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    Western Relations with Russia to Be Decided in Berlin

Summary

The last days have seen a frenzy of deals that consolidated the ties between Russia and Germany. Relations between Moscow and the West will pass through Berlin

by: Sergio

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Natural Gas & LNG News, News By Country, Germany, Russia

Western Relations with Russia to Be Decided in Berlin

The last days have witnessed a frenzy of declarations and acquisitions in the European gas markets that consolidated the ties between Russia and Germany, proving that relations between Moscow and the West will pass through Berlin.

Despite the recent Russian acquisition of European assets, the outcome of the standoff remains uncertain. Consequences on energy assets and companies will become clearer in the coming weeks, after Moscow will announce probable retaliations against the decisions taken by the US, Germany and other European countries. Eventual escalations could emerge by the end of the month.

SANCTIONS ON 21 RUSSIAN OFFICIALS

On Monday, US President Barack Obama ordered sanctions against 11 Russian and Ukrainian officials, following in Brussels' footsteps. The European Commission previously imposed similar measures against 21 officials. The sanctions, which are due to be expanded during the summit in Brussels on Thursday and Friday, do not include top management of any Russian energy company.

Commenting on recent decisions taken in the European capital, Austria’s foreign minister Sebastian Kurz denied that Gazprom chief executive Alexei Miller and Rosneft president Igor Sechin would face a visa ban and asset freeze.

GERMANY WANTS MILD SANCTIONS

Vienna is not the only one keeping an eye on events. Berlin is paying equally great attention. Chancellor Angela Merkel spoke about Russia in the German Parliament on Thursday and her unprecedented emotive approach betrayed the importance of the events for Berlin.

Despite her strong condemnatory words, she clearly stated that Europe would oppose any military intervention. According to Goldman Sachs Group, Bank of America and Morgan Stanley, Berlin would also vote against eventual sanctions limiting flows of Russia’s oil and gas.

But that is just one part of the story, as Germany is likely to play it even safer. If it is true that the Chancellor said that the country is ready to bear the economic consequences of the standoff, it is undeniable that nobody wants an escalation. In this sense, given the fact that Merkel perfectly knows that Putin’s retaliation will be proportionate to the sanctions, any kind of measure is expected to be rather mild.

GAZPROM COULD LOSE, BUT ONLY IN THE LONG TERM

Gazprom is the Russian company that could lose the most in case of a serious confrontation. Although the first round of sanctions did not have a direct impact, some analysts do see major problems for Russia's main exporter.

‘Fitch analyses a scenario where EU countries could be forced to "recast their approach to energy and economic links with Russia over time" to quote UK Foreign Secretary William Hague,’ reads a note released by the rating agency on Friday.

Gazprom is the main instrument in Putin’s hands to decrease Europe’s sovereignty, but its clout could decrease in the long-term in case of a concerted European reaction.

‘Gazprom faces the prospect of diminishing market share if Europe seeks alternative gas supplies instead of simply alternative gas routes from Russia around Ukraine. Gazprom supplied 30% of European gas volumes in 2013. Europe may find the political will to reduce this percentage, especially given the potential of US LNG exports,’ explained Fitch in the note.

Nonetheless, the company led by Alexey Miller is not giving up its medium-term plans. On Friday, it announced contracts for the South Stream’s offshore section with Italy’s Saipem and a Japanese consortium comprised of Marubeni-Itochu and Sumitomo (40% of total output), United Metallurgical Company (35%) and Severstal (25%).

At the same time, the Moscow-based company is trying to maintain its relations with European costumers. According to Reuters, Gazprom is considering making changes to its contracts, partially dropping the “take-or-pay” requirements.

The move could clearly help the Russian giant to maintain its influence on German companies and it comes as little surprise that Wintershall said last week that economic sanctions from the EU against Russia will not remedy the situation in Ukraine and would not help anybody. At Wintershall’s 2014 press conference in Kassel, Chairman of the Board of Executive Directors Rainer Seele proved that Russia could easily find some good allies within European borders.

RUSSIA FURTHER STRENGTHENS ITS TIES WITH GERMANY AND ITALY

On Monday, RWE entered into an agreement to sell RWE DEA to LetterOne Group at an enterprise value of ‘of some € 5.1 billion and on the major contractual conditions.’

LetterOne Group, a Luxembourg based investment vehicle with a mandate to invest in the oil and gas sectors, is controlled by Russia’s fourth-richest man Mikhail Fridman and Ukrainian-Russian German Khan. The deal is the first for the group, which was set up by the two businessmen after the sale of their stake in TNK-BP.

Germany’s Linde sent an equally reassuring message. According to its CEO, possible sanctions against Russia would not affect its gas business.

These last events clearly prove that Berlin does not want intervention or disruption of gas imports, and it equally dislikes any other strong measure. All in all, it is in Germany’s interest to speak loud and act gently in order to maintain the status quo. 

Berlin will clearly find some other allies in Europe. Austria, Poland and Italy are the first countries on this list.

On Tuesday, Rosneft has reached an agreement with international consortium composed of Unicredit Bank, Intesa Banking Group, and Clessidra Fund for purchase of 50% share of the company holding 26.19% of Italy's Pirelli.

The reality is that nothing has changed. Europe is as reliant on Russian gas as it was six years ago when Brussels failed to punish the Kremlin for the war in Georgia. But this does not mean that the situation is frozen and changes will not occur. European governments will soon look for alternatives to Russian gas and companies betting on LNG, FLNG and indigenous gas production could easily take advantage of the situation. Meanwhile, the Russian flag is likely to hang on the European institutions. Now, as decades ago. 

Sergio Matalucci