Russian gas export giant Gazprom strikes another deal with German EON and French Engie to expand the pipeline project known as ‘Nord Stream’. The project directly connects Russia and Germany, bypassing the entire Eastern Europe including the conflict-torn Ukraine. The first two pipelines are already in operation, and the expansion will double the number. While the Eastern European leaders voiced their protests, Brussels remained rather calm, highlighting the deep dilemma within the EU-Russia energy dialogue. The perceived ‘divide-and-conquer’ tactics by Moscow alone cannot fully illustrate the complexity of this ‘dialogue’, stemming from the clash between national and corporate interests.
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By Tom Hashimoto
A corporate rhetoric of the EU-Russia energy dialogue is comparable to a taxi driver, who asks the passengers from the airport if they would like to avoid the highway. The toll is high and the traffic can be heavy due to construction and frequent accidents. So, the driver suggests a bypass road. There is a chance the driver trying to trick the passengers into a longer ride, but the proposal seems reasonable. Now, Gazprom, the Russian gas export monopoly, proposes to avoid the pipeline which goes through Ukraine, as it costs more than one and a half billion Euro in transit fees, and quite frankly, it is unreliable due to the ongoing conflict in Eastern Ukraine. Next, Gazprom compares Ukraine and Germany – which is a ‘better’ costumer who pays more and buys more? Should Gazprom set a direct delivery channel to Germany to meet its industrial demand? The falling natural gas price further pushes Gazprom to ‘abandon’ unreliable customers.
The gas dispute between Russia and Ukraine frequently visited the international arbitration courts, sometimes resulted in the halt of gas delivery in the midst of cold winter. The lack of heat in a country which still struggles to implement post-socialist transition does feel inhumane, and the fact Gazprom is a monopoly makes us easily assume its mighty negotiation power. The dispute consequently affects the gas delivery to the EU, most notably the Czech Republic, Slovakia and Hungary. The impact however is asymmetric between Western and Eastern Europe, as the UK and Spain, for example, import almost no gas from Russia, while Italy continue to strengthen its Mediterranean links. Furthermore within Eastern Europe, Poland receives the gas from the Belarus-bound pipeline rather than via Ukraine, and Bulgaria has the Turkey-bound pipeline as an alternative. Is it cost-effective to negotiate in a group when each country has own particularly of the situation? When the coordination of the energy policy on the EU-level has been rather unfruitful, is the label ‘divide-and-conquer’ still accurate?
Bloomberg recently reported that Russian Gazprom reached an agreement with German EON and French Engie to expand the pipeline known as ‘Nord Stream’ which directly connects Russia and Germany. Since the launch of ‘Nord Stream’, the amount of gas which goes through Ukraine has halved, causing the loss of more than a billion Euro in transit fees. As Western Europe will be supplied directly, the Russo-Ukraine dispute has little consequences in Western Europe, reducing the chance of the EU stepping into arbitration. As Kiev counts Brussels on its side, this is a major setback in the negotiation process. Not to mention, the domestic corporate-government relationship between EON and Berlin, Engie and Paris, and Shell and the Hague adds another layer on the EU side.
A side-note is Poland. President Andrzej Duda quickly joined Ukraine and Slovakia in voicing his concern against the ‘Russian aggression’ behind the ‘Nord Stream-2’ deal. On the other hand, former Prime Minister, now President of the Council of the EU, Donald Tusk remained calm, if not silent. For Tusk, joining Duda will strengthen his Polish origin in the public mind, dangerously encouraging the East-West divide already seen in the current refugee/migration crisis. The division is a source of both Euroscepticism and various nationalisms throughout Eastern Europe, further complicating his effort to unite Europe.
Gas is a vital national interest. It provides heat and electricity to improve the living standard and the industrial production. Despite Gazprom being export monopoly, the price is influenced by the global energy commodity traders. We tend to view the Russian gas giant as a diplomatic tool of Moscow, but it might be Gazprom who is lobbying and utilising Moscow’s political power to survive in the European market in the midst of falling gas price and the Ukrainian crisis. As the rhetoric based on national interests dominates in the reading of the EU-Russia-Ukraine energy dialogue, we forgot a simple corporate mindset to maximise revenue, let it be Gazprom or EON. Those two group of interests are clearly clashing against each other. Moreover, as far as corporate interests are concerned, they seem to have a ‘dialogue’ as is evident in the ‘Nord Stream-2’ deal. Unfortunately, we observe little ‘dialogue’ when it comes to national interests.
Perhaps, one exit strategy for government is energy commodity hedging. Sovereign funds, development banks or the ministries (e.g. energy, industry, finance, treasury) can trade gas, or even electricity, in the commodity markets in London, Leipzig or Warsaw. Depending on the market environment, they can hedge different kinds of risks by participating in future, option, swap etc., similar to what airline careers do. As those officials are less likely to be experienced in such dealings, there must exist a mechanism to discourage speculative trades. That said, hedging can stabilise the domestic gas supply and traders have easier access to the third-party arbitration set by the markets, thereby, having a ‘dialogue’ between national and corporate interests.
Tom Hashimoto, LL.M., FHEA, specialises in post-socialist transitions as well as European integration. He is Lecturer of International Relations at Vistula University, Warsaw and DPhil Candidate in Financial Geography at the University of Oxford. His most recent research involves the rise of Central and Eastern European cities as financial centres.