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Tuesday, April 12, 2005

OPI UPDATE: GERMANY AND RUSSIA SIGN ENERGY COOPERATION AGREEMENTS

OPI wrote last week that Russia would reach out to Germany and France in an effort ally with the West while still balancing increased U.S. power in the region. No sooner said than done.

Meeting in Hanover Germany, Russian President Vladimir Putin and German Chancellor Gerhard Schroeder concluded a series of energy and transportation cooperation agreements, further enhancing bilateral relations between the two states. The agreements, worth about $4.9 billion, arranged for cooperation on Russian natural gas deliveries to Germany and for the construction of high-speed trains and rail lines in Russia. While $1.9 billion will go toward the rail lines, the remaining $3 billion is earmarked for energy.

For Russia the agreements constitute a sizeable and high-profile foreign investment commitment in the wake of Putin’s dismantling of one time Russian oil major, Yukos. The destruction of Yukos, which clearly took place for political reasons, has caused a steep reduction in foreign investment in the country as investors became jittery about the safety of money invested there. The agreements signed yesterday constitute a badly need vote of confidence by Germany in Russia's business climate —a vote Russia badly needs if it is to reverse the recent foreign investment trend.

For Germany the deal constitutes pay-back for its tacit support of Putin’s heavy-handed treatment of the Russian oil firm. While other countries criticized Putin’s handling of the oil company, Germany stayed quiet on the matter and even helped to bankroll the complicated process by which Yukos’ primary productions assets ended up in the hands of a now government-controlled Gazprom. Germany also hopes to get favorable treatment from Gazprom on its massive imports of natural gas.

The $3 million for energy is partitioned between two projects. $1 billion will go into the joint development by German industrial conglomerate BASF and Gazprom of one of Russia’s largest natural gas fields, the Yuzhno-Russkoye field in western Siberia. The field holds 500 billion-cubic-meters of gas, yet remains undeveloped and does not yet have easy access to the Russian gas pipeline network.

The agreement between the two companies to develop the field is thus an expensive and long-term venture. However, it constitutes Germany’s first foot in the door of upstream Russian natural gas development, something it would be pleased to do much more of in the future. Russia contains over 40% of the world’s natural gas reserves while Germany has the cutting-edge technology necessary to develop them quickly and efficiently.

The other $2 billion for energy cooperation is somewhat strangely earmarked for construction of a Baltic Sea natural gas pipeline –a project that many feel is not economically feasible. The pipeline would cost well over $5 billion to construct and millions of dollars to maintain. An amount less than half that much could be used to expand and improve the over-land pipelines running through Ukraine and Belarus that currently deliver Germany and Europe its natural gas.

So what is going on here? Is the $2 billion in Baltic Sea pipeline funds simply a PR move to make the total amount of agreements seem large while not really having to put up the money?

There is undoubtedly a large PR element to the deals. Putin wants to demonstrate to the West that it is once again a safe investment partner, and Germany regards its developing cooperation with Russia as part of its increasingly independent foreign policy. However, there may be another more important explanation for the earmarked funds.

A Baltic pipeline would allow Russia to use its energy relations with Ukraine –as it has in the past—as a tool with which to wield influence over the former Soviet state without at the same time threatening gas supplies to Germany and the rest of Western Europe. The greatest fear of the Russian military-security establishment is for Ukraine to join Nato or to otherwise station U.S. troops on its soil. Such a presence could once again put potentially hostile armies just hours away from the Russian capital, as was the case during World War II. A natural gas pipeline going straight from Russia to Germany, bypassing Ukraine, would allow Russia to use its role as Ukraine’s primary energy supplier to counter such trends should things move in that direction.

Indeed, Russia has often used its role as a primary energy supplier to surrounding nations as way to coerce those nations into cooperation with Russian aims. Earlier this month Russia made it quite clear, for example, that Moldova’s access to energy supplies were dependent upon its cooperation in the conflict over the Transdniester region.

While the Baltic pipeline project is still years at way at best, there are certainly those in both Russia and Germany who would like to see such an ‘insurance pipeline’ built. If the U.S. and Ukraine move toward any sort of expanded cooperation we can expect to see more money put into the project in a hurry.

Regardless, both sides clearly hope that these agreements constitute the beginning of a lucrative –and certainly very strategic—partnership.

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