The emerging ruling coalition in Germany might be experiencing hiccups when it comes to agreeing on complex issues, but the Nord Stream-2 project has proven a consensual ground. The German government has formally objected to the EC-proposed amendments to the EU Gas Directive citing trivial protectionist arguments atypical for a nation that pretends to lead the EU. The German government’s interpretation of its support for the Nord Stream-2 is that it is not defending Gazprom’s, but Germany’s own national interests, implying that German and Gazprom interests — Russia’s — are identical and run counter to the European Commission embodied shared interests. This is essentially Berlin’s bottom line – EU is dear to us, but when it comes to cash – our interests rate higher.
There is nothing fundamentally innovative – just one higher degree of cynicism accomplished. As it seems, the likelihood of Chancellor Merkel continuing to balance off the SDP’s pro-Russian sympathies in a future government will hardly reach current levels. German FM Sigmar Gabriel has recently not only openly questioned US shipments of lethal weapons to Ukraine, calling for lifting of sanctions against Russia, but has vehemently defended Gazprom’s strategy of depriving Ukraine of billions in transit fees the via construction of a $10 billion-dollar Nord Stream – 2 line. He has pointedly omitted a precondition set two year ago to Gazprom not to lower volumes of gas shipped via Ukraine.
Ultimately Germany’s diehard defense of the project underlies a massive shift of income from Ukraine and Eastern Europe to Germany and other western EU countries.
Most of the EC’s critique targeted at Nord Stream-2 has largely fallen under non-compliance with the EU Third Energy package and detrimental effect on the EU gas market. However, the legal basis for exerting direct control by the EC over the Nord Stream–2 is either incomplete and ambiguous at best, which allows Gazprom to play the EC against member countries and one EU country against the other.
It is worth investigating a more substantive approach based on the analysis of the value chain of Gazprom’s gas business in the EU and the transfer of state aid effects from the Russian state – both direct financial and non-financial support – via the Nord Stream-2 to German companies and other prime beneficiaries. The NS2 project will undoubtedly amplify and allow Gazprom to distort competition, to arbitrarily pick winners and transfer privileges stemming from lavish Russian state subsidies into the heart of Europe chasing foreign policy objectives.
A parallel could be drawn between the cheap oil policy pursued by the Kremlin versus Belarus, which allows Lukashenko’s regime to accumulate massive brokerage premiums on resale of below market priced Russian crude supplies and subsequent refined products, well in excess of $ 4-5 billion per annum. This is not the product of a business interplay between market players, but a concise strategic policy move conceived at the highest Kremlin level.
The same matrix could apply to cheap and privileged gas sales via Nord Stream-2 that allow Germany to act as Russia’s proxy for gas sales beyond Germany’s borders.
The detrimental impact of the state aid that the Russian government extends to Gazprom and Nord Stream-2 on the EU gas market exemplifies the definition of State aid in the EU.
To begin with – the ultimate benefits reaped by German and other key EU states’ public and corporate finances originate in the primary state intervention at the other end of the value chain in Russia – the upstream, including a whole range of forbidden under EU law, non-market state support – different grants, privileged loans, direct tax reliefs, exemptions from export duty on gas, profit and excise tax, import duties on equipment and direct state budget financing of critical infrastructure. All the way from the well head in Yamal to Nord Stream’s onshore entry into the German gas system there are a plethora of state interventions that sustain a substantial non-market advantage of Gazprom over its competitors in the EU gas market. The European Commission not only has the right but the duty to oversee the integrity of the common EU gas market. What is good for Germany is not automatically good for the EU.
The second level of addressing the Russian state aid challenge is that Gazprom enjoys selective privileged treatment at the national and regional levels in Russia wherever it operates. Being a monopoly helps consolidate its unique status and unrivaled access to Russia’s state coffers. There is no other company operating in the EU gas market that comes anywhere close to the amount of non-market advantages of Gazprom – both in terms of state aid component in the end price structure and privileged terms for access to transport infrastructure. What Germany offers Gazprom in terms of shield against the EC bears no parallel to any other company active in the EU gas market.
Thirdly, this massive state aid in Russia with spillover effects in the EU helps Gazprom distort competition in the EU market, allowing it to undermine the EU common energy policy promoting gas market liberalization and diversification, notably in the CEE region. The Nord Stream-2 project is indisputable proof of Germany’s direct support for Gazprom’s dominant market status versus other gas importers – including from the global LNG market, the Caspian and the East Med region.
Ultimately – what happens with the Nord Stream pipeline is not a bilateral issue as it affects trade among all EU states as Germany is granted the privilege of distributing and re-exporting critical-for-the-whole-EU-market volumes of Russian gas well above its current domestic import needs, as Gazprom holds the largest market share in the EU gas market. Therefore, it is not a matter of national energy security for Germany, as most SDP and other German proponents of Nord Stream-2 claim, or an internal issue, but a predominantly EU problem. Judged against current imports of Russian gas — 50 billion cubic meters — the cumulative capacity of Nord Stream 1 and 2 — well in excess of 100 billion cubic meters — speak volumes of the energy security vs selfish business arguments. Berlin can hardly hold the high ground in the EU debate on this as its support for the Nord Stream-2 is rampant evidence of Germany’s protectionism at the expense of EU shared interests and values.
Germany regularly features record trade and current account surpluses, and 2017 is no exception – with its $273 billion dollar current account surplus tops in the world. In the first 11 months of last year, Germany’s trade surplus in goods reached $304.8 billion and re-exports of gas via Nord Stream-1 contribute, albeit in a modest way. The direct and indirect fiscal and economic effect of Germany’s middleman role could measure up already in the tens of billions of euros. The addition of a second line to Nord Stream will certainly add new billions and contribute to greater current account and trade surplus at the expense of other European countries.
Although Russia is not a member of the EU, it is a member of the WTO and is a party to the WTO Agreement of Subsidies and Countervailing Measures that governs the state aid issue in the Nord Stream case. Other EU countries, however, are deprived of legitimate defense tools under the WTO agreement such as imposing countervailing taxes as Russian gas entering Germany, travels as EU gas.
Germany’s government backing of Nord Stream-2 can hardly be justified as necessary or pivotal to the well-functioning German economy. With or without Nord Stream-2, as statistical data confirms, the German economy’s robust performance is beyond doubt. However, the transfer of economic and financial gains from CEE countries to Germany deprive them of export income and GDP growth, thereby of catching up and contributing to a more balanced and equitable common EU market.
If Germany undermines the EC in its role to secure a level playing field for all gas market players in the EU, it will not be long before other EU countries start looking for identical separatist bargains with Gazprom – notably with the extension of the Turkish Stream into EU territory.
Then the least one could say about the EU gas market would be that it is common.