Nord Stream online: Russia’s gas export policy reset

On Tuesday (Nov. 8), the first of the two lines of the Nord Stream gas pipeline was launched into full operation. Just before midday in Lubmin on Germany’s Baltic Sea coast, German Chancellor Angela Merkel and Russian President Dmitry Medvedev made a symbolic turn of a large tap to officially launch commercial operation of the first of two lines of the Nord Stream gas pipeline. The longest submarine gas pipeline in the world is set to change the dynamics of the European gas market.   

While Germany celebrates the opening of the 1,224 kilometer pipeline from the Russian port of Vyborg to Lubmin, the new route is a cause for concern further east. Why?  

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Forty years ago in Czechoslovakia, amidst much fanfare, construction began on a major pipeline to carry gas from the Soviet Union to central, western and southern Europe. While Czechoslovak state-controlled media extolled the “construction project of the century” as “proof of the political thaw in Europe,” there was no mention that the project was first and foremost a huge hard currency spinner for the Soviet Union.  

There was no mention that the project was first and foremost a huge hard currency spinner for the Soviet UnionEssentially, conditions of transit of the Soviet gas were determined by inter-governmental agreements — and for its part communist Czechoslovakia received Soviet gas at advantageous rates.     

Even prior to the gas crisis at the beginning of 2009, which saw Russia turn off shipments to Europe via Ukraine as a result of a spat with Kieve over prices, Moscow was looking to diversify its export routes to Europe to significantly lower dependence on its southern neighbor. The current economic and political interests of Russia declared as “increased diversification of transit routes” represent nothing less than a comprehensive redefinition of Russia’s gas policy.    

The gas policy of the Soviet Union was based on the reality of a divided Europe and consisted of a different approach to “free-currency” consumers, i.e. Western Europe, and the countries of eastern and southeast Europe, controlled by Moscow.      

While Moscow’s approach to its western European consumers consisted of making maximum efforts to ensure that it built and preserved a reputation as a reliable supplier, in relations with its European satellite states gas was used as tool to apply political and economic pressure. And even in the Soviet era, due to large local consumption, Ukraine was not capable or willing to transit enough gas to satisfy demand for Soviet in West Europe. Moscow frequently resolved this by limiting supplies to its east European satellites.    

It should be pointed out that during the Soviet era the USSR sold its gas to the West on the outer borders of its empire, i.e. on the borders with Germany and Austria, while the Warsaw Pact satellites purchased gas on the USSR’s borders.

Trading houses

The current reset in post-Soviet Russia’s gas policy has already passed through several phases. In the early 1990s, Moscow opted to establish trading houses for its gas to be operated in cooperation between state-controlled Gazprom Export and western European importers of Russian gas. Incidentally, one such trading house was established in Slovakia, but the proposal was rejected by the Czech Republic.     

It was ascertained — unsurprisingly the credit was attributed to Vladimir Putin — that over 40 percent of the earnings from gas exports went to traders and middlemen. Through these trading houses, it was possible to buy Russian gas directly outside of the framework of the long-term priority supply contracts. Originally these trading houses were supposed to resolve the problem of sporadic lapses in gas supply, but in practice they became a source of personal fortunes for Russian entrepreneurs. These excesses reached a head around 10 years ago resulting in a massive reduction of gas trading via these houses.

It was ascertained — unsurprisingly the credit was attributed to Vladimir Putin — that over 40 percent of the earnings from gas exports went to traders and middlemen. 

Another deeper felt problem was the fact that independent Kiev controlled the taps on the major export route for Russian gas, which led to the proposals to build alternative export routes to the west bypassing Ukraine. The first was the Yamal–Europe pipeline from Russia via Belarus and Poland to the German border town of Frankfurt-on-the-Oder. This involved increasing the capacity of a Soviet-era pipeline for exports to Poland only and extending it to the German border.

Most gas supplies to Germany were rerouted from the Ukraine-Slovakia-Czech Republic route to the Yamal pipeline.

Poland and Russia took equal stakes in the Polish stretch of Yamal and a supposedly independent company with a 5 percent stake was established to act as a balance. The Poles soon discovered that this company was in fact controlled by Russians and Warsaw had to go to considerable diplomatic lengths to redress the situation. Nevertheless, according to mutual agreements, the Russian gas shipped via Yamal is sold to German firms on the German border.

Pincer effect

The Nord Stream pipeline, which when the second line is completed will have a capacity of 55 billion cubic meters (BCM) annually, is a far larger step in decreasing dependence on Ukraine as a transit route. Nord Stream will also become an alternative route for Russian gas supplies to the Czech Republic next year when the Opal pipeline running from the landfall of Nord Stream in Germany through the former East Germany is linked up to the recently-completed Gazela pipeline at Olbernhau. The Gazela route passes from the German state of Saxony, through north and west Bohemia then crosses the German border at Waidhaus, where it links up to the gas hub there.