Projected Russian gas pipeline opens rifts in Central Europe

The fate of a projected new gas pipeline link last week sparked a rift between the Czech Republic on one side and Slovakia and a series of Prague’s Central European partners on the other. The view from Bratislava is that the extension of the pipeline under the Baltic is a German-Russian plot to sideline Ukraine while at the same time damaging Slovakia and the European Union. We put the controversial project under the spotlight in this week’s Marketpalace.

Tomáš Mareček, photo: archive of Eustream

“The major problem in this region and this Europe is the behaviour of Germany. And what is most incredible for me personally is the Joachim von Ribbentrop-style visit to Moscow which was not in August 1939 but which took place three weeks ago.“

Harsh words there from Tomáš Mareček, the board chairman of Slovak gas pipeline company, Eustream. The visit Mareček was talking about was that by German deputy chanacellor and minister of the economy Sigmar Gabriel to Vladimir Putin at the end of October. Tomáš Mareček was speaking at the Central European Energy Conference 2015 in Bratislava just two weeks ago.

The Eustream boss’ comments will probably go a long way to explaining some of the background to the rumpus last week when the Czech government refused to sign up to a strongly worded letter penned by Slovakia’s Minister of Economy to the European Commission. It called for Brussels to get involved in the ongoing Russian-German moves to expand Russia’s existing gas pipeline links under the Baltic Sea to Western Europe.

Basically, what is being proposed is sometimes described as Nord Stream 2, sometimes as Nord Stream 3 and 4. But what Eustream and the Slovak government fear – they are basically reading from the same page - is that the result if the new pipeline is built is that Russian gas in the future will bypass Ukraine altogether and Slovakia, instead of being on one of the main natural gas highways to the West will become a cul-de-sac with its energy security impaired and hundreds of millions in earnings from gas transit fees lost.

‘What is most incredible for me personally is the Joachim von Ribbentrop-style visit to Moscow which was not in August 1939 but which took place three weeks ago .’

To be precise, the Slovak Minister of Economy Vazil Hudák has estimated that the Slovak government alone would lose out on gas transit revenues of around 400 million euros a year if its worst fears were realised. The financial damage to Ukraine from lost gas transit revenues is put at around 2 billion euros a year. Those are big sums for a conflict torn and poor country facing severe economic problems which the European Union is supposed to be helping.

Just another point perhaps, gas pipelines today are in strategic terms regarded by governments and decision makers a bit like railways at the end of the nineteenth century, before the First World War. Their position, direction, and financing are a pretty good indication of who is lined up with whom and which state, or grouping of countries, are being sidelined as a result.

Tomáš Mareček again outlining what he describes as Russia’s long term plans to get Germany and German companies on side so that it can pursue its broader energy and political strategy. He outlines how part of the plan is to get the key pipeline decisions made in Germany with the European Commission broader energy policies completely sidelined.

“There are three players in this game. The first one is Russia, which is opposite to what you can read in the media, really strong and cleaver. The stated goal of Russia is bypassing Ukraine for gas transmission. Russia, unlike Europe, has long-term strategic thinking. They do not need quick wins. Unlike Europe, Russia has fast track decision making process and can very effectively speak with one voice only, no discussions.

Illustrative photo: European Commission

“Russia has the exceptional ability to use almost any external environment for its own benefit. You can see it in two examples. One is low oil prices. In theory, low oil prices should be to the detriment of Russia. But in fact, the low oil prices are hurting the most the big Western gas and oil companies. That means that these companies are therefore in dire straits and because they are looking just to the next quarterly results, that is all they care for, they are relatively easily bought. And Russia knows it. So Russia can fairly easily propose to those companies which desperately need some new profit. Russia can offer them ‘Look, you can go to Russia. We can grant you access to our gas fields, but you must participate in Nord Stream 3 and 4. Deal done.’ And we can read in newspapers that this is business as usual.”

As last week’s events demonstrated, this pipeline clash has posed some particular problems for Prague and the Czech government. Normally, the Czech government would be expected to jump on board an energy security initiative piloted by its biggest regional friend and partner without a second thought. Czech Minister of Industry and Trade, Jan Mládek, took the letter backed by Slovakia, Romania, the Baltic States, Hungary, and Poland to the Czech government last week to get its approval for joining the anti-Nord Stream expansion coalition. He came away empty handed and needing to explain Prague’s lukewarm stance.

The proposed new Russian-German pipeline link is not altogether bad news for the Czech Republic because it could mean increased flows of gas, and earnings, through Czech pipelines heading towards Germany. Minister Mládek:

‘We are definitely supporting the transit [of gas] through Ukraine, through Slovakia, and we do understand the concern of those countries if the transit would be stopped.’

“We expect it will be an expansion not just for Nord Stream 2 but also the other pipelines. It means Opal and Gazela because the Germans need to transit this gas not just to the Baltic coast but to Bavaria, where the main consumption is, and the line is through the Czech Republic.”

But there was another factor in play as well. In recent weeks and months relations between Germany and the Czech Republic have been soured over immigration crisis. There are rumours, that top German politicians are refusing to pick up the phone when called by their counterparts in Prague. And that was also an element in play for Prague’s surprise decision, which has in some quarters been interpreted as a major success for Moscow in breaking up the solidarity of the Visegrad Four on a major strategic issue.

Two days after the Czech government decision, minister Mládek met with his Slovak counterpart and this was the tone of the argument that was he advanced. Minister Mládek again:

“We are definitely supporting the transit [of gas] through Ukraine, through Slovakia, and we do understand the concern of those countries if the transit would be stopped. And it would not help the Czech Republic either because we do prefer to have two routes for access to Russian gas because we can get it now either through Nord Stream and also through the gas pipeline through Ukraine and we would keep both of them. On the other hand it is a bit difficult for us to be boldly against Nord Stream 2 because it is increasing the security of supply for us as well.”

Jan Mládek, photo: Filip Jandourek

There is little doubt that Nord Stream phrase that will crop up again over the next weeks and months and that Prague could once again feel itself pulled between loyalty to traditional partners and a more pragmatic approach emphasising its relations to its overwhelmingly most important economic partner, Germany.

We conclude by revisiting Tomáš Mareček of Eustream and his broad ranging but gloomy take on how this pipeline development could shape the future of Central European relations and perhaps the fate of the European Union itself in years to come. He compares the pipeline project with a rocket which at some stage hits a crucial phase where it could explode with catastrophic results.

“2016 will be the year of the maximum dynamic pressure in this region and in the gas industry in Europe. The fate of Nord Stream 3 and 4 and of Ukrainian transit, as well as Ukraine, will be decided in 2016. The decision will not be made in Moscow or Kiev, it will be made in Berlin. The pressure will be enormous. We will hear and read in newspapers that this is only a commercial project, that Germany does not need any nod from the European Commission and that they can only decide on German territory and that this is only commercial.

‘The decision will not be made in Moscow or Kiev, it will be made in Berlin.’

"The problem is that if the key players in this game, and we have seen them, will push too hard when approaching this maximum dynamic pressure point, we believe that some structure in Europe may start to crack and the European project might start falling apart, especially in this part of Europe. The future of energy security in Ukraine, of the Visegrad Four countries and of the European Union as such is too important to be decided, as we say, in Deutschland GmbH.“