| Summary
German Chancellor Gerhard Schroeder and Russian President Vladimir Putin wrapped up a two-day summit April 11 with a series of business agreements they called "historic." While they made no small amount of progress, the truth does not live up to the hyperbole, and reveals much about the direction of Russian foreign policy.
Analysis
Germany and Russia, which have been politically aligning for the last two years, attempted to put some meat into their relationship at a summit in Germany on April 10-11. The geopolitical ambitions of the two states have been stymied by ongoing U.S. efforts to roll back Russian influence on one hand and the pro-American policies of many EU members on the other. Naturally, this has led the two to have a chat.
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 firms 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 a "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 (Shell), 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 has until now 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.
Moscow has other concerns; primarily Washington's geopolitical offensive across the breadth of Russia's former -- and current -- territories. The Kremlin desperately needs a break, and Shell has influence in both the Netherlands and the United Kingdom -- two of the United States' most loyal European allies. Putin likely is hoping that the Dutch and British will spare a kind word in talks with Washington. Moreover, if European firms do become involved in some fat projects in Russia, their governments will have an economic disincentive in Russia's dissolution. In short, Germany is already in the bag -- but Russia still needs all the help it can get.
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