1970 and early 1980s when after two price explosions Arab petrodollars were converted into industrial and other investment in the West, thus creating a network of interdependence. Can this kind of strategic deal be achieved with Russia’s rulers? Gazprom wishes to acquire an assured stake in downstream industries, while European companies want to invest upstream in Russia. It sounds like a perfect match, except that it does not work.
The EU, particularly EU president Barroso and German chancellor Angela Merkel want an agreed legal framework to facilitate two-way investment, while the Kremlin wants asset swaps. ‘Europe wants openness, Russia wants control.’[10] The Russians fear that the European dwarfs want to bind the Russian Gulliver through their legal constructions, and resent it. Meanwhile, reciprocity works in Russia’s favour. By the end of 2007 Gazprom already had investments in most of the twenty-seven EU countries – including, in Germany’s Ruhr area, the first-league football club Schalke 04. Gazprom not only invests in energy-related fields like storage facilities and distribution networks but also goes beyond this. In the Kremlin the EU is ill-understood in its supranational appearance and shared sovereignty, and therefore the Russians, following the time-honoured principle of ‘divide and rule’, tend to conclude bilateral deals with German, Belgian, French and Italian companies. Thus, Gazprom gains direct access to consumers in the West. Meanwhile, the EU’s energy charter, meant to create a legal framework for European investment in the Russian energy sector, is unable to move forward because the Russians refuse to ratify it.
This is a serious conflict of policy: the EU is dependent on Russian natural gas, and Russia needs the steady flow of Western consumption. The Europeans negotiate on rules, the Russians on deals. During the Cold War this difference of approach was taken for granted as immutable. Today, the relationship is different and the EU is trying, without much support from individual states, to export its standards of good behaviour and partnership and tame the Russian bear. The EU wants to extend its version of good governance to Russia, especially to Gazprom, which still looks more like the Gas Ministry of Soviet times than like a global player second to none. Brussels cannot accept the Russian approach to reciprocity without compromising its free-market principles and its norms of industrial governance. The EU treaty forbids discrimination against an investor on the basis of nationality. Banning Gazprom from investing in Western Europe would be hard to push through against the wishes of the individual companies who want to do their own deals with Gazprom. The EU has to insist on competition, fair play and transparency, even in the face of powerful and Kremlin-connected Gazprom. But how far can it go without causing an open rift? What is happening is a clash of strategies as part of a conflict between industrial civilizations, with natural gas attracting ever higher prices.
The EU is not only facing tough Russian resistance, it is also the big companies at home like E.ON and Gaz de France who oppose the principle of ‘unbundling’, i.e. opening national networks to competition. The EU Commission cannot allow monopolies to form under its eyes. The rationale, seen from Brussels, is not only lower prices for the consumer but also lower profits for the producer. As long as competing companies use the gas networks, no single player can abuse the market – be it Gaz de France or Gazprom. The outcome is open.
Europe as seen from the control room
Meanwhile, Gazprom continues to develop and enact a continental strategy. The company headquarters, a bold concrete and dark-blue glass tower in the centre of Moscow, with many heavy black premium-class cars from Germany parked in front, commands respect far and wide. Those fortunate enough to have access to the inner sanctum take the lift to the topmost floor. That is where the displays in the control room show the gas pipelines that cover most of the Eurasian landmass, i.e. from the easternmost tip of Siberia to the southern end of the Iberian peninsula and on to North Africa. The display shows, for instance, Algerian gas being transported to Spain and, via Tunisia, to Italy. In all innocence one of the Gazprom directors explains that, to improve Europe’s energy security, it might be a good idea to link the Russian pipeline system with the one coming from North Africa; nobody mentioned the word cartel. What is also on display, perhaps prematurely, is the future North Stream pipeline from Russia to Germany through the Baltic Sea. There was also on show a pipeline to be built to the Far East, but Gazprom planners cannot overlook the fact that Chinese companies will soon be unable to pay the prices Gazprom can demand from European consumers.
The sky is not the limit. LNG technology will, before long, work to the advantage of European consumers and bring gas from Qatar to, for example, Britain. And so will alternative energies. It was Putin who said that Russia has to be careful not to raise prices too high, or the premium on alternative energy will increase to tipping point. What is not on display at Gazprom’s top floor, of course, is the Nabucco pipeline – the EU-project to allow Central Asian gas to bypass the Russian system – much to the chagrin of Gazprom.
So far, Gazprom is landbound. But one day soon, with help from Norway, Europe, and the US, LNG technology will allow not only the gas producers of Qatar in the Persian Gulf but also Gazprom to free itself from some of its terrestrial restrictions and become an amphibious animal.
When President Putin nominated Dmitri Medvedev, for years the chairman of Gazprom’s overseeing board, to be his successor in the Kremlin, the all-Russian share index at the Moscow stock exchange jumped forward, and Gazprom shares gained 2.5 per cent within minutes, quoted at USD 14.25 per share. Whatever the democratic shortcomings of the preceding Duma elections – there were many, some serious – Russian and foreign investors were united in the belief that stability is more important than democracy, that Medvedev would be the best choice available, and that his Western, enlightened views hold a promise for Russia’s place in the world. Little did they realize that Medvedev’s greatest asset, his liberal charm, is also his greatest weakness, as he surely does not have much control over the FSB networks running the Kremlin and, by implication, most of Russia’s power structure. Much as in the recent past, investors see the continuity of the Putin-Medvedev couple, under whatever label, as the guarantee of pro-business price and investment strategies. Medvedev, in the past, was not only Putin’s chef de cabinet in the presidential administration but, at the same time, his young representative among the Gazprom directors. This personal union was to assure that the national interest – as defined in the Kremlin – would always prevail.