The Politics of German Gas

Round the back for the dodgy deal

A brief history, plus some other bits and pieces you won't read about in the meejah and might find helpful in forming a view on Germany's and Gazprom's shenanigans and Nordstream 2

(1) Firstly, it's also about oil - not just gas.  The Eastern and mittel-euro countries, including Germany, have long relied heavily on Russia for oil products (indeed, those countries nearest to Russia are almost wholly dependent).  Of course, oil as a commodity is very liquid - in both senses: and both senses are equally important.  (i) Market liquidity means there is a universally-accepted benchmark for pricing;  and (ii) literal physical liquidity makes transportation and delivery much easier than for (e.g.) gas, the latter being dependent on inflexible infrastructure.  Both factors make it much more difficult for Russia to stiff their european oil clients than it is for them to play games with gas: everyone knows what the market price of oil is; and it's not difficult to obtain the stuff, and transport it, from anywhere (albeit perhaps inefficiently).

Those factors combine to make the situation almost the converse to gas, because oil is easy to steal, and to fence.  There is a strong tradition of truckloads of misappropriated Russian oil being sold at discounted prices in eastern and central Europe by highly organised criminals (a bit like ISIS oil to Turkey a while back - and indeed mafia oil in New York City!)  In several EU countries, if they were being honest, what they lose on the gas price, they (well, some of their *businessmen*) gain on the oil.  I'm guessing we won't see an EC inquiry into that anytime soon.  (See also Raedwald passim.)

What does this gas-flow map remind Germans of?

(2) Gas and Germany:  it's fairly well-known that back in the late 1970s / early 1980s the USA made strenuous but unsuccessful diplomatic efforts to prevent Germany, France, Italy et al from buying Russian gas at all.   This was the era of Cruise, Pershing & 'Star Wars', after all.  But Germany (which in those days was more than pulling its weight in NATO) had already decided it was a strategic move, and went for it in a big way.  An exceptionally strong *commercial* relationship was forged between the predecessor of Gazprom (then called SoyuzGazExport) and Ruhrgas, a classic German entity of very complex ownership (including Shell, Exxon and BP) and extremely strong *connections* to the German government.  Ruhrgas was eventually bought by E.on in 2003 - mysteriously the EC competition authorities did not prevent it and E.on has continued in the tradition of being *very close* to both their own government and Gazprom.  No surprises there.

When the eastern countries complain that Germany has cut a preferential deal with Gazprom, they (and the European Commission) choose not to highlight the very substantial amounts of what we might call soft finance Ruhrgas and E.on have provided to Gazprom over the decades (obviously, at governmental behest, to say the least).  Whether Germany Inc as a whole has made a net return on this colossal *investment* in financial terms - cheaper gas in return for soft finance - I couldn't begin to guess.  Maybe they've received a "most-favoured-nation" discount, and maybe some of the eastern countries have been handed a "punishment premium".  Frankly, though, if Germany Inc has made an overall financial loss I wouldn't be surprised.   Because Germany sees it all as strategic.  And, as we know (see recently the Deutsche Einheit) Germany can be willing to pay a high price for what it sees as a strategic geo-political imperative.  

(3)  Overall / rest-of-Europe:  putting Ukraine to one side, Gazprom has generally been a very reliable supplier in political terms, i.e. they have kept the gas flowing westwards even sometimes at the expense of cutting off their own citizens in situations of shortage.  The reason is easy: hard currency revenues (trade was always better than fighting).  As I've mentioned here several times before, it's always been Holland that has been seen as a politically unreliable supplier: they'd always interrupt exports if there was a problem, in order to supply their own citizens in preference.
 

Not entirely reliable

(Incidentally, Gazprom hasn't been particularly reliable in engineering terms - in fact, their system is notoriously primitive.   But their big Europe customers understand this well, and have invested in huge gas storage facilities to tide them over the inevitable occasional hiccup; and everyone's too polite to talk about it much.)

Now Germany's dealings with Gazprom have been conducted more-or-less at state level; and while one can describe it as highly corrupt, you could also say it's just high politics (- like BAe and Saudi Arabia).  And on the western end of that relationship it's mostly a matter of plumb sinecures taken by Herr Schröder and the like - galling, but hardly the worst thing anyone's ever done, nor even remotely furtive.  But in other countries ... well, let's just say that in the case of certain large Mediterranean clients of Gazprom's, the hanky-panky has been rather more venal.

Ever meddlesome

(4)  The 'Energy Union':   I've written before of my disgust at the acquis-grab that is the European Energy Union.   Suffice here to say that for the eastern EU members, right from the start this has all been about getting the EC to deal with Gazprom on their behalves, urged on by the ever-meddlesome Mandelson, needless to say.  (The EC has actually been promising all countries everything they want in the energy space, in order to extend the acquis.)   Given that the timing of the Energy Union initiative coincided with the height of the Ukranian nonsense, the EC documentation contains some of the most undiplomatic anti-Russian sentiments you'll ever read from a non-Trumpian civil servant, so it's clear the easterners have been making the running and holding the pen.  Germany, though, blithely ignores all this crap and motors on with Nordstream 2 unaffected.

Let's see how it all pans out.  One of those easterners is presumably leaking the Competition enquiry stuff (which was almost forgotten, so quiet had things gone) in order to sabotage Nordstream 2 at a fairly critical juncture.  The Danes are nervous of approving their leg of the new Baltic pipeline, but will probably roll over.  The Finns have already rolled over (well, where do we think they get their oil and gas?)  Yes, it's power-politics all the way.  Think the worse of Germany for it?  They'll be the judge of their own strategic interests.

ND