What looked like a squabble between a powerful monopolist and a poor consumer was in fact a conflict over Ukraine’s geopolitical orientation between East and West, and in the last analysis over Russia’s ability to restore its geopolitical fortunes. In 2005 and 2006 the Orange revolution had been the spectre haunting Russia, and the stage-managed elections to the state Duma on 2 December 2007 owed much of their bitterness and pettiness to this trauma, second only to the memory of the Soviet implosion. Kremlin leaders had learnt the hard way how suddenly their fortunes could change, and this time around they wanted to be on their guard. Therefore the Kremlin party overreacted to any democratic expression of criticism, let alone serious opposition to the Kremlin, unsteadily steering between the instinctive desire for full control and the need to save democratic appearances inside Russia and outside. Ever since 2004 the Kremlin saw the Orange revolution as the writing on the wall, justifiably or not. The comeback of the blonde power-lady Yulia Timoshenko in December 2007 only strengthened misgivings in the Kremlin.
In the Soviet past, oil and gas exports to satellite states had served as the Russian equivalent of soft power, and in the final days and weeks of the Soviet system the International Department of the Central Committee, headed by former Soviet ambassador to Germany Valentin Falin, reassured itself that the satellite states would not dare to leave the Soviet camp for fear of being left out in the cold. Energy prices were the Kremlin’s long leash, or so the Soviet strategists believed.
After 2004 and especially after those cold winter days at the beginning of 2006, those memories were acutely painful. In the future, would Gazprom, more powerful than ever, at prices higher than ever, be the Kremlin’s instrument to punish unwilling neighbours and give a premium to others? The Russians pointed at Western demands for fair, i.e. market-driven, pricing as a precondition for their entry into the World Trade Organization, but they continued to charge different prices to different countries – the highest prices of course to be paid by the rich West Europeans.
Since then, Europeans have had to realize, courtesy of Gazprom, that their access to energy is not only a matter of pipelines and prices, but also of politics and power. The Kremlin in its turn, while using energy as the continuation of strategy by other means, pretends that no such nexus exists. Gazprom is an integral part of the Great Game, and it operates on two levels. One is commercial, creating networks deep into Western Europe and using energy dependence to convert petrodollars into market share on a long-term basis and even with an eye on the post-oil, post-gas economy of the future. The other is political and strategic, reminding the Europeans of their ever-growing dependence on Russian oil and gas, and extracting a political price far beyond what a commercial partnership warrants.
The Kremlin’s use of energy to further its global ambitions far beyond the commercial sphere will be a given in international affairs for a long time to come, and European nations had better see to it that their dependence on one source of energy and one kind of supplier is under control. It was at the EU summit at Lahti, towards the end of the Finnish presidency in the second semester of 2006, that the energy question was raised, and how to deal with Putin. The tour de table did yield some platitudes about saving energy and promoting alternative fuels but failed to come up with any revolutionary ideas; it was left to the EU’s High Representative for Foreign and Security Policy Xavier Solana to say that if the Europeans wanted to be less dependent on Russia the only practical alternative would be to cultivate nuclear energy and start building new power plants. Of course, the presidents and heads of governments only shook their heads at so much realism.
Meanwhile, Gazprom is forging ahead, encouraged and controlled by the Kremlin. No downstream, no upstream – this is how the commercial gas equation is being described at the Gazprom HQ in Moscow. Gazprom holds the monopoly for Russian gas exports and wants to control as much as possible of other, complementary markets. The Ukraine deal of early 2006 is a case in point: Gazprom gained indirect control over Central Asian exports and pipelines. Moreover, Gazprom also wants to link its networks, via Italy’s Enel, with the southern pipelines transporting gas from Algeria into Europe. With an eye on LNG and the future of sea transport, Gazprom is even trying to invest in gas fields and transportation systems as far away as Bolivia and Nigeria.
Pursuing a dual strategy of commercial and strategic interests, the Russians want access to distribution networks throughout Western Europe and are willing to concede minority share holdings to Western companies. One such example is the complex relationship of BASF and Gazprom. The day after Medvedev was named by Putin for the succession, the leaders of BASF and their Russian counterparts at Gazprom, assisted by German foreign minister Frank-Walter Steinmeier, celebrated their joint efforts in extracting gas from the vast Yuzhno-Russkoye field in Western Siberia (‘From Jamburg to Hamburg’ is the slogan). While celebrating and pushing the start-button in Moscow, thousands of kilometres away and working at -40 degrees Celsius, employees of Severneftegazprom welcomed the first gas from the new field developed in partnership by BASF – through its Kasselbased subsidiary Wintershall – and Gazprom, promising something between 600,000 and one million cubic metres of natural gas. The overall size of that field corresponds roughly to Russia’s production throughout 2006. Annual exports to Germany, now at 40 billion cubic metres, could be assured from Yuzhno-Russkoye for a minimum of fifteen years. In 2009 production at the field is planned to rise to an annual 25 billion cubic metres.
Via Wintershall, BASF holds 25 per cent minus one share in Severneftegazprom, who hold the licence to exploit the field. In addition, BASF holds shares without voting rights in the Russian company, assuring the Germans 35 per cent of future profits.
This is the upstream side. In return, on the downstream side Gazprom raised its stake in Wingas, a Wintershall subsidiary selling gas, from 35 to 50 per cent (minus one share). In addition Gazprom has 49 per cent in a Wintershall subsidiary producing oil in Libya. This helps the Russian gas giant in its strategy to seamlessly control the entire value chain from the source to the consumer. At BASF headquarters in Ludwigshafen this is seen not as a step towards absolute market dominance by Gazprom but as a fair deal between production and distribution.
Meanwhile, E.ON, not having secured a share in the Yuzhno-Russkoye field, is out to find other lucrative business with Gazprom. E.ON is another major player in the energy field in Germany and Europe. There seems to be agreement with Gazprom that certain assets owned by E.ON are open for Gazprom participation. So far, the project comprises natural gas reservoirs in Central and Western Europe (for instance Belgium) and power stations.
All three companies are already cooperating in the Baltic North Stream pipeline, planned to carry an annual volume of 55 billion cubic metres of natural gas from Siberia and, in the not too distant future, from the northern Shtokman field to Western Europe. The Baltic pipeline is bypassing Ukraine and Poland. This means that those countries are not only losing the lucrative transit fees but can also, if the Kremlin so wishes, be cut off from supplies without directly hurting more important customers like, for instance, Germany or France. The Swedish Defence Research Agency, reflecting concern throughout the Scandinavian and Baltic countries, in early 2007 published a report warning that this will divide the EUand increase European dependence on Russia. Poland is anxious, while countries like the Netherlands, so far relying on their own dwindling production from North Sea fields, will be linked to the new pipeline. In the south, Russia has built the Blue Stream pipeline supplying gas to Turkey. Now Gazprom wants to extend the line to Hungary (80 per cent of Hungary’s gas comes from Russia) and link up with Italy’s system; once in Italy, it is linked to the gas coming from Algeria. At the same time, the EU’s Nabucco project, devised to bring Central Asian gas to Europe via the Black Sea and Ukraine, is being sidelined. When the Hungarians, relative newcomers to the EU, were accused of undermining the EU’s energy policy, the tart response from Budapest was that you cannot undermine something that does not exist.