Global Europe

After exhaustive debates and speculation amongst policy experts on its practicality, Nord Stream – the gas pipeline running through the Baltic Sea connecting Russia and Germany – is steaming ahead. The Russo-German project, likened by Radoslaw Sikorski to the Molotov-Ribbentrop pact, has finally cleared its last regulatory hurdle with the Finnish environmental agency granting its approval. While environmental organizations such as WWF have filed a legal challenge against the pipeline, the €7.5 billion project is still expected to start construction already in April with a view to sending its first gas supplies in 2011.

Many have had doubts with regards to the pipeline’s construction, having placed an over-emphasis on the economics of the project. This has been particularly the case in the context of the financial and economic crisis, which has hit the Russian gas giant, Gazprom, especially hard. Poland, for example, has continually argued that a new onshore pipeline from Russia to Germany would be cheaper than the underwater alternative. Not only might that argument not be entirely true, as an underwater pipeline would require fewer costly compressor stations, but it is also completely irrelevant.

The Nord Stream project is not primarily driven by the desire to maximize immediate profits and increase export capacity to Europe, particularly not in today’s climate of depressed demand and a global gas glut. The recent decision of Gazprom to postpone gas production from the supergiant Shtokman field to 2016-2017 is testimony to that fact. Instead, it is driven by Gazprom’s strategic ambition to diversify its export routes and avoid transit countries, most notably Ukraine. Transiting roughly 80 per cent of the EU’s gas imports from the post-Soviet space and possessing large gas storage capacities, Kiev holds significant leverage when it comes to political and commercial negotiations with Moscow and Gazprom. Consequently, the Kremlin and the Russian gas major have continuously sought to either control the gas transit system or at least curtail Ukraine’s ability to interrupt gas supplies.  

While Russia has been able to gain significant control over transit pipelines throughout the post-Soviet space such as Moldova, Belarus, Armenia and other Central Asian states in the 1990s and early 2000s, it has been unable to grab a hold over Ukraine’s strategic transit system. Hence the construction of Nord and South Stream, which combined would give Russia similar export capacity as is currently delivered through the Ukrainian system.

Kiev is naturally concerned with these new developments, which would not only limit political influence but also reduce income from transit fees. In this context, newly President-elect Yanukovich has raised the old concept, touted in the late 1990s, of forming a special consortium to manage the Ukrainian pipeline network. According to this idea, equal stakes of 33.3 per cent would be allocated to Naftogaz Ukrainy, Gazprom and a pool of major European companies. The refurbishment of the outdated pipeline system by a consortium would certainly increase export capacity, by reducing losses due to inefficiency, and could be a cheap alternative to building new pipelines. In addition, Yanukovich is interested in selling this proposal to Gazprom in exchange for lower gas prices, since this would relieve Ukraine’s energy-intensive industries located in the East, which are run by oligarchs from Yanukovich’s home turf. For the moment, however, there seems little likelihood of such a consortium taking shape considering Ukraine’s law ‘On Pipelines’, which prohibits the sale of the network, unless Yanukovich can muster a parliamentary majority to change this piece of legislation, which also seems doubtful.

Furthermore, it should go without saying that Gazprom would not suddenly drop the Nord Stream pipeline simply because Yanukovich is willing to offer a deal on Ukraine’s transit system. Nord Stream is too valuable an insurance policy against Kiev and goes beyond traditional economic parameters. And with the preliminary regulatory hurdles having been passed the goal of diversifying away from Ukraine is taking another concrete step forward.