Russia, Germany and Nord Stream 2 - Ostpolitik 2.0?

By Stefan Meister
Russia, Germany and Nord Stream 2 - Ostpolitik 2.0?

Nord Stream 2 is an expansion of the existing gas pipeline between Vyborg in Russia and Greifswald in Germany through the Baltic Sea. The consortium which will build the expansion consists of Russian Gazprom (50%), German E.ON (10%) and BASF/Wintershall (10%), Royal Dutch Shell (10%), Austrian OMV (10%) and French ENGIE (10%). It will add two more pipes to the existing twin pipelines of Nord Stream, each with a capacity of 27.5 bcm per year. Germany will become a major hub for Russian gas to Europe. Critics argue that this pipeline will give Russia more leverage on Europe by increasing dependency and replace the existing Ukrainian transit capacity to weaken Kyiv's bargaining position. The main reading in Europe and the United States of this announcement is that the Germans are back to their traditional Ostpolitik, having not learned the lessons from the Ukraine crisis, and are again pursuing a policy of "change through trade" with Moscow. Because Russia will get more leverage over Europe via Gazprom, it will end the diversification policy of the EU. There is concern that Germany is again making deals with Russia not only at the cost of Poland and the Baltic States but particularly of Ukraine and Slovakia, which will lose their transit fees.

All this is true and not true, but the picture is much more complicated. This is not a strategic shift in German policy and the results are overrated. Yes, the timing is bad, as it was with the recent trip of Minister of Economy and Vice Chancellor Sigmar Gabriel of the Social Democratic Party (SPD) to Moscow. Both have given the Russian leadership the impression that they can get leverage on Germany and play the old games. But we have to bear in mind that German politics has a more hands off approach to business projects than is the case in the United States. Neither the critics nor the Russian leadership are right.

First, there is no consensus among the German political elite to build Nord Stream 2, on the contrary it has much been criticized in the German media and Chancellor Angela Merkel is clearly not happy with the project. Gabriel's "private" trip to Moscow at the end of October, during which he said he does not understand why the relationship with Russia is in such a bad shape and that he will help to bring Nord Stream 2 under German but not EU legislation, has politically disqualified him from becoming a potential chancellor. He again demonstrated that he is a domestic politician who does not understand Russia at all and is primarily concerned with impressing his own party, which is struggling with matching the legacy of its Ostpolitik with the reality of the Putin regime. In any case the ratings of the SPD have not grown. Gabriel knows that Merkel is at the moment occupied by the refugee crisis and will not go into direct conflict with him on Nord Stream 2. But when Gabriel "walked into Putin's trap" by saying that because of Russia's role in Syria we need to rethink our sanctions policy on Ukraine, Merkel's answer was clear: "I don't see any link between Syria and Ukraine."

Second, the future global gas market is undergoing radical changes and is becoming much more competitive and flexible. Following the fall of oil prices this year, gas prices will drop in 2016. At the same time, new exploration projects which were started at a time of higher energy prices are now going online. China is growing slower and will need less gas in the coming years. The result is an oversupply of gas on the global market in the coming years, which will improve the bargaining position of the consumers towards the suppliers. LNG will make the future gas market into a spot market and big pipeline projects will be less profitable. As a result, the bargaining position of the European companies towards Gazprom will increase and not vice versa. The decision for Nord Stream 2 is also the result of the failure of South Stream and the difficulties with Turkstream, but most significantly of Russia's failed pivot to Asia. Gazprom wants to protect its core market in the EU although that will be impossible because of changes in the global market. At the same time European companies, because of their improving bargaining position, get Russian gas for a lower price and sell it to Ukraine to a better price than they would get from Gazprom.

Third, despite some setbacks, the third energy package of the EU and the European Commission‘s liberalization policy in the energy sector is a success story. There are few such areas where Brussels has fought against the protectionist instincts of the member states and the Russian lobby so successfully. The Commission has set up an antitrust case against Gazprom, which the Russian state had to accept. Gazprom is now selling more than 10 percent of its gas on the spot market, it has to accept that it cannot fill the existing pipeline from Nord Stream to Central Europe completely because of the competition rules of the Commission, and it gave up on building South Stream in the face of Commission opposition. Even if Gabriel intends to bring Nord Stream 2 under German legislation to shield it from the Commission‘s influence, Merkel will not support him. The Commission will resist this initiative because it will not be a priority of the German leadership.

We have to understand that the Ukraine crisis has not only revealed the failure of Putin's Ukraine policy but also his policies towards Germany. Building up informal and personal ties between the two countries did not prevent Germany from leading the sanctions response to Russia's aggression against Ukraine. It was Chancellor Merkel who took leadership on Ukraine and created together with French President François Holland the Minsk Format. There is a complete loss of trust between the Russian and German leaderships, a loss which cannot be rebuilt in the short term with a project like Nord Stream 2. There might be some German Social Democrats and business lobbyists who still believe or hope that change through interdependence is possible with Russia. But this is neither the consensus among the German elite or the German public.

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