Critics questioned why Gazprom, one of the world’s wealthiest corporations, needed such a guarantee. In the words of Guido Westerwelle, a German opposition party leader, “This affair stinks terribly.”56 Many Germans saw Schroeder’s appointment as chairman of the pipeline consortium not only as a blatant conflict of interest but also as outright prostitution. They called for Schroeder’s resignation from the chairmanship. Schroeder denied that he even knew such a loan guarantee had been offered and Gazprom insisted that it did not need a loan, much less a loan guarantee.57 Schroeder refused to resign but the incident did little to improve either his or Gazprom’s image, much less its transparency.
Schroeder’s role in this was not a black and white matter. It certainly made sense to argue—as he did—that Germany should diversify its sources of energy supply so that it would be less dependent on the Middle East. Moreover, with the continuing unrest in the Middle East, supplies coming overland by pipeline from a continental neighbor seemed a safer bet than supplies shipped from the Persian Gulf and through the Suez Canal.
From the environmentalists’ point of view, there was also something to be said on behalf of such a pipeline, at least in part. Once he was assured of supplies of natural gas from Russia, Schroeder ordered all of Germany’s nuclear energy plants to be closed down by 2021.58 In 2004 nuclear reactors generated 30 percent of Germany’s electricity, so to do away with nuclear energy would mean that Germany would have to generate significant quantities of electricity with other fuels.
The downside of these otherwise praiseworthy initiatives was that this pipeline would increase Germany’s dependency on Russia. Would Russia adhere to its contracts, even if there should be a future political disagreement? Because the Soviet Union had held to its contract commitments with Germany and others in Western Europe even during tense periods of the Cold War era, those favoring such dependence on Russia felt the risk was worth taking.59
From the American point of view, however, concerns were raised by the knowledge that both the Soviet Union and Russia had a history of ignoring contractual agreements with a number of non-West European countries. Of course, halting the flow of gas to Germany would be a much more momentous matter than cutting off the flow to Ukraine, but if there were a serious enough dispute, the Russians might do just that. While some U.S. as well as European policy makers began to worry that the showdown with Ukraine in January 2006 was a forerunner of many more such incidents, the German public was much more titillated by the scandal that centered on their prime minister. It stemmed from Schroeder’s appointment as head of the Nord Stream Pipeline and Schroeder’s brazen efforts subsequently to obtain a gag order from a Hamburg court halting criticism of his backing of the project. Nor were skeptics reassured in August 2007 when Gazprom acknowledged that the cost of building the pipeline would be 50 percent higher than initial promises. Moreover, there was also a strong likelihood that there would be yet other costs in the future.60
Adding to the notion that the pipeline project had become a honey-pot for payoffs and a form of apparatchik nepotism, Matthias Warnig was appointed managing director of Nord Stream, the company that would build and operate the pipeline.61 Warnig, who at the time was board chairman of the Russian branch of Dresdner Bank, had worked with Putin in East Germany during the 1980s when both were intelligence agents: Warnig a captain in the Stasi, the East German Secret Police (or the East German Ministry of Foreign Trade, as his official biography describes it), and Putin a lieutenant colonel in the KGB.62 Their paths crossed again in St. Petersburg when Putin was put in charge of the mayor’s office for foreign economic relations. Warnig negotiated with Putin for an operating license in St. Petersburg for Dresdner Bank, and it became the first foreign bank to receive such permission to operate in St. Petersburg.
Having friends in the U.S. White House is not that much different, but clearly, friendship with Putin does pay. Schroeder and Warnig are the best examples. Before he became managing director of Nord Stream, Warnig was also nominated to Gazprom’s board of directors. It did not hurt the Putin-Warnig relationship that in 1993 Warnig stepped in to pay for an emergency private plane flight to a German hospital for Putin’s wife after she had a serious auto accident.63 Warnig also helped finance the living expenses for Putin’s two daughters while they were studying in Germany.
While the Germans favored the Nord Stream project, the East Europeans—particularly Ukraine, Belarus, and Poland—opposed it. They were not only worried that Nord Stream would eliminate their chokehold on such shipments, but they were also concerned that they would lose substantial transit fees. Besides, there were legitimate fears that the construction of such a pipeline would cause further damage to the ecology of the Baltic Sea, which was already seriously polluted. Incidentally, other neighboring states, including Latvia, Estonia, and Lithuania, worried that any underwater construction might trigger the explosion of the numerous mustard gas containers the Germans had dumped into the Baltic at the end of World War II.64 Such concerns ultimately have forced a review by Nord Stream of the pipeline’s environmental impact. Sweden insists that Nord Stream must have the approval of all the countries whose territory will be traversed by the pipeline. For that reason, Estonia has extended its claim to sovereignty over the territorial waters from three to twelve nautical miles, which means that the Russians will now also need Estonia’s permission. However, Estonia has rejected Nord Stream’s request to conduct a survey of the Baltic seabed in Estonia’s offshore economic zone. With such complications, construction has been postponed for at least one year.65
The Poles had their own fears. Given their history, some saw the pipeline agreement as a conspiracy by Germany and Russia to gang up on their immediate neighbor. For a time it seemed to be a replay of the Rapallo Pact of 1922, which some argue helped Germany re-arm after World War I. However, after Donald Tusk became prime minister in late 2007, he and German chancellor Angela Merkel worked to reassure Poland, and Ms. Merkel also offered to divert gas to Poland from the German pipeline should there be a need to do so.66
As if all this were not enough to cloud the project, knowledgeable specialists from Sweden have told me that the Swedes are also opposed to such a Baltic Sea pipeline. Their opposition goes beyond the environmental concerns of their Baltic neighbors. The Swedes are worried that the Russians will use such a pipeline to install underwater listening and eavesdropping equipment.67 This would allow the Russians to monitor the commercial traffic as well as Swedish military communications, just as the Swedes presently use similar equipment to monitor communication within Russia. Officially Sweden is neutral and not a member of the NATO pact, but whether a member or not, Sweden nonetheless maintains close intelligence connections with NATO headquarters. Officially, Sweden argues that its permission is needed for such a pipeline because it will be built within what Sweden considers its exclusive economic zone.68 Its ostensible concern is that because the Baltic is such a shallow sea, the pipeline will serve as a barrier to existing poor water circulation and thereby increase pollution within the already vulnerable seabed. Should the Russians go ahead with the pipeline’s construction, some Swedes have told me that the Swedish military have drawn up plans and are fully prepared to sabotage the pipeline if and when it is built.69
OPPOSING CASPIAN OIL AND GAS ALTERNATIVES
While Russia has had to fight off efforts by countries bordering the Baltic Sea who want to prevent the building of a direct Russian-German gas pipeline, there has been a somewhat similar struggle over a Caspian Sea pipeline, only this time Russia seeks to outmaneuver and discourage efforts by Western companies, Central Asian producers, the European Union, and the United States. As we saw, they seek to build a non-Russian alternate undersea route for both gas and petroleum pipelines from producers operating within the Caspian Sea basin. This gas pipeline would be built under the Caspian Sea, and depending on the particular proposal, link up with either or both Turkmenistan and Kazakhstan. The pipeline would then come ashore in Baku and f
low through to Ceyhan, Turkey, on the shore of the Mediterranean Sea. The Russians have warned that they would oppose such an underground gas pipeline until “the legal status of the Caspian Sea” is resolved. After the breakup of the USSR, three new countries— Azerbaijan, Kazakhstan, and Turkmenistan—all began to claim underwater rights, some of which had previously been held by either Iran or the USSR (until 1991 the only two countries with Caspian Sea shoreline).70 Not surprisingly, Russia evidenced no such concerns as it sought to build its own gas pipeline under the Baltic Sea.
Because the petroleum pipeline did not involve construction under the Caspian Sea, there was no petroleum pipeline proposal for the Russians to oppose. The Trans-Caucasian petroleum pipeline was all overland and on non-Russian land. As we saw, prompted by the United States, BP and some other producers in the region constructed a petroleum pipeline from Baku in Azerbaijan through Tbilisi, Georgia, on to Ceyhan, Turkey, on the Mediterranean Sea. This petroleum pipeline satisfied three needs. First, it provided an outlet to the Mediterranean and on to Europe for non-Russian petroleum producers so their petroleum shipments did not have to pass through the narrow and therefore dangerous nineteen-mile long Bosporus Strait in Istanbul. Second, it also offered an alternative to the Caspian Pipeline Consortium (CPC) that transports petroleum from Kazakhstan—a country with huge production potential—to Novorossiysk in Russia on the Black Sea. Finally, it also provided a right of way for the parallel natural gas pipeline that opened in December 2006 and is intended to link up with the NABUCCO gas pipeline further to the west, which, as stated, was also designed to provide an alternative to the Gazprom pipeline monopoly.
To ensure that the Baku-Tbilisi-Ceyhan oil pipeline will not be profitable, Putin has done his best to provide cheaper alternatives through overland Russian routes. For that reason, in March 2007 he agreed to promote the construction of the Trans-Balkan Oil Pipeline from Burgas, Bulgaria, on the Black Sea, to Alexandroupolis, Greece, on the Aegean Sea, which would also bypass the Bosporous. To guarantee that this new Trans-Balkan Oil Pipeline will attract enough volume, Russia consented to the expansion of the semi-privately owned Caspian Pipeline Consortium (CPC) from Kazakhstan, which the oil companies need badly; however, there was a condition: in exchange for allowing the expansion of the CPC pipeline, the companies must also agree to use this proposed Trans-Balkan Oil Pipeline—which of course will reduce the supplies available to ship through the BP-backed pipeline alternative through Azerbaijan and Georgia. In what seems to be an effort to intimidate them into supporting these Russian projects, the CPC members have been charged with failing to pay $290 million in back taxes to Russia.71 When built, this Burgas-Alexandroupolis pipeline will be the first pipeline within the European Union itself that will be controlled by a Russian state agency. Expanding into Europe, Russia will hold a 51 percent share and Bulgaria and Greece each 24.5 percent. These moves are designed to counter the EU’s efforts to reduce its dependency on Russian oil.72 Even though construction will not be completed before 2011 at the earliest, use of the Burgas-Alexandroupolis route will help frustrate Western efforts to send petroleum from the Caspian region on through Georgia across the Black Sea and then to the Odessa-Brody pipeline in Western Ukraine. The Odessa-Brody pipeline, built in 2001, was designed to take Caspian oil from Odessa north to Poland and the EU. Because the volume and shipments were too low to make this profitable, the Russians instead arranged to reverse the flow and send petroleum south from Brody to Odessa and on to Burgas, Bulgaria. While efforts continue to find enough petroleum to make it possible to send non-Russian petroleum north, for a time at least the Russians seem to have prevented Western companies from bypassing a Russian chokehold.73
PIPELINES IN ASIA
Russia’s pipeline diplomacy is not limited to Europe. Asia’s dynamic economies are also important markets for Russian energy exports. Russia has enormous potential for oil and gas development off the island of Sakhalin and for gas at Kovykta in East Siberia. Japan, South Korea, China, possibly India, and even the United States are all potential customers. On a 2006 visit to China, Putin indicated that Russia would build two gas pipelines to China, one from East Siberia and one from West Siberia. As a measure of how important Asia is expected to become to Russia, at a September 2006 meeting, Putin told a group of us that Russia’s energy exports to Asia would increase from 3 percent of the country’s total energy exports in 2006 to 30 percent by 2012. He did not indicate where, if at all, its energy exports would be cut back, but the implication is that at least the share of energy exports—if not the actual volume—destined for Europe would be smaller.
The sale of so much petroleum and natural gas is predicated on the assumption that the parties can agree on prices (China is a particularly tough negotiator) and that an agreement can be reached as to who will build and operate the pipeline. The latter should be a simple matter, but nothing is simple in these dealings. In the case of Kovykta, for example, Gazprom insists that TNK-BP, which has developed the field, cannot build its own pipeline. Rather, it can only transport its gas through the Gazprom pipeline, and Gazprom will do that only when Gazprom is allowed to have a major equity share of the project. As we saw, Gazprom also muscled out Royal Dutch Shell from dominant control in the Sakhalin II project in much the same way. (We will see that when the sides were reversed, the Russians were quite unhappy when the EU proposed that as a producer of natural gas, Gazprom should be precluded from owning and controlling the gas distribution pipelines as well.)
Given the distances involved, constructing a pipeline to China is a major engineering challenge. But Kazmunai, the Kazakh state oil company, has already completed a 970-kilometer petroleum pipeline from Central Kazakhstan to Xinjiang in northwest China, which it opened in May 2006.74 Both countries have agreed to extend the pipeline to western Kazakhstan near the Caspian Sea oil fields. The CITIC group of China, along with the China National Petroleum Corporation, has spent over $6 billion to buy up shares in Kazakh oil fields.75 The Russians are engaged in similar pipeline construction efforts, including one project that would involve transporting Russian oil via the Kazakh pipeline on to China.
Shipping petroleum or gas to China is also an important part of Gazprom strategy. Whenever Europeans try to reassure themselves that they need not fear that the Russians will use energy to bully them because the Russians need Europe to buy its gas as much as Europe needs to buy the gas, Putin runs off to Asia with promises that even though it will be very costly, Russia will ship gas from fields the Europeans assumed had been set aside for their use.76 And if China refuses to pay Russia’s prices, Putin knows there are customers in Japan and South Korea who will. Moreover, once it does start to accept Russian gas, China is as likely to become as dependent on it over time as the Europeans and to find itself becoming as vulnerable as Europe to the possibility of political pressure and on occasion blackmail.77
Of course, the Russians insist they will never, ever, allow political disagreements to interfere with contractual agreements. According to Alexander Medvedev, deputy CEO of Gazprom, “For us contracts are like a Holy Bible.”78 He has been echoed by Igor Shuvalov, the economic adviser to President Putin, who told the Financial Times that Russia “did not like” the fact that the European Union felt it necessary to diversify its energy suppliers. “We’ve always said the same thing; we are the most reliable supplier, in any circumstances, for the European market. The most reliable. Like it or not, even if people question it. Europe will never have a more reliable supplier of energy than Russia.”79 In much the same spirit, Sergei Karaganov, chairman of the Russian Council on Foreign and Defense Policy, criticized U.S. Senator Richard Lugar for referring “to Russia as an unstable country in talking about NATO’s energy security. . . . Indeed, Russia has now a reputation over several years as a reliable partner for the West in terms of supplying energy resources.”80 Putin himself has also stressed Russia’s reliability. At a press conference on February 1, 2007, Putin charged, “We are constantly being fed
the argument that Russia is using its current and emerging economic levers to achieve its foreign policy goals.” He insisted, “This is not the case. The Russian Federation has always abided by all of its obligations fully and completely, and it will continue to do so.”81
Were it only so. Admittedly, the Soviets held to their supply contracts with NATO countries, like Germany and Italy, through the worst of the Cold War. But ironically, other countries, some of which were one-time Soviet allies or part of the USSR itself, were not so lucky. Although Putin and his associates may not find it in either their Soviet or Russian history books, as we saw earlier in Chapter 2, there have been almost a dozen instances when both petroleum and gas deliveries were suspended for political or economic reasons in mid-contract by both Soviet and Russian energy exporters. Behavior like this, and the denials that such things ever happened, should make those dependent on Russian gas deliveries very nervous.82
OGEC
For a time, in 2006–2007, there was debate as to whether Russia would be able to create a gas counterpart to OPEC. Putin visited all the usual suspects. He discussed such an arrangement with leaders of Iran, Algeria, and Qatar, the most likely participants in such an organization. Even earlier in 2002, Putin had proposed that Russia and the Central Asian gas producers explore the possibility of creating an “alliance” to coordinate the transportation of their natural gas, a trial balloon he soon dropped.83
But the gas market is different from the petroleum market so that an OPEC-like organization, an OGEC (Organization for Gas Exporting Countries), would not make sense. Unlike petroleum producers, gas producers cannot easily shift their deliveries around to other countries. To the extent it is effective, OPEC must be able to induce restraint among producers of petroleum from doing just that. This generally means reducing the supply of petroleum on the market so that at existing prices there will be more demand for petroleum than producers are willing or able to supply. But for such a tactic to be effective, each OPEC member must limit its daily production so as to hold down competitive pressures and price cutting. This tightens the market and frequently leads to an increase in crude oil prices. By contrast, since most natural gas is delivered to its customers by pipeline, there is usually no other viable or affordable source of supply available. Some say that LNG could serve that purpose, but producing and delivering it is very expensive—so much so that producing and selling LNG is viable only when the parties are also willing to sign long-term contracts. This explains why there is as yet only a limited international spot market for LNG, which contrasts with the petroleum spot market where many last-minute purchases can easily be arranged.
Petrostate:Putin, Power, and the New Russia Page 21
