Germany and Russia: A one- or two-way partnership?

It's hardly a non-aggression pact, but there is news today illustrating just how closely Germany is tying its energy sector to Russia.

A high-profile summit between Russian President Vladimir Putin and German Chancellor Angela Merkel ended today with the two countries signing a major gas deal.

The agreement gives Germany's BASF the right to take part in the development of a large gas field in Western Siberia with Russia's Gazprom.

The Yuzhno-Russkoye gas field will feed a new gas pipeline that will deliver Russian gas to Germany under the Baltic Sea.

This actually isn't a new deal. It goes back to the summit a year ago between then German Chancellor Gerhard Schroeder and Russian President Vladimir Putin that formalized the deal to build the North European Gas Pipeline.

BASF is helping build the pipeline, and now BASF will help develop the field from which the gas for the NEGP will come.

The pipeline has been criticized for its cost, and the route under the North Sea, instead of a cheaper overland route, only adds to the cost. In bypassing Easter European countries, there are fears Russia can squeeze their gas supplies and also make Germany dangerously dependent on Russian gas.

In analyzing the deal a year ago, Stratfor had this to say:

Deals signed at the summit total a sizable $4.9 billion, but $2 billion of that is earmarked for the as-yet-theoretical Baltic Sea pipeline, which would ship Russian natural gas under the Baltic Sea to northern Germany. The leading -- and unrealistically low -- price estimate puts the pipeline's cost at about $5.7 billion. This would make natural gas imported through it prohibitively expensive relative to natural gas shipped via more conventional land-only routes.

The Russians want German companies to pay for the project. However, it makes more sense to tweak the existing export network via Belarus and Ukraine for a fraction of the cost -- and much bigger returns. For example, Gazprom, the Russian state natural gas firm, itself indicates that a mere $2 billion investment into the Ukrainian transport infrastructure would increase Russia's natural gas exports to Europe by more than the Baltic line could ship in toto.

The remaining $2.9 billion in deals are more promising. The first $1.9 billion would jointly develop high-speed trains for Russian use, while the remaining $1 billion would give German chemical firm BASF access to the 500 billion-cubic-meter (bcm) Yuzhno-Russkoye field. The deal is the first-ever German-Russian joint venture in Russia's natural gas upstream, finally giving some economic heft to the much-ballyhooed German-Russian energy partnership.

But $3.9 billion is not a lot to show from such an "historic" summit, and Yuzhno-Russkoye is not the sort of thing that will make the Germans go gaga for all things Russian. It is not so much that $1 billion is not a lot of money, or that Yuzhno-Russkoye is not a big step in Russo-German cooperation.

It is simply a question of scale.

Moscow controls some 40 percent of the world's known natural gas deposits. Gazprom has more natural gas reserves than all of the Western energy supermajors combined. In fact, Russia's Yamal Peninsula alone has more natural gas than all of North America. In comparison to that, Yuzhno-Russkoye is small potatoes. Also, Yuzhno-Russkoye is a virgin field, not hooked up to the Russian export network at present. If previous joint ventures -- where Gazprom tended to expect a free ride -- are any indication, BASF will have to put up most of the development costs itself (although considering Germany's interest in working with Russia, it will be quite happy to do so).

Compare that to a deal that the Royal Dutch/Shell Group of Companies, a British/Dutch supermajor, is hammering out with Gazprom. Under the terms of an asset exchange that the two companies have agreed to in principle, Russian sources say, Shell will transfer 22 percent of shares at the Sakhalin-2 oil and natural gas project in exchange for a 50 percent-minus-one share of the Zapolyarnoye field.

The deal is heavenly for both players. Sakhalin-2 brings together several characteristics of intense interest to Gazprom: offshore production (in icy conditions, no less), oil production and liquefied natural gas (LNG). All are skill sets that Gazprom desperately wants to develop. In particular, Gazprom feels (correctly) that LNG expertise will allow it to tap the lucrative U.S. market -- but the company until now has refused to pay its way, preferring to threaten potential partners into developing LNG assets for it. Unsurprisingly, that has not worked particularly well. Now, however, Gazprom will be part of a consortium that already has completed drilling, built its LNG facility and signed production contracts. Gazprom can simply sit back and learn.

Shell, whose biggest problem of late has been beefing up its reserve sheet, comes out similarly well. The 3.3 trillion-cubic-meter Zapolyarnoye field is Gazprom's largest project since the Soviet breakup, and already produces some 100 bcm per year, mostly for export to Europe. If finalized, Shell's 50 percent share in Zapolyarnoye will increase the energy supermajor's natural gas holdings by two-thirds.

But isn't Germany Russia's new best friend? Why isn't Germany getting such plum deals?

The answer is simple: Russia does not need to bribe Germany to cooperate. Germany is already committed to its relationship with Russia.

In other words, Germany may be selling itself too cheaply in its desire to bring in the natural gas it needs. If BASF ends up shouldering much of the startup costs for this field, it's a win for Russia, and so they can afford to toss this deal to Germany.

This analysis would indicate BASF, and Germany, need these kinds of deals to address employment concerns.

The first reason for this is a refusal of the German leadership to use atomic energy for electricity production. The second reason is the stagnation of the German economy over the past decade, which has forced the country’s leaders and large economic structures to search for cheap and stable sources of energy carriers. Russia, with its huge stocks of oil and gas, being close to Germany geographically, represents a rather tempting economic partner.

The true value of the Hannover transaction can only be seen through the prism of German internal policy of the past years. Since Gerhard Schröder`s re-election to the chancellor's office in 2002, the weakness of his economic policy ("Agenda 2010") is becoming obvious. One of the main indications of the constantly deepening economic crisis is the rate of unemployment. By the beginning of 2005 it had reached 12%. For the first time since 1932, more than 5 million German citizens are clients of the labor registry office, more than 2 million belong to the "concealed unemployed" category, about one million lack a place of residence, and 85% of the working population express anxiety concerning their future.

A catastrophic drop in popularity of the ruling Social-Democratic Party (Sozialdemokratische Partei Deutschlands - SPD) is a direct consequence of this situation.

An April 2005 poll has shown that only 28% of potential voters support the SPD, while the opposing Christian Democrats Union (Christlich Demokratische Union - CDU) is supported by 46%.

Various extremist political forces are also gaining strength. The 2004 elections to the European Parliament, local elections to the parliament of the German province of Thuringia and elections to the local governments of 6 out of 16 provinces carried the first signs of upcoming electoral disaster for SPD.

The party has lost 2.8 million voters, receiving an average of only 21.5% of the votes.

On February 2005 SPD suffered another painful blow in the local elections to the parliament of the Schleswig-Holstein province. The SPD received only 38.7% of the votes against the CDU with 40.2%.

The close upcoming elections to the parliament of North Rhine-Westphalia on May 22 2005, are extremely important from SPD`s and Schröder`s point of view, for this is the most densely populated part of Germany.

But political forecasts do not foretell any luck to the Social Democrats.
Given this background, an increase in pressure on the SPD by the German Trade Union Confederation – DGB is observed. In 2004, leading political and trade-union figures already spoke openly about the confrontation between the unions and the Social Democrats.

The trade union associations of such industrial giants as Daimler-Chrysler, IG Metall, Siemens and BASF are in the avant-guard of the attack on the SPD.
In BASF`s case, after a massive wave of employee layoff (about 10,000 worldwide), active participation of the company's 28,000 German employees opposing the economic policy of the present political leadership has been provided by the agreement achieved in July, 2004 between the trade union and the management of BASF.

The agreement stipulated a constant salary bonus for all trade union members, its amount depending on the economic success of BASF.

Thus, the economic well being of the workers became dependent to a degree on the Schröder government’s support for the company's external economic policy.

In view of all the aforesaid, the Hannover agreement between BASF and "Gazprom", became possible due to the personal involvement of the chancellor, who is trying to split the German trade unions’ united front against the SPD.

Actually, providing BASF with the long-term prospective contract, and its 28,000 workers with their guaranteed bonus, the Social Democrats neutralized one of the strongest trade unions in the country, and also split DGB lines.

Concurrently, the German government relies on improvement of general macroeconomic parameters, by purchasing cheaper energy carriers, and by increasing BASF`s profits.
Leaders of the SPD hope that this will raise the party's popularity before the 2006 elections to the Bundestag.

In the end, Germany would seem to need Russia more than Russia needs Germany. Russia does seek investment to help develop its energy resources, but in return, Russia gets some serious leverage over other nations by making them dependent on Russian energy.

Germany believes that it might be able to use the gas it gets exclusively through the NEGP by, in turn, using it as leverage over these bypassed European nations as a reseller. However, what Gazprom did to Ukraine at the beginning of the year, in turning of its gas for a time, is going to become a real possibility in Germany the deeper it dives into Russian gas.

For this reason, European nations are reluctant to confront Russia over its protection of Iran in Iran's deliberately provoked confrontation with the West.

Always politics. When nations jockey to merge competing interests and goals, bets are made. However, by eschewing nuclear power, by allowing a growing unassimiliated Muslim population in its midst, by pursuing a diplomatic strategy with Iran that is all carrots and no sticks, by becoming increasingly dependent on Russian gas, Europe may have made a losing bet.