The European Commission's agreement to the Nord Stream 2 pipeline
signals Russia's conclusive victory in its protracted struggle to secure
its position as Europe's principal gas supplier whilst retaining
control of its energy resources.
Confirmation that the EU Commission has dropped its opposition to Nord Stream 2
– the giant gas pipeline Russia is building through the Baltic to
supply natural gas directly to Germany – effectively ends whatever
doubts previously existed about the project.
More importantly, it also means Russia has won the energy
war, which has been raging around the issue of Russian gas supplies to
Europe over the last decade and a half.
Nord Stream 2 is the second undersea gas pipeline directly
linking Russia to Germany. It comes after Nord Stream 1, which was laid
down in the late 2000s and completed in 2011, coming on stream in 2012.
The story of the export by Russia of gas to Europe is
extraordinarily tangled and is scarcely ever discussed properly. This
is unfortunate because in my opinion it is the single most important
reason for the collapse in relations between Russia and the West since
Putin came to power in 1999.
Following the collapse of the USSR in 1991 there was a
general assumption in the West that Russia would become the major source
of oil and gas for the European economy.
This went together with an assumption that Russia’s vast oil
and gas fields would be developed and exploited by Western energy
companies in much the same way that those companies had developed oil
and gas fields in other places.
This was the period of the so-called “dash for gas”, with
Europe’s coal industry – highly polluting and with a notoriously
truculent and politicised workforce – being deliberately closed down in
anticipation of a vast flow to Europe of cheap Russian gas.
It never quite happened that way. Even during the Yeltsin
era resistance in Russia to the country ‘opening up’ its oil and gas
fields to unrestricted development and exploitation by Western energy
companies proved sufficiently strong to prevent it happening.
Following the change of government in Russia in 1999, with
Vladimir Putin emerging as Russia’s leader, first as Prime Minister and
then as President, the possibility of Russia ‘opening up’ its oil and
gas fields to unrestricted development and exploitation by Western
energy companies was finally and conclusively ruled out.
Putin at the time of his appointment was already known as
someone who believed in the importance of Russia retaining control of
its energy resources. Indeed Putin had actually written a doctoral
thesis on the subject (a partial translation can be found here),
which since his emergence as Russia’s leader (and especially after the
Yukos affair) has been the target of hostile commentary (see for
Almost certainly the fact Putin was known to believe that Russia
should retain control of its energy resources was one of the most
important reasons so many people within the Russian leadership in 1999
backed him for Russia’s President.
Though the bitter hostility of the West to Putin has many
causes, the anger caused by his role in closing Russia’s vast oil and
gas fields to unrestricted development and exploitation by Western
energy companies is in my opinion unquestionably one of the most
important, and one that consistently gets underestimated.
Suffice to say that all the allegations that Putin is
corrupt and a billionaire have their origins in stories which circulated
in the early 2000s that the “real” reason Putin wanted to prevent
Western energy companies from exploiting Russia’s energy wealth was
because he wanted to keep this wealth for himself. In this way action
which Putin took for patriotic reasons could be misrepresented as done
for selfish ones. It is no coincidence that some of the very earliest
claims made about Putin and his billions centred on false allegations
that he owns hidden shares in Gazprom, Russia’s giant gas monopoly
exporter, and that he is its actual owner.
This is not to say that Putin opposes all investment by
Western oil and gas companies in Russia’s energy sector. On the
contrary he not only wants such investment but he actively encourages
it. However Putin has always insisted that this investment be
controlled and regulated by the Russian state, and his strong preference
is that it happen through collaborative joint ventures with Russian
companies, especially Rosneft.
This was not what Western governments and Western energy
companies had had in mind. Their conception was for something closer to
what happens in some countries in what was once called the Third World,
where Western energy companies run the show, exploiting the energy
wealth of these countries as they please in their own and the West’s
interests. Not for nothing were some calling Russia before Putin became
its leader “Nigeria with snow”.
Western oil and gas companies, as the hardheaded and
pragmatic people that they are, have long since reconciled themselves to
the new reality. Companies like BP, Total and Exxon have long shown a
willingness to work with the Russians on Russia’s terms. Indeed they
have developed a genuine respect for the tough way the Russians
negotiate to protect their interests and then stick by any agreements
The same however has not been true of the more ideological
and geopolitically minded officials in the West’s governments. The US
and UK governments and the European Commission in Brussels in particular
have been implacably hostile, doing everything they can to bring the
Russians to heel so as to force them, in the euphemistic language they
like to use, to liberalise Russia’s energy industry ‘upstream’ so as to
match the liberalisation that supposedly already exists in the West’s
energy market ‘downstream’.
The result has been a festering energy war between the West
and Russia which has gone on for years, with Gazprom – Russia’s majority
state owned monopoly gas exporter – the primary target.
Gazprom is regularly accused in the West of manipulating
Russia’s gas exports in order to achieve Russia’s political objectives,
and recently it has been the subject of legal action brought against it
by the European Commission amidst allegations that it has abused its
monopoly position to gain unfair commercial advantages in the European
The agenda – obvious to all informed observers though never
openly stated – is to force the Russians to privatise Gazprom and to
break it up, ending its position as a monopoly exporter of Russian gas,
and opening up Russia’s gas industry to exploitation and development by
Western energy companies regulated by the European Commission in
In reality there is no evidence the Russians have ever used
their energy exports to gain political advantages in Europe or anywhere
else, and it would be completely counter-productive for them to try. As
for the accusations that Gazprom abuses its monopoly position in order
to gain commercial advantages for itself, these ignore the fact that
Gazprom acts at all times as the export arm of the Russian state, giving
its energy supply contracts something of the quality of interstate
agreements rather than mere commercial agreements.
The primary tool used by the European Commission for its
attacks on Gazprom is the EU’s Third Energy Package, which seeks the
liberalisation of Europe’s energy market and industry by opening it up
to competition. The European Commission insists this means Gazprom
cannot have exclusive control of any pipelines it builds or operates on
EU territory since supposedly that would be contrary to the Third Energy
Package since it would give Gazprom an over-dominant market position.
The Russian government signed the Third Energy Package but
in the end refused to ratify it. Russia has since repeatedly made clear
that it does not consider itself bound by the Third Energy Package.
The reason is that the Russians understand that if they accept the
Third Energy Package the European Commission will in time try to extend
it to Russia itself by demanding that the Russians ‘liberalise’ their
energy industry ‘upstream’ by privatising and breaking up Gazprom and by
opening up Russia’s oil and gas fields to Western energy companies in
order to conform to the European energy market liberalised by the Third
Energy Package ‘downstream’.
Behind this move and counter-move was a Western
miscalculation that the EU had the whip hand over Russia because of the
EU’s supposedly dominant position as Russia’s primary energy customer.
Since it was assumed that the whole existence of the Russian economy
depended on Russia selling its oil and gas to Europe, the Europeans
assumed the Russians would eventually be forced to accept the Third
Energy Package so that they could continue to sell their gas to Europe.
In December 2014 however the Russians proved this to be
completely wrong when they abruptly cancelled the South Stream pipeline,
which was supposed to supply gas through southern and eastern Europe,
after the European Commission insisted that the Third Energy Package
applied to it. Moreover the Russians not only cancelled South Stream
but announced that they would no longer seek to build or operate gas
pipelines on EU territory, and that instead of South Stream they would
build a pipeline to Turkey, which is not a member of the EU and
whose territory is not EU territory.
This Russian move came as a complete shock, provoking
furious recriminations across the EU whilst demonstrating that the whole
assumption that Russia so depended on Europe for the sale of its gas
that it would eventually be brought to heel was completely wrong. On
the contrary it turned out that it was the Europeans who depended on
Russia for their gas, and not the other way round.
At this point it is necessary to say something about
European efforts to ‘diversify’ away from Russian gas and their failure,
and about the role of Ukraine.
As the energy war between the EU and Russia heated up from
the mid 2000s, demands – many of them originating in Washington and
London, even though the US and UK are not significant importers of
Russian gas – for the EU to ‘diversify’ its gas imports away from Russia
so as to reduce the EU’s supposedly dangerous dependence on Russia
steadily built up.
These led to various schemes to reduce the EU’s ‘dependence’
on Russian gas, including the importing of liquified natural gas from
the Persian Gulf and the US, the building of the Nabucco pipeline across
Turkey and the Caucasus to Azerbaijan, the importing of gas from the
newly discovered gas fields in the eastern Mediterranean, and the
importing of gas from north Africa.
These projects and the EU’s campaign against Gazprom were
given further life by a succession of ‘gas wars’ fought between Russia
and Ukraine in 2006 and 2009.
The background to these wars is that the existing pipeline
network between Russia and the EU was largely built by the USSR from the
1960s to the 1980s, with many of the pipelines passing through Ukraine,
which was of course at that time a constituent republic of the USSR.
After the USSR broke up the Russians for a time sought to
keep Ukraine politically friendly to themselves by supplying Ukraine
with cheap gas.
The result was that the Ukrainian budget benefitted from the
transit fees Gazprom paid Ukraine for having gas destined for Europe
pass through Ukraine’s pipelines, whilst Ukrainian oligarchs – like the
oligarchs in Russia in the 1990s – made gigantic fortunes by buying
cheap Russian gas domestically within Ukraine itself and then selling it
at a high price to Europe.
After Putin became President this cozy arrangement came to
an end. Russia began insisting that Ukraine pay the full market price
for Russian gas, and in 2006 and 2009, as earlier gas supply contracts
came to an end, Russia made it a condition for the supply of gas to
Ukraine that it do so.
At the same time the Russians began to insist on prompt
payment by Ukraine for gas already supplied, and demanded that Ukraine
pay all outstanding arrears for gas supplied but not paid for.
In 2006 and 2009 Ukraine refused to pay the higher price
demanded by the Russians, and failed to pay its arrears, causing Russia
to cut Ukraine’s gas supply off. Ukraine retaliated on both occasions
by siphoning off gas passing through its pipelines intended for
Gazprom’s European customers. The result was gas shortages across
central and eastern Europe.
On both occasions Ukraine eventually backed down, but the
interruptions of gas supplies to Gazprom’s customers in central and
eastern Europe were seized on by Gazprom’s and Russia’s critics who
alleged that they proved that Russia was an unreliable supplier.
For their part the Russians and some of their European
energy customers concluded that Ukraine was an unreliable transit state,
causing the Russians to launch pipeline projects like South Stream,
Nord Stream 1 and eventually Nord Stream 2 in order to bypass Ukraine.
By December 2014, when South Stream was cancelled, all these disputes and conflicts had come to a head.
The European projects to ‘diversify’ away from Russian gas had all failed.
The reason was that all these projects ran into the same
problem: they did not provide enough gas to reduce Europe’s need for gas
from Russia, and they made no economic sense because the gas they would
have provided would have been significantly more expensive than the gas
supplied by pipeline from Russia.
In the meantime the Ukrainians during fraught negotiations
over gas supplies from Russia over the course of the summer of 2014 once
more threatened to siphon off Russian gas passing through Ukrainian
pipelines destined for Gazprom’s EU customers.
Meanwhile the Russians for their part were having far more
success in diversifying their gas exports to non-European customers than
the Europeans were having in reducing their need for imports of gas
from Russia. Specifically in 2014 the Russians announced major projects
to build two giant pipelines to supply gas to China. Though these
pipelines have been derided by Western and Russian liberal critics as
making no economic sense because the Chinese will pay less for the gas
than Russia’s European customers, there is no doubt the Russians will
make a profit from the sales, and the fact that they will soon be
selling large amounts of gas to China means that they are no longer as
dependent on the Europeans as their customers as they once were.
The European country which found itself most exposed was
Germany, whose large industrial sector not only requires plentiful
supplies of cheap gas but which has also become more gas dependent as
Germany has been closing down its coal and nuclear industries.
The result is that despite the sanctions the EU imposed on
Russia on German insistence in July 2014, in June 2015 – just a few
months after the cancellation of South Stream in December 2014 – and
with the full backing of the German government, a new pipeline project
linking Germany to Russia across the Baltic was announced, which is Nord
Stream 2. Moreover, in order to ensure that this pipeline would be
built the Germans agreed to Russia’s demand that it would not be subject
to the EU’s Third Energy Package.
The new pipeline predictably provoked a sustained campaign
of opposition from a coalition of opponents including those who claimed
to be concerned about Europe’s ‘energy dependence’ on Russia, various
eastern and central European states unhappy at the loss of transit fees
caused by the direct supply of gas to Germany from Russia, other EU
states such as Italy unhappy at the way Germany dealt directly with
Russia in its own interests whilst simultaneously insisting that other
EU states impose sanctions on Russia, and of course Ukraine, which risks
being cut out completely as a transit state.
Opposition to Nord Stream 2 was led by the European
Commission on the grounds that it was not compatible with the EU’s Third
Energy Package and would increase Europe’s dependence on Russian gas.
The Germans and the Russians countered, truthfully if somewhat
disingenuously, that Nord Stream 2 is not subject to the Third Energy
Package since it does not cross over EU territory as it passes under
the Baltic Sea
The reality is that in today’s Europe if the Germans and the
Russians agree on something it is going to happen irrespective of
whatever others might think or say about it. The German government
could have killed Nord Stream 2 at any time but it chose not to because
that would have outraged German industry, already seething over the
sanctions imposed on Russia. That in effect all but guaranteed that
despite all the objections Nord Stream 2 would go ahead.
The EU Commission has now dropped its objections to Nord
Stream 2 and said Nord Stream 2 is not covered by the Third Energy
Package. This amounts to it raising the white flag, not just in
relation to Nord Stream 2 but in respect of the whole energy war.
Suffice to say that it is not a coincidence that at the same time the
European Commission’s case against Gazprom seems to be fizzling out.
What this means is that following more than a decade and a
half of struggle the Russians have finally and conclusively won the
Not only will Nord Stream 2 be built as the Russians want –
without it being subject to the Third Energy Package – but there is
nothing now to stop the Russians building Nord Stream 3 or Nord Stream 4
or as many other pipelines as they want under the Baltic on the same
Not only does that secure Russia’s position as the
predominant supplier of gas to Europe for the foreseeable future, but it
means that Russia will go on supplying its gas to Europe whilst
retaining full control over its own energy resources.
The Russians have paid a price for this war. Not only have
they been forced to spend vast amounts of money building expensive
pipelines to bypass Ukraine, but plans they once had for Gazprom to
become a gas retailer within the European energy market have had to be
Gazprom’s excessively low market valuation for a company of
its size and resources undoubtedly also in part reflects the harm it has
suffered because of this war.
The Russians will nonetheless consider all this an acceptable price to pay given the scale of their victory.
Source: The Duran