Can Europe Make It?

German-Russian business cooperation: what consequences for eastern Europe?

Germany's trade policies towards Russia, notably on the issue of natural gas, have contributed to re-shaping the eastern European geo-economic landscape. Could Ukraine become a hostage of Berlin's recent Ostpolitik should tensions between Moscow and Kiev rise further?

Andreas Umland
11 October 2013
Flickr/Harald Hoyer. Some rights reserved.

Flickr/Harald Hoyer. Some rights reserved.

How should Berlin behave towards Moscow in light of the increasingly authoritarian trends in Putin’s third presidential term? Germany's policy towards Russia has been tested over the last months in its ethical and political implications. In contrast, the geostrategic intricacies of Germany's close economic cooperation with this post-imperial autocracy have received less attention. What consequences for eastern Europe, as an economic and political space, does Germany's close cooperation with Russia have? Which security policy risks are involved in the participation of German companies and public figures in the geo-economy of eastern Europe – especially the participation in Russia’s well-known pipeline mega projects?

On the surface, these joint ventures seem to be purely western European-Russian undertakings. Their geopolitical effects are, however, closely linked to the future integrity and sovereignty of some non-Russian former Soviet republics – most of all Ukraine. While this nexus remains mostly unknown to the German public, the close connection between German-Russian economic cooperation and the future of the Ukrainian state is an obvious issue for Ukrainians.

Clearly, the German politicians and managers involved in Moscow’s projects would strongly reject being associated with Russian neo-imperial schemes. Those who are familiar with the way the present Kremlin handles domestic and foreign matters will, however, know that the activities of the major Russian state-owned corporations do not strictly abide by economic principles. This is especially true of the current biggest player, the Gazprom corporation, which is involved in various politically as well as geo-economically important projects in and outside of Russia. In this connection – as the current dispute over the gas price for Ukraine illustrates – profit seeking and geopolitical calculus do not necessarily contradict each other.

Everybody with elementary knowledge of Russian affairs would also acknowledge that one of the Kremlin's priorities in Russia’s so-called “near abroad” is Ukraine. In the Middle Ages, the Kyiv Rus was the cradle of all three major Eastern Slavic nations – the 'Great, Small and White Russians'. As a result, Ukraine’s secession from the Russian empire has been creating phantom pain for the Russian people during the last 20 years. Particularly difficult to digest, for many Russians, is the loss of the Black Sea peninsula of Crimea, which is dominated by ethnic Russians and plays a significant role in Russian historical mythology, in addition to its importance for Russia as a militaro-strategic asset and touristic destination. After the fall of the Soviet Union, Crimea fell – by mere coincidence – to Ukraine and not to Russia. A main aim of the Kremlin's foreign policies has thus been, especially under Putin, to forge a new close relationship between Ukraine and Russia. Ideally, the Kremlin would like to establish a new union between the three Eastern Slavic republics (along with some other former Soviet states) – under, of course, Moscow’s leadership.

Against this background, the combination of the substantial – although mostly resource-based – economic potential of Russia with the commercial interests of certain German politicians and entrepreneurs has led to an unhealthy situation, in which German companies appear to assist Moscow in its re-shaping of the east European geo-economic landscape. The Kremlin skilfully plays on Germany's lack of knowledge, missing concern or purposeful self-delusion about the deeper motives of Russian foreign economic policies towards the other former Soviet republics. 

The most prominent example is the Baltic Sea 'Nord Stream' – the world's longest underwater gas pipeline and one of the biggest infrastructure projects in the history of Europe. It directly transports Russian gas to Germany at the bottom of the sea. This Russian gas would otherwise largely be flowing through Ukraine – and such a diversion is exactly the main purpose of the costly pipe, for the Kremlin. In this connection, it is convenient for Russia that, in the Soviet Union, the once significant Ukrainian gas fields were largely exhausted first, while many of the conventional Siberian deposits remained untouched for a long time. Russia’s gas reserves are today the largest in the world whereas Ukraine’s cannot satisfy domestic demand.

It is also possible that the even more expensive parallel plan for building 'South Stream' (or a similar additional project, in the Baltic Sea for example) will be realized during the next years. The creation of a second underwater pipeline at the bottom of the Black Sea would have even greater implications for the relations between Russia and Ukraine. In combination with 'Nord Stream' and 'Beltransgaz' (the Belorussian pipeline already controlled by Gazprom), 'South Stream' would turn Ukraine's network of gas pipelines (its biggest strategic asset), according to Gazprom CEO Alexej Miller, into “scrap”. This would result in an even stronger power shift in eastern Europe than the gradual deployment of the first two 'Nord Stream' segments in 2011-2012 has already caused. Taking place at the EU's doorstep, such an important change in the distribution of economic power in eastern Europe cannot be ignored. 

A number of German companies and public figures have embarked in unusually close cooperation with the Russian state or firms close to the government. The prominent role of two veteran politicians of Germany's Social Democratic Party in the Gazprom business empire is especially surprising: since 2005 Gerhard Schröder, the former German Chancellor, has been the chairman of the supervisory board of the management company of Nord Stream, while the former SPD mayor of Hamburg, Henning Voscherau, has exercised the same role in the South Stream Transport AG since April 2012. It is astonishing how blatantly high representatives of German social democracy support a state-owned company of Putin’s authoritarian regime and its dubious geo-economic projects. The Ukrainian national democratic opposition, moreover, associates this phenomenon with the peculiar relationship the social-democratic faction of the European Parliament maintains with the Party of the Regions – seen by many in Kiev as having been selling out Ukraine to Russia since Yanukovych became President of Ukraine in 2010.

The ominousness of the special political and economic relationship a part of Germany's elite has with Russia is, of course, known - and occasionally a topic of snappy journalistic commentary in Berlin. However, because the political and ethical ambivalence of this relationship is so obvious, serious discussions about its potential collateral damage, geostrategic implications and long-term consequences occur – if at all – mostly in the quiet. In Ukraine, on the other hand, the seeming German-Russian political friendship and considerable economic links between the two former empires have become a consistent feature in the media. There is a Ukrainian perception that Germany is conducting its energy policies in eastern Europe at the cost of Ukrainian sovereignty. This accusation is, as such, misleading.

One has to take into account that the Ukrainian state is still young and therefore fragile. Whatever appears to jeopardize the recently gained independence is closely watched by the nervous Ukrainian intelligentsia. The impatience and occasional exaggerations in Ukrainian assessments of Germany's Russian policy are due more to suspicion about the intentions of the Kremlin towards Ukraine, than to mistrust towards Berlin. After all, the economic justification for the elaborate underwater gas pipelines is awkward, given the various new – for instance ecological – risks they entail, and the existence of large transport infrastructures in Ukraine (although they are in need of renovation).

The total cost of Nord Stream and South Stream could account to up to 40 billion euro. There are alternative strategies to secure Europe's gas supply, which would be cheaper than the expensive offshore projects. With the completion of Nord Stream at the end of 2012, the overall transport capacities for gas from Russia towards the EU were of ca. 250 billion cubic metres even though Russia’s actual gas exports to the west amounted to merely 112 billion cubic metres in 2011.

The gas transport diversions via sea are sometimes justified by the fact that Russia has historically been western Europe’s prioritised partner, because Moscow has never, even during the Cold War and despite repeated political escalations, cancelled the supply of energy to the west. It remains unclear, however, why the USSR's reliability to deliver energy is today accredited only to Russia, but not to Ukraine and Belarus, which were also parts of the USSR. Another classical argument - the cynical comparison between Ukrainian pluralistic instability on the one hand and Russian authoritarian stability on the other - has lost some of its power since the start of mass protests in Moscow in December 2011. This argument also ignores the fact that Russia has been involved in various military actions in the country and abroad in the last 20 years, while Ukraine has developed, despite the occasional brawl in Ukraine’s parliament, surprisingly peacefully since 1991.

Moreover, recent Russian behavior regarding European energy policy is hardly reassuring. In 2009, the Kremlin withdrew its signature from the Energy Charter Treaty, an agreement already ratified by the Ukrainian parliament (though not yet fully implemented, in Ukraine). The operating companies of both Nord Stream and South Stream are, despite being primarily entrusted with the gas supply of EU member states, registered in the Swiss canton of Zug, a name well-known to observers of post-Soviet oligarchs. The 'selective reliability' of Gazprom as an energy supplier became apparent during the 'cold spell' of February 2012: Gazprom could not satisfy the increased demand for gas both in and outside Russia at the same time, and made the fulfilment of its contracts dependent on the political preferences of the Kremlin.

Often in recent years, the gas disputes between Ukraine and Russia and their implications for the EU, along with the risk of further disputes, are invoked as an argument for the bypass pipelines in the Baltic and Black Seas. Also, the current energy transportation issues in Ukraine are to a large extent the country's own fault, having a lot to do with the rampant corruption as well as absence of will to reform in Kiev. The Ukrainian leadership is solely responsible for the deteriorating condition of the Ukrainian pipeline network, which increases western interest in the Russian mega projects.

However, the degree of Ukrainian versus Russian responsibility for the supply stops in the beginning of 2006 and 2009 is so far unclear. Under pressure from multiple European capitals, then Ukrainian PM Julia Tymoschenko entered a dubious new gas contract with then-PM Vladimir Putin in January 2009. That the Ukrainian leadership did not have much room to negotiate an acceptable deal for Ukraine is illustrated by the peculiar 'take-or-pay' conditions of the original contract, which impose extraordinary penalties upon the buyer if he does not purchase the agreed supplied quantity. Characteristically, this strange provision was temporarily suspended already in November 2009, and has recently been blatantly ignored by Ukraine. Russia seems to have accepted the treaty’s breach, has not turned to arbitration to enforce the ‘take-or-pay’ clause, and thus implicitly acknowledged the unsustainability of the agreement.

Still, this notorious gas contract from 2009 today results in a higher gas price for Ukraine than, for example, for rich Germany, in spite of Ukraine receiving a substantial discount on its Russian gas in exchange for maintaining, until 2047, an outpost for Russia's Black Sea fleet in the Crimean port town of Sevastopol. The continuously high gas prices threaten to eventually strangle the fragile Ukrainian national budget. Whatever the origins of the gas crises of the last decade, the current situation makes Moscow the clear winner of the 2009 gas dispute, in the midst of the world financial crisis. It is also noteworthy that before this incident, Moscow had over years loudly complained that Ukraine buys Russian gas at a rate below world market prices. Yet, today Russia has no qualms to sell her gas to Ukraine to rates significantly above the price of her far richer west European partners.

Another frequently ignored fact is that Russia’s new underwater pipelines mean high costs and new risks for Europe. The South Stream pipeline (estimated construction costs: over $18bn) would be more threatened by political instability in the Black Sea region than the Ukrainian land route for Russian gas is at the moment. Nord Stream has already made sections of the existing gas transport infrastructure useless not only in Ukraine, but also in Slovakia, the Czech Republic and Austria, and will make further investments necessary to transport Russian gas from Germany back to eastern Europe.

The future role of Ukraine's considerable gas storage facilities is also unclear, even though these have proved useful in previous extreme weather situations. Were these storages to remain empty in the future, due to the diversion of the gas away from Ukraine, the EU would be shooting itself in the foot. The east European gas issues expert Jonas Grätz (ETH Zurich) has, among others, pointed out that the overall assessment of the Baltic Sea project has to be adjusted because 'additional costs for the construction of new storage capacities will need to be accounted for, as Ukraine possesses high storage capacities which need to be substituted in case Nord Stream replaces the Ukrainian corridor.'

Whatever one may think about the utility and reliability of the new underwater gas pipelines for the west, the less Russia requires Ukrainian pipelines for its gas exports into the EU, the weaker the interdependence between the region's two largest countries will be. Even if – which does not appear to be the case – Ukraine forcefully starts exploiting its reserves of shale gas, for the time being there will be no alternative to large Russian gas exports to Ukraine. By implementing its Germany-supported offshore gas pipeline projects, Moscow has started to gradually free itself from its crippling dependency on the Ukrainian transport system while keeping Ukraine’s dependency on Russian gas deliveries largely intact.

Thus far, the extensive energy transfers from Siberia and Central Asia to central and western Europe and, consequently, the integrity of the Russian national budget as well as the reputation of the Kremlin as an energy supplier was threatened by every increase in tension between Russia, Ukraine and Belorussia. As Russia has become increasingly able to fulfil its delivery commitments to the west without the two ‘brother nations’, the economic barriers for an escalation of political disputes are disappearing. In the worst case, this could induce the Kremlin to act as relentlessly in the eastern Slavic area as it currently does in Transnistria, Abkhazia or South Ossetia. Berlin cannot afford to ignore such scenarios.

This articles is an abridged version of the essay 'Berlin, Kiew, Moskau und die Röhre. Die deutsche Ostpolitik im Spannungsfeld der russisch-ukrainischen Beziehungen', published in the Zeitschrift für Außen- und Sicherheitspolitik, no. 3, 2013. Thanks go to the author for allowing us to republish it here.

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