Asia Times Online
M K Bhadrakumar
September 8, 2011
For Russian Prime Minister Vladimir Putin, September 6 will remain as one of the memorable days of his checkered public life. The Nord Stream pipeline carrying Russian natural gas under the Baltic Sea directly to Germany formally opened on Tuesday. On the very same day, Moscow also announced that a shareholder agreement has been finalized between Russia, Germany, France and Italy for the South Stream pipeline project, which is designed to carry Russian gas to Western Europe under the Black Sea.
Both Nord Stream and South Stream have been Putin's pet projects. Against heavy odds, he tenaciously advanced these two projects that hold the potential to rewrite Russia's ties with the West and change the power dynamic in Europe. Russia takes a leap forward in realizing its longstanding dream of finding some form of permanent habitation in a common European home.
Nord Stream, which redraws Europe's energy map, evoked criticism from the United States and Poland in particular, while the South Stream was countered all along by Washington with the rival Nabucco gas pipeline project, envisaged to transport gas from Azerbaijan and Turkmenistan to Western Europe via Turkey.
The Nord Stream will start pumping 27.5 billion cubic meters (bcm) of gas to Germany, Britain, the Netherlands, France, Denmark and other European states at the beginning of October. In short, in the next few weeks, German consumers will directly receive Russian gas for the first time in history. With that, German-Russian strategic ties cruise to a qualitatively new level.
The 1,224-kilometer Nord Stream is a twin pipeline and should be able to move a volume of 55 bcm of gas by 2013. The Nord Stream is designed to connect the European gas grid and the United Kingdom through the planned connection between Bunde and Den Helder and from there through the offshore Balgzand-Bacton Pipeline.
British Prime Minister David Cameron is arriving in Moscow on Sunday in a renewed attempt to build on UK-Russia ties when the other major European powers - Germany, France and Italy - have surged ahead in fostering ties with Russia.
Although the US lost the first round of sparring over the Nord Stream, which will further increase Europe's energy dependence on Russia and even, arguably, "lock in" European dependence, Washington hasn't given up. It is quietly promoting European "resistance" to the robust attempts that Gazprom, Russia's energy leviathan, has been making to snap up the highly lucrative downstream energy market in Europe by acquiring the utilities that deliver Russian energy supplies directly into the homes of its European customers.
What irks the US most is that Russia is striving to make lucrative deals with individual countries - such as Germany - which might incrementally strengthen Moscow's political influence with them and will profound implications for Euro-Atlanticism. The trend is already evident with Germany and Italy stalling on the US-sponsored drive to further expand the North Atlantic Treaty Organization (NATO) into the territories of the former Soviet Union, lest that would disturb Russian sensitivities.
The US is working hard in Brussels through Poland and the Baltic countries to encourage the creation of a new regime vested with the power to supervise Gazprom's energy agreements with the European Union member countries. Prima facie, the argument is that Europe should speak with a single unified voice on energy issues.
The US counts on new German energy commissioner in Brussels Guenther Oettinger, who is a senior German politician as well, to push for an enhanced role for the EU in the European countries' direct energy deals with Russia.
Interestingly, on Wednesday, no sooner had Nord Stream been formally opened, the European Commission unveiled a proposal that, given the prospect that the share of imported energy is poised to rise in the coming years in Europe - 80% of EU countries' oil needs are currently met through imports, while the share of imported gas is touching 60% - there ought to be a comprehensive EU energy policy to obviate the possibility of individual member countries competing when striking energy deals with Russia.
Oettinger has a maximalist position that all energy deals with Russia should be negotiated by the EU and a minimalist position that the EU member countries should at least allow more EU oversight over their energy deals with Russia. Oettinger belongs to Chancellor Angela Merkel's Christian Democratic Party.
A special friendship
The US also finds Poland, which currently heads the rotating EU presidency, a key ally. The heart of the matter is that the Nord Stream bypasses Poland and takes away the one trump card Warsaw traditionally held to influence Moscow, which is that it has been a transit country for Russian gas flowing to Germany.
Poland not only loses the transit fee for gas transportation from Russia, but in political terms, Nord Stream also symbolizes a shared German-Russian interest to deprive Warsaw of a "spoiler's role" in the two powers' expanding strategic ties. (Polish Foreign Minister Radek Sikorski, in his previous capacity as defense minister, once compared the Nord Stream deal to the Molotov-Ribbentrop pact that partitioned Poland between Nazi Germany and the Soviet Union in 1939.)
The US is most perturbed about the special friendship between Germany and Russia built around energy cooperation - what Germans delightfully call their "modernization partnership" with Russia. Washington apprehends that Moscow is finessing a formidable asset by way of its relationship with Berlin for playing a greater role in European affairs.
Germany's unique export boom depends on Russian energy, and its decision to do away with nuclear energy following Japan's Fukushima Daiichi disaster further accentuates the dependence in the coming period. Put plainly, Germany may no longer be able to solve its energy problems without its Russian partner.
Injecting a high degree of reliability and predictability in German-Russian relations, therefore, becomes a priority foreign-policy objective for Berlin. This hasn't substantially changed even under Merkel, although she may lack the fervor and personal commitment of former chancellor Gerhard Schroeder, who was a strong advocate of excellent relations between Germany and Russia. (Schroeder at present heads the Nord Stream consortium.)
It was Merkel who opposed the plan by the George W Bush administration in 2008 to induct Ukraine and Georgia into NATO and also blocked the EU from introducing regulations that would restrict Gazprom's acquisition of European energy utilities.
As the Germans see it, Gazprom's deals have been very profitable for its Nord Stream collaborators E.ON and BASF. Indeed, Gazprom has given a vastly differentiated treatment to German companies in regard of stakes in its Russian assets, too. BASF and E.ON control almost a half of Russia's massive Yuzhno-Russkoye gas fields that will provide most of the supplies for Nord Stream.
However, the fear psychosis over Nord Stream among the European countries - "Old" and "New Europeans" alike - whipped up by the US, is slowly withering away against the backdrop of the steady improvement in Russia's ties with the former Warsaw Pact countries of Eastern Europe. Even Poland is now considering taking part in Nord Stream as a recipient country.
Meanwhile, Germany's own relations have dramatically improved with the former Warsaw-Pact countries of Eastern Europe that have been Russia's most vocal critics so far. Germany's trade with these countries is flourishing and currently by far outstrips its business with Russia. The Czech Republic alone is a bigger market today for German exports than Russia, while imports from the Czech Republic, Poland, Slovakia and Hungary amount to US$56 billion a year, compared with only $21 billion from Russia, including its energy.
United States propaganda about Nord Stream was exaggerated and had probably more to do with its own trans-Atlantic leadership role in the post-Cold War era than about the real specter of a Russian dominance over Europe's foreign policy. After all, Nord Stream is a European project, not a German project.
But then, Russia is now all set to have a repeat show with the South Stream gas pipeline project. The US will find the South Stream a bitter pill to swallow since the Russia-sponsored project is soaring high, finally, while the rival Nabucco pipeline, which has been tirelessly projected by Washington as a symbol of European grit to reduce energy dependency on Russia, continues to languish.
Russia plans to deliver as much as 63 bcm gas to Western Europe via the South Stream pipeline. On Tuesday, Gazprom revealed that Electricity de France (EDF) and Germany's Wintershall - a subsidiary of BASF - will each get 15%, while Italy's ENI will have a 20% stake in the South Stream project and that the shareholder agreement will be signed on September 16 in the Russian Black Sea resort city of Sochi. Russia plans to begin forthwith the construction of the South Stream pipeline and to commission it in 2015.
Meanwhile, on a parallel track, Moscow has been revving up its energy diplomacy with Turkmenistan and Azerbaijan to get these two Caspian countries to use the South Stream to export their gas (which would also starve Nabucco).
The finalization of the shareholder agreement over South Stream puts paid to the project's detractors. Some of these have argued that South Stream is far too expensive. The pipeline is expected to cost 20-24 billion euros (US$28-$34 billion) including the construction of the offshore section at a cost of 8.6 billion euros. Some others have questioned the need of South Stream in view of the fall in energy demand caused by the global financial crisis.
The US argument is also that with new discoveries of gas in the United States, Middle East and elsewhere, there would be increased global supplies and along with it is also the advance of LNG, which together would drive down prices and transform the global gas market.
Evidently, Germany, France and Italy have not bought into this argument and seem to prefer that the safety and stability in gas delivery that South Stream assures is worth their investment. Besides, they see ahead an era of gas for at least two decades ahead.
However, a dark cloud can always have a silver lining. What the "Orange Revolution" in Ukraine in 2006 failed to achieve conclusively for the US in geopolitical terms, Nord Stream and South Stream might - if luck holds and Moscow errs.
The fact of the matter is that the South Stream bypasses Ukraine, which is traditionally the main transit route for about 100 bcm of gas to European countries and made up 80% of all Russian gas supplies to Europe. The so-called "pro-Russian" leadership of Viktor Yanukovich in Ukraine, who was feared to undo the Orange Revolution, tried its level best to convince the Kremlin to give up South Stream.
Ukrainian fears are palpable, since apart from the hefty transit fee, Ukraine is 100% dependent on Russian energy supplies. Also, woven into Ukraine's energy relationship with Russia are a host of issues. The established status as a crucial transit country enabled Kiev to extract concessional terms for its gas purchases from Russia. Moscow now counsels Kiev that it has a choice to make: either join the Russia-led Customs Union (comprising Kazakhstan and Belarus) and become eligible for concessional energy pricing or pay up market prices.
Moscow has essentially posed an existential choice for Ukraine because the choice inevitably means repudiating decisively Ukraine's option of its future association with the EU. Yanukovich is going to have a hard time making this choice. He is on record as favoring the previous pro-US government's policy seeking rapid rapprochement with the EU. But Russia can make it real hard for him if he presses the accelerator hard in the journey to Brussels.
The real irony is that all three protagonists are in a dilemma in varying degrees - Yanukovich, EU and Russia. The US encourages EU to pursue the development of ties with Kiev as top priority. But Brussels is dithering in offering yet a clear long-term prospect of membership to Ukraine whose passage as a transition country in the corridor of "Europeanization" offers, admittedly, a grim prospect. And as of now, Europe is broke and EU expansion is the last thing on anyone's mind when European integration itself is in such visible disarray.
On the contrary, without the alluring prospect of a EU membership, Yanukovich would ever hesitate to take a plunge into the dark by annoying Moscow.
For Russia, too, the dilemma is acute. Nord Stream and South Stream rock the foundations of Russia-Ukraine relations. The interdependency built around the Soviet-era pipelines provided a sort of equilibrium in the relationship - a sort of sobering influence - since Kiev knew it survived on Russian energy supplies at concessional price and Moscow knew the criticality of fully functioning pipelines heading toward Western Europe via Ukrainian territory.
Moscow's dilemma is going to be to resist the temptation of the new "freedom" provided by Nord Stream and South Stream to pressure Ukraine and force it to its knees and make it to irrevocably join the Russia-led integration processes. The danger is that if Moscow's idea is to integrate Ukraine, it may end up having an opposite result with a recalcitrant Kiev searching for alternate means to move altogether out of a Russian sphere of influence.
As things stand, the Deep and Comprehensive Free Trade Agreement (DCFTA) which EU has proposed to Ukraine, already holds the potential to change the power calculus in Ukraine-Russia ties. The DCFTA is also a brainchild of the US. If ratified, it decisively takes Ukraine away from the Russia-dominated Eurasian trading area.
Besides, the EU is also working on a Political Association with Ukraine, which envisages among other things visa-free travel regime, and practically enshrines Ukraine's place in Europe. (Russia has been pleading in vain for a similar regime with EU.) And all this can eventually take Ukraine to within striking distance of membership of the EU - and, conceivably, of NATO as well.
In sum, Nord Stream and South Stream are poised to leap out of the world of energy security and choreograph an altogether new power dynamic in the heart of Europe.