Nord Stream and the future of Russian energy policy

10 november 2011

Fyodor Lukyanov is Editor-in-Chief of Russia in Global Affairs, Chairman of the Presidium of the Council on Foreign and Defense Policy, and Research Director of the Valdai International Discussion Club. Research Professor, Faculty of World Economy and International Affairs, National Research University Higher School of Economics, Moscow.

Resume: Discussions about the global political shift of Russia from the West to the East are gradually acquiring a more practical dimension in the energy sphere.

Russian President Dmitry Medvedev and German Chancellor Angela Merkel attended the November 8 opening ceremony for Nord Stream on November November 8. This is the largest Russia-EU energy project of this century, in part because it is unclear if further projects will be implemented, but also because it was designed as the model for their strategic partnership in the mid-2000s.

The agreement to build the gas pipeline was signed by Vladimir Putin and Gerhard Schroeder in the fall of 2005. Barely a week later, Schroeder was voted out of office and a month later he was appointed the chief executive of Nord Stream AG, the operator of the project. It was fitting to have a politician at the project’s helm, as Nord Stream was expected to achieve several political goals.

First, this undersea pipeline bypasses transit countries and hence should free Russia and its largest European customer, Germany, of their influence. The Russian-Ukrainian gas wars started after the project was initiated, though bilateral relations already had been damaged by Ukraine’s “orange revolution” in 2004. Given subsequent developments, including Russia’s decision to shut off all gas supplies to Europe through Ukraine in winter 2009, Russia and Germany were clearly wise to sign the Nord Stream agreement. The pipeline offers at least a partial alternative, even if it cannot fully replace Ukraine as a transit country.

Second, Putin once again offered the EU the model of a strategic alliance after the political crisis provoked by the “orange revolution,” when Europe supported anti-Russian candidates. The offer stipulated not only building one more gas pipeline – which could be an achievement in itself – but also the exchange of shares and assets between Russian and German companies. Russia was ready to give its partners access to its development projects in exchange for stakes in European energy grids. Putin, then Russia’s president, advocated that scheme as the most promising form of cooperation. He never warmed to the EU proposals of asymmetric institutional integration.

What have the sides achieved?

When Putin opened the tap to let buffer gas into Nord Stream in September 2011, he said publicly what many knew but feared to admit: Ukraine has lost its exclusive status, and Russia and Germany’s dependence on the whims of transit countries will now diminish. Ukraine reacted immediately, saying that the new pipeline will have only a minor impact on its gas transportation system.

Curiously, both are right: Nord Stream is not an alternative to Ukraine, but Ukraine has lost its exclusive status, which is a major psychological blow.
Russian-Ukrainian gas relations deteriorated substantially this year. Ukraine has taken several steps to force Russia to review its gas contracts with it, one of them being the trial of former Prime Minister Yulia Tymoshenko for overstepping her authority in 2009 by signing gas supply contracts with Moscow at allegedly inflated prices. The launch of Nord Stream will change this situation. Overall, Ukraine, which alternatively threatens and makes offers to Russia, seems to be aware of the change or of the need to act expeditiously, because the importance of the Ukrainian transit route and its usefulness as a tool for influencing its partners are diminishing.

If the underwater South Stream pipeline is built across the Black Sea, bringing Central Asian gas to Europe, Ukraine will lose its trump card. But this will not happen soon, if at all, as there are many political and economic obstacles.

Russia’s path to its second objective – a strategic alliance with Europe – has been less easy. Putin hoped in vain that energy ties would help Russia develop a fundamental political partnership with the leading European countries – a policy that dates back to the Brezhnev era. The main reason for the failure is mutual mistrust and inability to find a common language for discussing their interests.

An honest dialogue has been prevented by the inertia of the West’s confrontational attitude towards Russia and the impatience of the Russian leadership, visibly irritated by each new problem. In addition, the situation on the European gas market is unclear. Forecasts of gas demand vary, and so Gazprom cannot be confident in the future of its European business several years from now. Furthermore, Germany has rejected Russia’s recent proposal to expand contracts for gas supply via Nord Stream.

The events of the past few weeks have shown that gas relations are much more complicated than they seem. Acting at the request of several member countries seeking to revise their contracts with Russia, the European Commission initiated “dawn raids” at the offices of Gazprom’s European affiliates. It was a highly impressive show of force. The logical conclusion is that Russia is unlikely to achieve the second objective of the Nord Stream project.

The pipeline has been launched amid growing Russian debate about the energy sector’s development strategy, in particular a balance between its Asian and European vectors. Russia is coming to see the need for major diversification, because it is not natural that it delivers the bulk of its gas exports to the EU. At the same time, while developing similar relations with China, potentially its largest customer in Asia, Russia has to deal with a different mentality and a very difficult client.

Furthermore, market conditions in Asia may not be as good as in Europe, but demand is much stronger and the Asian market also has a political potential. The geopolitical configuration could be influenced by energy relations with several other Asian customers apart from China – South Korea and Japan. Another interesting element is Moscow’s initiative to resolve the North Korean issue by building a trans-Korean gas pipeline.

Although the prospects are vague, discussions about the global political shift from the West to the East are gradually acquiring a more practical dimension in the energy sphere, which has traditionally been Russia’s key priority.

| RIA Novosti

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