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Russian-German gas deal strains relations with Poland

by Jerome a Paris Wed Sep 7th, 2005 at 05:40:39 AM EST

Russia and Germany to seal $5bn gas pipeline agreement

Vladimir Putin, Russia's president, will this week visit Germany to mark the signing of an agreement to build a $5bn gas pipeline linking Russia and Germany under the Baltic Sea.

(...) Gazprom will own 51 per cent of the North European Gas Pipeline, while the German partners [Eon and with Wintershall, a subsidiary of BASF] will each hold just under 25 per cent.

(...) this [is] the first concrete step towards building a link expected to carry 55bn cu m of Russian gas to western Europe through two parallel pipelines that would begin carrying gas in 2010. Gazprom currently exports about 116bn cu m of its gas through overland pipelines crossing Ukraine, Belarus, Poland and Slovakia.


The Baltic pipeline has been condemned in Poland and other eastern European states as a manoeuvre designed to make them more vulnerable to Russian pressure.

Coincidentally or not, the FT publishes on the same day a letter from an unhappy Pole:

Time for a mature Polish-German dialogue within EU

(...) plans for the Baltic pipeline are going ahead when there is a perfectly viable and much less expensive alternative route across Poland (Jamal 2). The pipe, which was to have run parallel to the existing Jamal 1 pipeline, was first planned by the Russians in the early 1990s and was to have been completed by 2002. It has now been shunned by Gazprom, which explains it no longer wants to be dependent on transit countries, in this case Poland and Belarus.

It should also be noted that the cost of the underwater pipeline to its investors compared to Jamal 2 is double or more of the sums in dispute between the member states including Germany over the next European Union budget running from 2007 to 2013.


Would it not be better if the next German government recognised that policies towards Germany should be conducted together with other member states, new and old, within an EU context? This would signal that Germany indeed intends "to remain anchored in the EU", which would become more viable at a critical time following the collapse of the EU constitution and the row over the next budget. Also Angela Merkel, the Christian Democrat leader, would no longer have to assure Warsaw that there would be "no deals over the heads of the Poles"; nor would Ms Merkel fear that Poland would determine the content of Germany's relationship with Russia. (...)

Krzysztof Bobinski, Vice President, Unia & Polska Foundation

The fact is, the Poles have behaved with the Russian gas pipelines just like the Russians have with the Caspian oil pipelines - as pains in the ass, trying to use the pipelines for political games and brinkmanship games. They forced Gazprom to cough up a lot more money than initially intended to finance the construction of Yamal 1, and they proved that they were little more reliable than the Ukrainians (the first country to have a hold on Gazprom through its export pipelines), so I sympathise with Russia's decision to diversify its export routes. It's good business to diversify your risks as much as possible, and the Poles can only blame themselves if they have killed the goose that lays the golden eggs (transit fees for the new pipeline would have been quite significant, probably close to a billion euros per year for the mooted volumes).

Calling for Germany's European solidarity there is slightly disingenuous, as the interests of the Germans is to have a reliable supply of gas, and the Poles were trying to extract as much value for themselves from the deal by using blackmail-like arguments - the unreliability of the alternative, Ukraine, and the need for their own reliability to be "properly remunerated". They played a game of brinkmanship and apparently lost, pissing off both the Russians and the Germans in the process, I expect...

Putin, as quoted in the article, actually does a good job of presenting the Russian gas strategy:

"We know it's a concern for our Polish partners. But politics doesn't come into it," said Mr Putin, arguing a direct link would lower transit costs, reducing energy prices for west European consumers. In any case, Russia would not stop using the existing routes. It was increasing exports and diversifying its routes to promote stability of supply, he said.

Mr Putin explained that Russia wanted to expand energy exports in other directions, including to North America and east Asia.

He repeated support for a northern gas export project in which tankers are to take liquefied natural gas from Russia's northern port of Murmansk to the US. The scheme has been frequently aired but has yet to materialise. The project is likely to be raised again when Mr Putin visits the US for the United Nations General Assembly next week.

The Russian president also backed the proposed east Siberian oil pipeline from Lake Baikal to China and the Russian Pacific port of Nakhodka. "We don't want to supply only one consumer. We want to reach world markets," said Mr Putin.

He repeatedly made clear that economics would determine Russia's energy strategy. However, in a separate meeting, a senior Foreign Ministry official argued that it was "natural" to use energy for diplomatic purposes as well. He said: "I think it's self-evident that energy diplomacy is something that many countries use and with our resources we think we can use this energy to strengthen our position [in the world as well as make a profit."

All this makes a lot of sense. Gazprom has actually had a very sound development strategy over the past 30 years, steadily building export pipelines towards its main markets: the main pipeline via Ukraine, Slovakia to Austria, Italy and Germany, the southern line to Greece and Turkey, the northern line via Poland, an additional route to Turkey under the Black Sea, and now this Baltic route (and the mooted Asian routes).

All these routes are progressively filled up, so the new capacity is not built to spite any of the transit countries, but to build up exports while avoiding a single route - and point of vulnerability. Gazprom has been an extremely reliable provider of gas to Europe and is keen to remain so, and its main clients, the gas companies form all the big European countries, are similarly keen to keep the gas flowing uninterrupted to them.

And Poland's aggressive behavior precisely shows why it makes sense to have different routes and not rely on a single partner, especially when they want to use the pipeline as an instrument of leverage.

As for the more general relationship between Europe and Russia on the energy side, see it as a long marriage, with each pipeline as a kid which further ties the parties together in a web of mutual obligations and responsibilities. Both sides are totally and fully integrated via the infrastructure in a co-dependency relationship that no one can really use agaisnt the other. Europe needs Russian gas, and Russia needs the hard currency that comes form that gas (25% of Russian exports and a good chunk of the federal revenues).

Poland should stop these silly games. (And Russia should learn from the same to stop playing identical games on the oil side for the Caspian resources).

Fact is, whoever has gas and oil, has the strong hand...and countries will have to deal with these countries diplomatically in the long run, if they want to do business.

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Wed Sep 7th, 2005 at 06:33:56 AM EST
I 've heard that the Russians raised unilaterally the price of natural gas that goes to Europe by 25%. Is that true? It doesn't sound as a co-dependency to me.

What's going on with the Nabucco Pipeline? It is much more nessesary I think.

by Greco on Wed Sep 7th, 2005 at 08:53:44 AM EST
Most Russian gas is sold under price formulas directly linked to oil products (diesel and fuel oil), usually using an average over several months. Thus Russian gas prices tend to follow oil prices with a lag of a few months and with much less volatility.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 7th, 2005 at 09:53:19 AM EST
[ Parent ]
The Nabucco pipeline is supposed to be built from Turkey to Austria (via Bulgaria Romania and Hungary - not sure abotu Greece but I think not). This will indeed allow in the long run to bring gas form the Caspain and Iran to Europe, but do note that most of the gas currently in Turkey comes from Russia, so it might yet be turned into an additional route for Russian gas... - it will certainly allow for swaps with the Russians)

It's well on its way, I think, and could be ready in a few years.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Sep 7th, 2005 at 09:56:20 AM EST
[ Parent ]
The Turkey - Greece - Italy natural gas pipeline is a different pipeline. It is under construction.

Turkey buys russian gas, because they deliberately haven't connected to the iranian grid. After the crisis  they don't need all this gas.

by Greco on Wed Sep 7th, 2005 at 11:43:39 AM EST
[ Parent ]
Nabucco is Turkey to Austria. The Turkey to Adria (via Greece) is not happening yet.

Turkey buys Russian gas, because the Russians got there first. It's been unclear why the pipeline from Iran was not connected. I have never seen convincing proff that the pipeline on the Iranian side was actually ready otherwise they would have forced Turkey to enforce the contract.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Sep 7th, 2005 at 02:48:49 PM EST
[ Parent ]
I almost forgot it. I have heard that the French PM gave a very important speech on energy issues. Somewhere I read that he spoke about the post petroleum era.

Well, was it that important? Or bussiness as usual?

by Greco on Wed Sep 7th, 2005 at 11:48:18 AM EST
there was some hype around the spike of 70+$ oil because Chirac was inaugurating an ethanol plant that day, and there have been various declarations to get used to expensive energy and the like, but nothing major that I can remember.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Sep 7th, 2005 at 02:50:22 PM EST
[ Parent ]
A completely one sided presentation. Yes the Poles have played games with the pipelines. You're ignoring, however, Gazprom's machinations involving massive bribery to obtain its deals. Then there's Russia's history of playing political games with energy supplies. Finally the Russian elites' open nostalgia for their lost empire and thorough disregard for democracy.  The Poles have a perfectly reasonable fear that the Russians might choose to cut them off of their gas supplies as political blackmail at some point in the future. It wouldn't be that hard for the EU and the Germans to preemptively issue some sort of guarantees and threats against Russia to reassure the Poles.

Also you're acting as if all of this happens in a vacuum.  Yet France's and Germany's policy of cuddling up to Putin has as an inevitable corollary Poland choosing to side witht the US against them and viewing these two countries as strategic enemies.  

This is happening in a context where the Polish-German relationship is already quite rocky as a result of German politicians playing to the expellee lobby. (They want a museum devoted to the suffering of the expellees, only problem, allowing the BdV - Federation of Expellees - to run it is a bit like asking some hardline pied noir group to create a huge museum in Paris devoted to their suffering. The history presented is likely to be a tad one sided. The Germans rejected a proposal for a joint group of academics to create a museum.) Polish politicians in turn have reverted to the old virulent anti-German rhetoric of the communist period.  A sad development considering the incredible progress of the nineties, including on the expellee issue.

Polish French relations are also far from ideal ever since the run up to the Iraq war where the French seem to have decided to take lessens in effective diplomacy from Don Rumsfeld.

Both the French and to a lesser extent the Germans like to complain that the Poles are an American trojan horse in the EU, yet they themselves seem bent on perpetuating and solidifying Poland's pro - Bush stance.

In any case, for its own security if nothing else, Poland needs to wean itself from its dependence on gas supplies from Russia. Personally I'd favour a combination of renewables and nuclear power (Poland currently has none, courtesy of the Party wiping out its nuclear power program in the anti-semitic purge of 1968).

by MarekNYC on Wed Sep 7th, 2005 at 04:22:41 PM EST
I was despairing to have the opposite point of view!

Actually, I am quite sympathetic to the Polish position viz. Russia, and I am NOT happy at all with Chirac and Schroeder's shameful coddling with Putin, for a number of reasons, including:

  • it brings nothing to France and Germany (there will be no serious alliance between Russia and "Europe" against the US, and no trust between Russia and "Europe" in any case; "Europe" doesn't even exist as far as the Russians are concerned)

  • we shamefully let Putin wage genocide in Chechnya and play his power politics in other regions, including the Baltics and the Caucasus;

  • we rightfully and needlessly piss off and/or scare central Europeans

  • it makes no difference whatsoever on the energy front.

But Poland is still wrong to play the pipeline card because (i) it perpetuates the cycle of mistrust that you mention and (ii) it pisses off both the Germans and the Russians and (iii) it doesn't work.

The argument that Russia could cut off gas to Poland and not to Germany and the EU would not react is not serious. Cutting gas to Europe, to any country, is an act of war from Russia, let's be very clear about that, and it will be treated as such, unless it's seen as being part of silly underhand games by squabbling local oligarchs allied with various Russian factions, in which case it will be tolerated until it has a macroeconomic impact on the country or a political impact anywhere else.

The gas pipelines are not an asset for oligarchs to play with if you want to be taken seriously as a European country. Get rid of Bartimpex and his boss Gudzovaty, for instance, before blaming the Germans.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Sep 7th, 2005 at 05:41:25 PM EST
[ Parent ]
No argument with you about the Polish energy oligarchs - the closest thing Poland has to the FSU criminal/state capitalism. Getting rid of them would be a wonderful thing, but it is not so easy considering the amount of money they've put into the politicians pockets and the existing legal rights they've obtained as a result. The Polish press, in between freaking out about Gazprom and Putin, has been in perfect agreement with you on this point. Opposition politicians generally have as well, at least until they get into government.

Where I disagree with you is that it is crazy to worry about the Russians blackmailing the Poles or that such an event would be certain to produce a strong reaction going beyond words.  The Russians have used the energy card in the past against the various FSU states, including the Baltics (before they joined the EU). I can't imagine they are all that worried about an EU where Germany lauds the Chechen elections as a shining example of democracy and France initially complains sotto voce about the Polish led efforts to overturn rigged elections in Ukraine before eventually going along. These are the two most powerful countries in the EU and they have made it clear over the past several years that they place a very large value on close relations with Putin and little value about what the Central Europeans might think. So even if you are right, I would call the situation analogous to Iraq's lack of concern over the US response to an attack on Kuwait. That's why I suggested that it would be a good idea for the EU countries to make a public declaration to both reassure the Poles and warn the Russians that any use of the energy card would have immediate and disastrous consequences, not just diplomatic but practical.

If you think that would be an unnecessary provocation of Russia consider that the Polish political, policy, and media elites are unanimous in viewing the possibility of energy blackmail as a very real threat. Regardless of whether they are correct or not, they will conduct themselves accordingly. I don't want Poland to go down the British 'special relationship' path. I believe that a Poland aligned within a strong EU is in the natural interest of both Poland and Europe. But that's not going to happen as long as the EU's two most powerful countries are seen as the friends of Poland's chief strategic threat - every single action by them will be seen through that prism.  

by MarekNYC on Thu Sep 8th, 2005 at 02:54:24 AM EST
[ Parent ]
France and Germany should stop their stupid games with Russia - and should make it cristal clear that Poland is in the EU and any blatant aggressivity or "games" played with Poland will be treated as seriously as if played against France or Germany.

This is probably the case, but I can understand the worries of the Poles on this topic. But hint - don't play the UK card if you want friendly irrevocable words of support form France and Germany.

As to Ukraine, Poland got full access to the EU loudspeaker, so it becomes really bad form and ungratefulness to say that others did not share fully the Polish p.o.v. from the start. Poland made the policy and got full support for it, that's the hard facts. There was no second guessing or underhand diplomacy, so complaints about France's initial reluctance seem silly and provocative to my ears and beg the response "you'll never be happy, so why bother at all".

Poland in in the EU now. It's not temporary, it's real. It brings rights and responsibilities. and yes, France is an arrogant pain in the ass country. Is it really a surprise?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Sep 8th, 2005 at 05:04:12 AM EST
[ Parent ]

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