Gennady Timchenko and Arkady Rotenberg

Gennady Timchenko and Arkady Rotenberg

 

Russia launched the Nord Streams as a political endeavor to bypass this Ukraine and forge a strategic alliance with Germany to subjugate Eastern Europe. Germany was not the only partner, Austria also joined in. Ample proof in the outspoken Russian lobby among Austrian politicians and businessmen. Germany has its Schroeder; Austria has a long list of his kins – from Straße to Schussel.

 

German politicians have their own business plan, calculated financial benefits at the expense of Eastern Europe. Their symbiosis with the Russian oligarchy is striking, with more evidence and proofs, as Russian oligarchs Timchenko and Rothenberg build and receive billions in inter-related project orders for gas infrastructure, connecting the Yamal gas fields to the Baltic ($ 4 billion), to the Black Sea ($ 15 billion). The joint German – Russian interests’ chain continues – North Stream 1 – $ 10 billion, North Stream -2, another $ 10 billion, with Gazprom opting for the most expensive option.

 

Timchenko and Rothenberg manage the deals and the cash flow. But they are only elements in the circular gains’ chain– taking their own but also redistributing benefits in line with orders from the Kremlin – classics of a state mafia model of governance.

 

Few however dig deeper into the geopolitical underpinning of these strategic interplay between Russian, German and Austrian top level politicians and businessmen. The bypass of Ukraine is just an instrument to help Kremlin subdue resistance in Kiev, enforce recognition of Crimea and autonomy to Donbass and Lugansk. The pressure Moscow exerts on Ukraine builds on and depends on the collaboration of elites in Berlin and Vienna. Leaving aside the moral and ethics side of such policies as key EU members are favoring business and politics with an aggressor over the interests of the victim and fellow member states is hardly in line with the founding principles of the EU.

 

At the end of the day – German and Austrian politicians fully well understand that what they gain by going to bed with Gazprom is someone else’s loss in Eastern Europe.

 

Germany profits most. It receives for free gas pipelines on its territory, financed with Gazprom’s money, and receives hefty profits from brokering Russian gas through its territory. Currently, the country is one of the largest exporters of pipeline gas in the EU, with only 14 billion cubic meters of its own production, exporting over 30 billion cubic meters of gas.

 

The benefits that the Berlin derives, cheaper gas and profits margins between the gas purchase price and the sale price at the border with its neighbors, for example, multiplied by the quantities of gas exported, exceeds $ 2 billion. If the pricing benchmark is the Ukrainian gas market, the profits skyrocket. A cynic might say – this is what business is all about.

 

Serving national egos comes at the detriment of EU solidarity, market competition, and equitable relations. Even if Ukraine is not an EU member, other affected Eastern Europe countries are.

 

Germany seems ready to pay any political price for its new version of Ost Politik, despite its incremental trend. Most surprisingly, the terms and consequences are beyond the control of the German government. In order to sell politically the North Stream deals, Chancellor Merkel has pledged to guarantee that the gas transit across Ukraine will be maintained above the minimum volumes of 60 billion cubic meters. Her assurances rest on Vladimir Putin’s vague promise. Yet, neither the gas markets nor the international community trust that Putin will honor his promise.


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Gazprom is losing money, serving its Kremlin’s policy goals, and Germany seems more concerned with sustaining the exclusivity of its Russian-gas option and Gazprom’s monopoly than upholding the core principles of the European gas market – liberalization, diversification and competition. All this happens against the backdrop of Kremlin’s forceful actions, including gas cuts without notice, the latest as near as the 2014-2015 season. Gazprom lost $ 4 billion that season alone, yet was quickly compensated via charging higher gas prices in Eastern Europe.

 

At the same time, the European Commission, under pressure from Germany and Austria, in spite of abundant evidence, ruled to spare Gazprom heavy fines (incredible leniency when juxtaposed with billion-euro fines against US IT giants) ending the antitrust investigation with a loose agreement, that is now contested in the same European Court of Justice. Instead of striving to reduce risks to EU energy security, with a focus on diversifying gas sources, including through LNG terminals / the European priority/ Germany and Austria opted for diversification of routes / Russian policy /.

 

The ECJ’s decision overturning the EC ruling that allows Gazprom to use 90 percent of Opal’s pipeline capacity is another blow to the Russia-Germany-Austria gas coalition. The mandatory capacity release that will follow will allow third party access, which automatically will cut revenues projections from forecasted Russian gas transit volumes, undermining the feasibility of the “streams”, concurrently putting under pressure Gazprom’s market shares in markets alongside pipelines’ route.

 

Should the economy of the Nord Stream – 2 come under strain, Gazprom will inevitably have to seek alternatives – possibly selling its gas at Russian border. This could in theory resolve European Gas Directive compliance issue, at least in part. Establishing the practice of selling Russian gas at Russian border could potential foster a break up of Gazprom’s monopoly within Russia, a cut in its profit margins, and leave it without options but to renew transit contracts through Ukraine. Buying gas at Russian-Ukrainian border will deny Gazrpom the political excuse of insecure Ukranian transit and allow other Russian exporters to sell gas at border.

 

The ECJ ruling will block the current Turkish Stream 2 extension through Bulgaria because Gazprom and its proxies will have to accommodate their capacity needs within a cap of 50% of long-term capacity. The rest will be up for grabs in shorter term capacity tenders. One way to circumvent this restriction could be to sell Russian gas at the Turkish-Bulgarian border so that Gazprom’s clients can engage in transit contracts using Bulgartransgaz’s infrastructure. This is an option Gazprom has consistently denied traders so far. Significant surpluses of natural gas are piling up in diversified markets in Turkey, Romania and Greece, which can be sold beyond Bulgaria, competing with Gazprom.

 

In order to continue to sell its gas in Europe, following the ECJ’s decision, Gazprom will have to part with its monopoly status, undergo structural reforms unbundling the upstream, the transport and distribution-trading segments in its operation, and liberalize the gas market in Russia itself. The sooner Gazprom realizes an equivalent of Transneft, the more adequate will be its role in using, investing and operating infrastructure abroad, including “the Streams”.

 

In any case, the decision of the European Court of Justice will bear a positive effect on gas talks between Ukraine and Russia, mediated by the EC, on the new transit agreement, which are due September 19-th, as it limits Gazprom’s maneuvering space. The chances for a new 10-year transit agreement are on the up, although it is unlikely that a breakthrough is imminent. The new reality will have to sink in the minds of Russia’s leaders while they contemplate a PR crisis strategy.

 

Alerts are already available. The man who controlled Gazprom’s finances, Andrei Kruglov, has left the company to become Deputy Minister of Finance in early September – a clear sign of a pending change in management model.

 

A second red flag that Mikhail Krutikhin drew attention to is that Gazprom has started acquiring construction companies that have been building its most expensive infrastructure projects – the „Streams” and the Power of Siberia. This means that the era of major infrastructure projects is over, and that it’s time for the Kremlin oligarchs – Timchenko and Rothenberg – to cash in and exit the construction business and use the proceeds to buy Gazprom’s upstream assets – gas fields in the Yamal peninsula. Gazprom and the state budget could cover the cost of this transition with lavish benefits – subsidies, tax reliefs, etc. The next likely steps will be a LNG terminal and trading gas in every gas market in the world – competing with Gazprom. Krutikhin argues that Putin’s power network, which resembles a mafia type structure, is made up of replaceable people with clear “jobs description” whose role is to redistribute public funds– keep part for themselves and pass on to others under the instructions from the Kremlin. Such a system is increasingly resilient, autonomous and self-sustainable, waiting for the next Putin, who will be elected after a test of loyalty to the System.

 

The biggest problem with Putin’s legacy, Krutikhin continues, is that Russia has become far more addicted to revenues from oil and gas, which evokes the image of a syringe with heroin. 60% of budget revenues depend on energy exports. Above those 60% more comes in exports of timber, ore, rolled metal, precious stones. Russia’s exports of high value added goods, notes the Russian energy expert, in absolute terms is less than that of the Czech Republic.

 

This growing dependence on low-valued added goods and services, substantially restricts the range of flexibility of the Russian state and economy to respond to exogenous and endogenous crises. A sharp and simultaneous fall in energy commodity prices – oil, gas and coal – which seems natural while the global economy shifts to a low carbon stage will most certainly subject Russia’s budget and companies to overwhelming challenges, unable to alleviate negative social impact.

 

As a matter of fact, the Soviet economy was much more diversed and independent that Russia’s current one. As large investors start to pull out of oil and gas projects after 2025, and as this trend becomes mainstream by 2035, Russia will most likely face critical existential problems.

 

In the absence of alternatives and a positive agenda, within Putin’s own power paradigm, missing the train of the global innovation and technological revolution, Russia’s government and its ruling class, could resort to a neo-Stalinist survival mode, treating the world as a hostile place, justifying further aggressive and destructive foreign policy, and hardening dictatorial rule as the only way to keep the state mafia on top.

 

By Ilian Vassilev

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