Nord Stream in the Russo-German Special Relationship

A former Stasi (East German secret police) officer and current Nord Stream general manager Matthias Warnig traveled around the world this week to promote that Russo-German gas transport project on the Baltic seabed. Warnig now also serves as an "independent member" of the board of Russia’s state-owned VneshTorgBank (Foreign Trade Bank), the second-largest bank in Russia. He received $2.4 million in compensation for his service in the fourth quarter of 2008, according to the bank’s fourth quarter report released yesterday (Interfax, February 12). As an executive for German banks prior to this, Warnig had been instrumental in arranging massive financing for Russian state energy companies.

Meanwhile, Nord Stream’s chairman of the board, former German chancellor Gerhard Schroeder, has joined the board of TNK-BP in Russia, also as an "independent member." Schroeder was installed in that post in January, as part of changes forced by Russian state agencies against the BP side of that joint venture. The "independent members" Warnig and Schroeder, however, have been working officially for Gazprom during the last three years, under that monopoly’s successive chairmen and first deputy prime ministers of Russia, Dmitry Medvedev (now head of state) and Viktor Zubkov.

Schroeder’s and Warnig’s roles in Russian energy and banking are the most visible cases in a more deep-going process. They exemplify a trend toward Russo-German "interlocking" at the level of interest groups, parallel to the German Ministry of Foreign Affairs’ ideas of "interlocking" (Verflechtung) at the macroeconomic and institutional levels between Russia and Germany. This special relationship’s divisive effects on NATO and the EU are being widely noted, but its potential to subvert European and German market economics and business legislation is also an issue coming to the fore.

Russian Prime Minister Vladimir Putin, as president, had recruited Schroeder and Warnig as part of the Russo-German special relationship in the energy sector. Putin discussed that strategic interlocking process during the World Economic Forum just held in Davos, citing Nord Stream as a prime example:
   

"We have exchanged assets. For the first time in the history of our gas industry, we have allowed [German] partners to take over a large stake in one of Russia’s largest deposits, Yuzhno-Russkoye, as well as a 49 percent stake in the gas transportation system [Nord Stream]. In return, Gazprom received a stake in West [sic] Germany’s gas distribution system. If we act in this manner we will create a system of interdependence. And we will develop long-term relations not only in energy, but also in high technologies" (www.premier.gov.ru, January 29).

   
Gazprom has indeed acquired stakes of up to 49 percent from its German partners in their gas distribution systems, on top of Gazprom’s 51 percent stake in the transportation. The cross-investment is far from being symmetrical, however, given Gazprom’s and the Kremlin’s discretionary control (physical and political) over access to the gas deposits and transport of the product.

Along with supply contracts designed for 20 to 30 years ahead (despite uncertainty about reserves), these Russo-German arrangements eviscerate any serious attempt at creating a European energy policy and a unified energy market in the European Union. The EU regards the energy market’s unification as a basic requirement for energy security and a prerequisite to dealing on equal terms with suppliers. Yet the European Commission looks in frustration at special arrangements made with Russia that splinter the energy market and lock Gazprom in while locking competitors out, under those long-term contracts.

Moreover, those practices breach European competition law and EU regulatory directives. This assessment is widely held in the EU, and the European Commission does have the tools to counteract those breaches. European competition law and regulations do not allow a gas producer or supplier to own distribution networks (a cumulation known as "bundling"). This antimonopoly legislation applies to companies in EU countries and is all the more necessary as a precaution with regard to a non-EU state monopoly such as Gazprom. Political obstruction within EU institutions (not only from Germany) seems, however to prevent Brussels from taking legal measures.

The European Commission has successfully imposed a billion-dollar fine on the American software company Microsoft for bundling its operations in Europe. In Gazprom’s case, however, no action is being taken to protect EU citizens from monopoly practices. Some civic and media pressure was building outside EU institutions for the enforcement of antimonopoly legislation when the natural gas prices were skyrocketing. Now that those prices have entered a downward cycle, that civic pressure seems likely to subside at least temporarily.

The Nord Stream project, if implemented, would add to the distorting effects on Germany’s energy sector. The project’s current version involves transporting the gas on German territory from the Baltic coast (entry point near Greifswald) southward into Czech territory, where the pipeline would run for only a short distance before turning westward into Germany again (re-entry point Waidhaus). The initial plan has been modified in this way because the little detour through another country would change the pipeline’s status into a transit pipeline. This change would minimize the influence of German law and regulatory authorities on Gazprom and its chosen partners on German territory and would shield Nord Stream against possible competition from non-Russian suppliers in the future (Der Spiegel, January 29).