German-Russian Natural Gas Relations in the Context of a Common European Energy Policy

Graduate School of Social Sciences (GSSS)

German-Russian natural gas relations in the context of a common European energy policy

Thesis to obtain the academic title of Master of Science (MS) in the program Political Science (International Relations)

Academic year 2018/2019

Date of submission: June 21st 2019

Author: Caspar M. Henke (12299804) Supervisor: Dr. Mehdi P. Amineh Second Reader: Dr. Henk W. Houweling Research Project: The Political Economy of Energy

Abstract

This thesis analyses the interwoven commercial and political fabric of German-Russian natural gas relations. A theoretical lens that combines liberalist interdependence theory and the critical theoretical concepts of the state-society complex and social networks against the background of selected energy security dimensions will be employed. It will be argued that in order to assess the prospects for a common European Union energy policy, it is crucial to understand the importance of social forces and external relations shaping the energy policy of EU member states vis-á-vis the Russian Federation. It will be highlighted how the different perceptions of Russian natural gas as a political tool and a commercial commodity have resulted in different actors taking the lead in the natural gas strategies of the European Commission, the Central and Eastern European member states, and Germany. Portraying the Russian state-society complex of natural gas, it will be concluded that the German commercial-led approach is not compatible with a European Union energy policy that responds to the geopolitical threats of Russian gas perceived by other member states.

Key words: Natural Gas, Russia, Germany, European Union, State-society complex

Acknowledgements

I would like to express my sincere gratitude to my thesis supervisor Dr. Mehdi P. Amineh for his valuable guidance in the writing process of this thesis. I would also like to thank the entire research project for their comments on the research proposal and their companionship throughout the final block of the Master’s programme. Enduring the stress of writing this thesis would not have been possible without the moral support of Karolina, my family, and my friends and colleagues at the University of Amsterdam.

Contents

MAPS 6

LIST OF TABLES, FIGURES AND MAPS 10

LIST OF ABBREVIATIONS 12

CHAPTER 1: INTRODUCTION 14

1.1. Theoretical Framework 16 1.1.1. Interdependence Theory 16 1.1.2. The concept of the State-Society Complex and Social Networks 19 1.1.3. Energy Security and Diversification 22

1.2. Argumentation and Hypothesis 24

1.3. Data and Methods 26

1.4. Structure of the thesis 27

CHAPTER 2: THE ENERGY SITUATIONS IN THE EU WITH A FOCUS ON RUSSIAN NATURAL GAS IMPORTS 29

2.1. The Energy Situation of the European Union 29

2.2. The Energy Situation of Germany 34

2.3. The Visegrád states 37

2.4. The Baltic States 45

2.5. Conclusion 51

CHAPTER 3: EUROPEAN COMMISSION AND GERMAN ENERGY POLICY AGAINST THE BACKGROUND OF RUSSIAN NATURAL GAS SUPPLY DEPENDENCY 52

3.1. Development of EC energy policy 53 3.1.1. From the European Coal and Steel Community to the Treaty of Lisbon 53 3.1.2. From the Russian-Ukrainian Gas Disputes to the Energy Union 56

3.2. The policy dimensions of the Energy Union 60

3.3. Projects of Common Interest for the diversification of Natural Gas imports 64

3.4. Regulations for Natural Gas and Market Competition 70

3.5. The paradox of German energy policy in the EU 73

3.6. Conclusion 79

CHAPTER 4: ACTORS IN THE NEXUS OF NATURAL GAS BETWEEN GERMANY AND RUSSIA 83

4.1. The origins of German-Russian natural gas relations and Ostpolitik 83

4.2. German-Russian natural gas relations after the Cold War 91

4.3. Political Pragmatism in the Merkel era 97

4.4. Economic Actors, Interest Groups and Social Forces in German-Russian Relations 105 4.4.1. The German gas market and Gazprom 106 4.4.2. German-Russian Economy 112 4.4.3. Societal and Political Forces 117

4.5. The Russian state-society complex of natural gas under Putin 122

CHAPTER 5: THE PROSPECTS FOR A COMMON EUROPEAN ENERGY POLICY 129

Trends and further research 136

REFERENCES 138

Primary Sources 138

Secondary Sources 146

Maps

40° 50 ° WHITE CENTRAL AND EASTERN EUROPE SEA Arkhangel'sk (Archangel)

Oulu I A Umeå N H Trondheim T FINLAND O B

F O Lake F Petrozavodsk Onega L Bergen NORWAY Konosha U 60 G 60° ° Tampere Turku Lake Oslo (Åbo) Ladoga L. Beloye Helsinki Åland SWEDEN Is. Gulf of Finland Vologda Stockholm St. Petersburg Tallinn Rybinsk Reservoir Hiiumaa Lake Novgorod Göteborg ESTONIA Peipus A Saaremaa L. Il'men Yaroslavl' Tartu L. Pskov Ålborg E Jönköping Gulf of Pskov RUSSIAN FEDERATION S Riga Gotland Nizhniy DENMARK Novgorod Århus Riga Tver' Liepaja LATVIA Copenhagen C Moscow Malmö I Siauliai Daugavpils T Klaipeda Panevezys L Kalin Vicebsk Ryazan' A ing LITHUANIA B ra d Kaunas Smolensk Tula Hamburg RUSSIAN Rostock FEDERATION Vilnius Barysau Gdansk Elblag Mahilëu Bremen Szczecin Minsk Olsztyn Bryansk Hannover Berlin Bydgoszcz Torun Bialystok BELARUS Orel Poznan´ Baranavicy Babrujsk GERMANY Warsaw Homel' Voronezh Leipzig POLAND Brest Pinsk Kursk

Dresden Lódz Radom Wroclaw Lublin 50° Karlovy Opole Kielce Luts'k 50° Vary Prague Rovno Kyiv Zhytomyr Nürnberg Plzen (Pilsen) Kraków Rzeszów Kharkiv CZECHIA L'viv Ceské Brno Ternopil' Poltava München Budejovice Lugansk (Munich) Zilina Ivano- UKRAINE Vinnytsya Kosice Frankivs'k Dnipropetrovs'k Shakhty Linz Vienna SLOVAKIA Donets'k Bratislava Miskolc Chernivtsi Kryvyy Rih Innsbruck AUSTRIA Nyíregyháza Balti Mariupol' Graz Budapest Rostov REP. OF na Donu Baia Mare HUNGARY Debrecen MOLDOVA Mykolayiv Ljubljana Cluj Napoca Chisinau Verona Trieste Bacau Pécs Szeged O Sea of Azov Zagreb d SLOVENIA Arad e ROMANIA s Venice a Kerch Krasnodar Rijeka CROATIA Bologna Osijek Novi Sad Timisoara Sibiu Galati Crimea Novorossiysk Banja Luka SAN Pitesti Ploiesti MARINO BOSNIA Tuzla Sevastopol' A AND Bucharest Florence Belgrade Craiova D HERZEGOVINA Constanta Perugia R Split I Sarajevo A SERBIA T Mostar BLACK SEA ITALY I Nis Pleven C MONTENEGRO Varna Pescara Dubrovnik Rome BULGARIA Podgorica Stara Burgas S Sofia Foggia E Skopje Zagora A Plovdiv Tirana THE FORMER Naples Bari YUGOSLAV REP. OF MACEDONIA ALBANIA Istanbul 40 Thessaloníki Sea of ° Marmara 40° Bursa Ankara TURKEY TYRRHENIAN SEA IONIAN GREECE AEGEAN SEA Balikesir 0 200 400 600 km SEA The boundaries and names shown and the designations used on this map do not imply official endorsement or 20 Izmir 30 0 200 400 mi acceptance by the United Nations. ° °

Map No. 3877 Rev. 8 UNITED NATIONS Department of Field Support MapAugust 2016 I: Political Map of Central and Eastern Europe Geospatial Information Section (formerly Cartographic Section) Source: United Nations Department of Field Support, Cartographic Section

Map II: EU member states Source: BBC, online at: https://ichef.bbci.co.uk/news/1024/media/images/70233000/gif/_70233868_eunames.gif, accessed 18.06.2019.

Map III: Political Map of the Federal Republic of Germany Source: Encylopædia Britannica

Map IV: Political Map of the Russian Federation Source: United Nations Department of Field Support, Cartographic Section

List of Tables, Figures and Maps

Tables Table 2.6. Gross Inland Consumption and overall Import Dependency of the 37 Visegrád states and the EU28 in 2017 Table 2.8. Gross Inland Consumption and overall Import Dependency of the 45 Baltic States and the EU28 in 2017 Table 4.9. Operators and Shareholders of major gas pipelines in Germany 111 Table 4.10. Imports and Exports between Russia and Germany 2018 112

Figures Figure 2.1. EU28 Total Energy Supply 2017 30 Figure 2.2. Gross Domestic consumption of Natural Gas of EU28 in mtoe/ 31 Russian imports in percent 2006-2016 Figure 2.3. Primary energy consumption and GDP of the EU since 1995 32 Figure 2.5. Total Energy Supply of Germany 2017 34 Figure 2.7. Cross-border natural gas volumes in Central and Eastern Europe 43 2010-2015 in bcm Figure 2.9. Flow map of gas interconnections in Europe 46 Figure 2.10. Primary Energy consumption of the Baltic states 2006-2016 in 48 mtoe Figure 3.5. Architecture of targets and objectives in Germany’s energy 74 concept Figure 3.6. Power Generation from different resources in Germany in TWh 75 Figure 4.1. Development of Soviet natural gas exports to (Western) Germany 88 until reunification as supplied volume in bcm and share (%) of German natural gas imports Figure 4.2. Development of Soviet natural gas exports to Europe between 88 1973 and 1990 Figure 4.3. German Natural Gas Imports in TJ by country of origin 2000-2015 99 Figure 4.4. Natural Gas imports in TJ and average annual import price at the 100 German border in €/TJ Figure 4.5. German Natural Gas Imports and Exports in TWh 106 Figure 4.7. Gas distributors in the German market by length of pipeline 108 network in km Figure 4.11. German Exports to Russia: Six most valuable groups of goods in 114 Thousands of US$ Figure 4.12. German Imports from Russia: Five most valuable groups of goods 115 in Thousands of US$ Figure 4.13. Shareholder structure of Gazprom OAO 2019 123

Figure 4.14. Model of Gazprom and the Russian state in the Russian state- 127 society complex

Maps Map 2.4. Major Gas infrastructure in Europe 2018 33 Map 3.1. Projects of Common Interest: BEMIP Gas 65 Map 3.2. Projects of Common Interest: NSI East Gas 67 Map 3.3. Projects of Common Interest: Southern Gas Corridor 68 Map 3.4. Pipelines in the Greek section of the Southern Gas Corridor 69 Map 4.6. Natural Gas Market Areas in Germany 107 Map 4.8. Natural Gas pipelines in Germany 110

List of Abbreviations

ACER Agency for the Cooperation of Energy Regulators AHK Deutsch-Russische Aussenhandelskammer (German-Russian Chamber of Foreign Trade) APERC Asia Pacific Energy Research Centre bcm (unit) Billion Cubic Meters BASF Badische Anilin und Soda Fabrik BEMIP Baltic Energy Market Interconnection Plan BKarA Bundeskartellamt (Federal Competition Agency) BMWi Bundesministerium für Wirtschaft und Energie (Federal Ministry for Economic Affairs and Energy) BMU Bundesministerium für Umwelt, Naturschutz und nukleare Sicherheit (Federal Ministry for Environment, Nature Conservation and Nuclear Safety) bn Billion BNetzA Bundesnetzagentur (Federal Network Agency) BP British Petroleum CEE Central- and Eastern Europe CESEC Central and South-Eastern European Gas Connectivity High Group CEZ České Energetické Závody CDU Christ-Demokratische Union Deutschlands (Christian Democratic Union of Germany) CSU Christlich-Soziale Union in Bayern (Christian-Social Union in Bavaria) Destatis Statistisches Bundesamt (Federal Statistical Ageny) DG Department General DIW Deutsches Institut für Wirtschaftsforschung EC European Commission ECSC European Coal and Steel Community EDF Energie de France EEA European Economic Area EEC European Economic Community EEG Erneuerbare Energien Gesetz (Renewable Energy Act) EESS European Energy Security Strategy EEZ Exclusive Economic Zone EFSI European Fund for Strategic Investment ENTSO-G European Network of Transmission System Operators Gas ETS European Union Emission Trading System EU European Union FDP Freie Demokratische Partei (Free Democratic Party) FNG Fernleitungsnetzbetreiber Gas FRG Federal Republic of Germany FRSU Floating Regasification and Storage Unit GDR German Democratic Republic GHG Greenhouse Gas Ibid. Ibidem IGA Inter-Governmental Agreement iNECP integrated National Energy and Climate Plan IEA International Energy Agency LNG Liquefied Natural Gas

MKM Ministry of Economic Affairs and Communication of the Republic of Estonia mtoe (unit) Million tons of oil equivalent MVM Magyar Villamos Művek (Hungarian Electrical Works) NATO North Atlantic Treaty Organisation NCECP National Commission for Energy control and prices of the Republic of Lithuania NSI North-South Interconnection OAOEV Ostausschuss/Osteuropaverein der Deutschen Wirtschaft OIES Oxford Institute for Energy Studies PCI Projects of Common Interest PGNiG Polskie Górnictwo Naftowe i Gazownictwo SA (Polish Mining and Gas Extraction Company) SNA Social Network Analysis SOCAR State Oil Company of Azerbaijan Republic SPD Sozialdemokratische Partei Deutschlands (Social-Democratic Party of Germany) TANAP Trans-Anatolian Natural Gas Pipeline TAP Trans-Adriatic Pipeline TEN-E Trans-European Networks Energy TEP Third Internal Energy Market Package TFEU Treaty on the Functioning of the European Union TJ (unit) Terra Joule TPA Third Party Access TSO Transmission System Operator TWh (unit) Terrawatt hours UGS Underground Gas Storage UN United Nations V4 Visegrád group (Czech Republic, Hungary, Poland, Slovakia) VNG Verbundnetz Gas WEC World Energy Council WIEH Wintershall Erdgas Handelshaus

CHAPTER 1: INTRODUCTION

In the process of European policy integration, energy policy has emerged as a particularly contentious policy field. Over the last six decades the European Community became the European Union, the membership increased from six to 28 and the European institutions have become supranational actors with wide-ranging competencies. And as much as energy policy has been at the core of European integration from the beginning, the discussion about a common European energy policy is as heated and unresolved as ever. The geographic juxtaposition and the distribution of fossil fuels across the European continent and beyond have created differences in national energy policy approaches that have proven difficult to overcome. The most divisive and geopolitically charged issue in this context is the dependency on natural gas and other fossil fuels from the Russian Federation. Being that the EU generally depends on energy imports due to its low domestic resources and a high demand, Russia as a resource-rich neighbour in direct geographic proximity has emerged as the main supplier of oil, natural gas and coal. In the last two decades, the Russian federation has established its natural gas exports and Gazprom as explicit tools of its foreign policy, the power of which it demonstrated during the gas supply disruptions in 2006 and 2009 and at the onset of the Ukraine crisis in 2014. For many EU member states, the disruptions highlighted the perils of being dependent on Russian natural gas. Without the ability to flexibly adjust their natural gas imports, member states in Central- and Eastern Europe were most vulnerable. This has sparked a new process of European energy policy integration that put the aspects of supply diversification and market liberalisation on top of the European Commission (EC)’s agenda. Because Brussels, as well as many member states perceive Russian gas import dependency as a threat, they have developed different policies and energy strategies to respond to the dominance of Gazprom and to reduce it. The largest importer of Russian gas and biggest EU member state, Germany, however, seemingly has not. Germany’s continued cooperation with Russia on natural gas, which is especially tangible in the construction of the Nord Stream pipelines, prevents the EU form speaking with one voice and increases the amount of Russian natural gas on the European market. While Brussels and the member states criticise Germany’s engagement with Russia for its political and security implications, Germany continues to stress the commercial nature of their relations. The divergent perceptions of Russia’s natural gas exports as a political threat and a purely commercial good uncover the larger problem for European energy policy: To unionise

fundamentally different energy strategies towards- and perceptions of Russia as an exporter of natural gas borne from historical experiences of political and economic exchange. In the light of Germany’s central role in the EU, both politically and geographically, it seems clear that it will not be possible for the EU to adopt an effective common energy policy toward Russia, without Germany’s support. In order to better assess the prospects of a European energy policy, it is therefore vital to understand the complex nature of German-Russian natural gas relations. Thus, this thesis aims to assess German-Russian natural gas relations within the context of a common European energy policy approach and pays particular attention to the involved actors and social forces that have shaped their relationship. Its objective will be to shed light onto transnational actors like special interest groups, commercial actors and networks of politicians and societal actors influencing German-Russian natural gas relations. The research question this thesis seeks to answer is two-fold:

“How do social and political actors co-shape Germany’s natural gas strategy towards Russia and what are the prospects for German-Russian natural gas relations within a common European Union energy policy?

The research question has two parts and investigates the interplay between the commercial and political spheres in German-Russian energy relations. The time frame in consideration spans from the origins of German-Russian natural gas relations and Germany’s Ostpolitik (the doctrine of West-East rapprochement during the 1960s and 1970s) until today. The objective is to determine Germany’s interests and prospective role working towards and within a European policy framework, namely the Energy Union. For the analysis of German- Russian natural gas relations this means that Germany will not be treated as a unitary actor, but instead the business ties between the German energy companies and Gazprom, as well as the political relations between Berlin and Moscow will be considered. In order to understand the European Commission’s energy strategy, the natural gas challenges in the EU and the policy responding to them will be analysed. The influence of Russian natural gas import dependency as a factor for the development of the EC’s energy policy and its strategies for natural gas supply security will be considered. The concrete measures to reduce the EU’s vulnerability to Russian natural gas import dependency will be examined from an infrastructural, market- regulative and political dimension. Lastly, the interconnected relationship between Gazprom and the Russian state will be examined under the prism of the concept of the state-society

complex. Unveiling the personal links, mutually benefiting structured and economic relationship between both spheres will benefit a more thorough understanding of how Russia utilises its natural gas exports abroad. Synthesising the insights gained, this thesis will finally attempt to locate the German position in the future of the EU’s energy policy integration.

1.1. Theoretical Framework

The theoretical framework of this thesis rests upon contributions from different schools of thought in International Relations and International Political Economy. From the liberalist school, the expectations of interdependence theory will be reviewed. There is a broad stream of literature on interdependence theoretical discussions of the German-Russian energy relationship because Germany’s famous Ostpolitik concept arguably quite explicitly applied the promises of this theory to German engagement with the East. Drawing from scholars of Critical Geopolitics, the concept of the state-society complex as a unit of analysis and social networks will be used to amend the liberalist framework. Combining both concepts, the theoretical framework of this thesis argues for a differentiated unit of analysis, which treats authoritarian type state-society complexes as unitarian actors on the international stage, while the range of different, even conflicting interests within a liberal type state-society complex make the unitary actor notion implausible. Lastly, three principal dimensions of energy security will be discussed in order to be able to relate the energy policy of the European Commission to the issue of Russian import dependency.

1.1.1. Interdependence Theory

Nye and Keohane have been amongst the most influential scholars contributing to the liberalist discourse. In their book ‘Power and Independence’ (first published 1989) they present their ideas on different states of interdependence. Central distinctions when assessing the state of interdependence between actors and the likelihood of a conflict onset have to be made regarding the complexity and symmetry of the interdependence. Nye and Keohane attest symmetrical dependence to work as an insurance against political manipulation, because asymmetrical interdependence constitutes an important source of hard power for the less vulnerable (Keohane/ Nye 2012: 216). This is contested by Barbieri (2002) who argues that symmetric interdependence too can lead to conflict. She proposes that rather than focussing on

symmetry alone, analyses should pay attention to the individual significance of the trade relationship for the involved parties, i.e. how large a share of the GDP depends on it (2002: 44). Similarly, Armstrong (1981) notes that relative issue importance of the interdependent field for both states determines the onset of (economic) conflict. Dealing with the question about the political consequences an interdependent or symmetrically dependent economic relationship can have, Armstrong argues that interdependence does not lead to political concessions from the less dominant state per se. Rather, there are facilitating conditions which allow for more political influence of the dominant state. Accordingly, Armstrong suggests that political influence can be exercised, if (i) the less dominant state is not in control over the dominant state’s investments, (ii) alternative supplies are not available to the less dominant state, and (iii) there exists an intense demand for the good in question and the dominant state can convey its desires for a certain political effect without threatening the dominated state (Armstrong 1981: 404). Reviewing Armstrong’s conditions, Wagner (1988) argues that political concessions can only be expected, when they are compensated for economically or politically (1988: 472). This is opposed by Harsem and Claes (2013), who find that the scarcity and economic importance of a commodity are sufficient conditions for political compliance or concessions (2013: 786). Lee (2017) echoes this argument and claims that rather than the onset of conflict, issue importance determines the political compliance to demands made from either side (2017: 207). In this sense, Harsem and Claes and Lee both view that reciprocal concessions are not necessary, because the threat of a supply disruption itself provides enough incentive for the dominated state to allow political influence. Furthermore, Harsem and Claes make a distinction between different forms of political coercion. They argue that political concessions that lead to policy changes or adjustments are more likely to be made by less powerful states. This however does not mean that more powerful states do not make concessions, it means that their concessions are more likely to take subtle forms like ‘gas-for-silence’, a policy they claim has been observable during the German Schröder administration, when Germany hesitated to condemn Russia’s role in the conflict in Chechnya after signing the declaration of intent on the first Nord Stream pipeline (Harsem/ Claes 2013: 786). Liberalist scholars lend the image of the security dilemma from realism. This is not to suggest that the security concept that constitutes the dilemma is the same. The realist security dilemma is grounded on military defence capabilities and the principal actors are self-help driven states, whereas in liberalism the transnational social context and social purposes make for the state’s strategic calculation. But like is the case with the realist security dilemma, in the

liberal version both interdependent actors are unable to increase their relative capabilities without decreasing the other’s relative security- although here in an economic sense. In the context of energy trade between the EU and Russia this means that both partners cannot reduce their dependence on the other without threatening the other’s economic or political interests. Russia’s and the EU’s more recent policies to reduce their mutual dependence highlight the dilemma. Both the EU’s strategy to liberalise its downstream energy market, as well as Russia’s strategy to diversify its exports by investing into the exploration of Eastern Siberian gas fields in order to be able to supply Chinas have been perceived as a threat by the other party. Regarding the interdependence security dilemma Deudney and Ilkenberry (1999) maintain that only complex interdependence that includes multiple economic sectors and even societal and political spheres can credibly reduce the significance of individual issues and thus eliminate the security dilemma. Analysing the energy relations between Russia and the EU, Krickovic (2015) finds that Germany’s behaviour vis-à-vis Russia can be explained by the fact that Germany is the only member state which further developed its interdependence with Russia beyond the energy sector (2015: 8). Proedrou (2007) negates the assumption that deeper integration will inevitably serve as a means to avoid conflict. He argues that the higher sensitivity, which is a natural result of economic integration and dependency, forces both parties to explore measures to reduce their sensitivity in the long term. Both parties will only seek to resume cooperation at the cost of high sensitivity, as long as there are no available alternatives (Proedrou 2007: 347). In an interdependent relationship, sensitivity interdependence describes a state of liability to costs imposed from the outside before policies have been adjusted. Vulnerability interdependence in turn describes the liability to costs imposed from the outside that persists even after policies have been adjusted (Esakova 2012: 54). Copeland’s (1996) perspective on the question about interdependence and conflict is that the most important factor for the onset of conflict is the states’ expectations of future trade as both are threatened by the end of their trading relationships. Fusing liberalist and realist assumptions about cost benefits from continued trade and war, Copeland argues that the likelihood of either of the two camps correctly predicting the dominated state’s behaviour largely depends on that state’s assessment of the future of their mutual trade relations. This means that high interdependence only has a peace-inducing effect as long as the more dependent state can expect relations to remain largely positive, because it will assign a higher value to the continuation of trade, making war an unappealing option (Copeland 1996: 17). Consequently, this has the effect that as soon as the more depended state assigns a lower or negative value to the continuation of their mutual trade,

war could become a more cost-effective and appealing option, because a negative value of continuation will result in a loss in power. Most of the contributions discussed above relate interdependence theory directly to the energy relationship between the EU and Russia or between Germany and Russia respectively. A reoccurring theme is that there exist different levels of (inter)dependence between the EU and Russia on the one hand and between Germany and Russia on the other. Interdependence theory certainly holds promising approaches for a thesis examining Germany and Russia in energy relations, but the theory has drawbacks as well. While Esakova (2012) lauds that interdependence theory invites non-state and transnational actors such as banks and multinationals into the analytical framework (2012: 24), more can be done to assess the connections between economic actors and political decision-makers within the state of interdependence. Here approaches from the critical theory school could be beneficial could provide additional insights to fully understand the relationship.

1.1.2. The concept of the State-Society Complex and Social Networks

Scholars of the critical theory school focus on the interwoven connections and relationships between the political, economic and societal spheres in order to analyse the international system. Critical theorists consider the political and social complex as a whole, rather than sperate units. Critical Theory questions existing institutions and power relations by analysing the social process from which they originated and investigating the change they might be undergoing (Cox 1981: 129). Coined by Amineh and Yang (2018), the state-society complex as unit of analysis offers a conceptual framework to understanding the relationship and interactions between state actors, market actors, and civil society actors. The state-society complex determines how the energy market is regulated (Amineh/ Yang 2018:10). Two ideal types have been identified: The authoritarian and the liberal state-society complex. In an authoritarian or centralised state-society complex, the state has vast possibilities to exercise influence on the market, which allows for decisive strategic action to be taken. One indicator for an authoritarian type state-society complex is the strong role of state-owned enterprises in the field of energy policy (Ibid.:12). Another indicator for an authoritarian type state-society complex is the relative differentiation between the government and other social spheres. The nationalisation of important industries in an authoritarian state-society complex therefore only allows for limited independent business activities, because social forces like economic actors

are incorporated into a centralised governance system. In the interaction of these social forces in the transnational space, their capacity to act on their own interest is constrained by the primacy of interests of the political leadership (Ibid.: 12). The liberal type state-society complex on the other hand is characterised by a stronger civil society and related autonomous business class. The business class in a liberal state-society complex not only has the ability to influence policy making, it is also considered to provide the dominant input in this process. This in turn reduces the possibilities for the state to act in the market (Ibid.:11-12). Amineh and Yang (2018) theorise that in centralised governance systems, political, economic and civil forces are subsumed under one central source of power (2017: 13). When actors that are part of a state- society complex engage in any kind of activity that transcends their territorial borders, in doing so they inevitably connect the institutions and society of their domestic realm with the external realm. Amineh/ Houweling (2003) refer to this as power projection (Amineh/ Houweling 2003: 325). This has important implications for the governance of energy security and commodity supply strategies. In a system that exhibits indicators of an authoritarian state-society complex, state-owned energy companies would necessarily act as an extension of the state. This has the effect that the state’s capacity to intervene into the market in order to achieve political and strategic objectives is greatly increased, particularly relative to liberal governance systems. It is important to note, that the distinction between authoritarian or centralised and liberal state- society complexes is not to imply that states are necessarily to be allocated within this dichotomy in a binary fashion. Purely liberal or authoritarian state-society complexes are theoretical ideal types and an ordinal concept. In reality, state-society complexes exhibit liberal and authoritarian qualities alongside each other. The literature stream of power structure research has investigated the transnational elite networks that exert their influence in the realm between the economic and political spheres. In what is referred to as corporate elite networks, members from both spheres interact, engage in ideational exchange and influence each other, which has effects on both policy-making and corporate strategies (de Graaf 2017: 49). Scholars have identified two types of networks, borne from their juxtaposition of professionals from different backgrounds and implicit or explicit position in the governance structure of different entities. The first type is a network that is formed through interlocking directorates. This means that members of the board of directors hold multiple board positions with different companies at the same time, which fosters their exchange and allows for mutual influence to converge interests and strategies (Ibid.). The effect of their exchange is emphasised by the fact that the board of directors is the principal explicit

decision-making organ in the governance structure of corporations. The second type are so called policy-planning networks, in which commercial actors, policy-makers, intellectuals and other civil actors meet to exchange ideas about corporate strategies or political and societal ideas (de Graaf 2017: 50). Policy-planning networks usually do not have an explicit position in the governance structure of corporations or in the policy-making process, which is why their influence is implicit. Both types of networks share that they provide platforms for intra-elite cohesion, which creates shared interests that go beyond the confines of individual corporations (Ibid.). Approaches from critical theorists are particularly valuable to explain the behaviour of state-owned energy companies like Gazprom in Russia. The benefit of employing the concept of the state-society complex as a unit of analysis for Gazprom and Russia will be highlighted through the following brief literature review. The strategic benefits close ties between the state and Gazprom have for the manoeuvrability of Russian energy policy, have been noted Finon and Locatelli (2008) and other scholars, who argue that ever since Putin’s move to advance Gazprom to an unrivalled national champion with very close ties to the Kremlin, Gazprom’s strategy abroad has to be treated as an integral part of Russia’s foreign policy (2008: 426). Bilgin (2011) analysed the relationship between the Russian state and Gazprom and found that through a variety of political moves, Gazprom retained a position as a natural monopoly and was excluded from liberalisation processes. It is argued that despite of assertions by officials from the state and Gazprom that the two are fully independent and there are no formal mechanisms for either of the two to control the other, an analysis of the structure of shareholders and proxies pointed to the fact that the state’s influence on Gazprom’s strategy is nothing short of significant (Bilgin 2011: 124-125). Therefore, a purely economic exchange with Gazprom is not possible in the nearest future, because its business strategy and corporate expansions mirror the states geopolitical ambitions (Idem: 126). Stressing the close relationships between Gazprom’s managers and the Russian state, Goldman (2008) referred to Gazprom’s managers as “agents of the state”, who adhere “strictly to the goals set out by senior state officials as if they were wholly owned by the state” (Goldmann 2008: 173). Vatansever’s (2017) assessment of the Russian oil and gas export strategies comes to a similar conclusion. However, his analysis highlights the importance of infrastructure (pipeline) ownership, arguing that the pipeline politics of the Russian state leave little doubt that the Nord Stream pipelines and others cannot be purely economic, as is often claimed by both the Russian and German sides (Vatansever

2017: 6). Orttung and Overland (2011) point to constraints on the Russian state’s ability to influence Gazprom and find that the state has lost one of its most important policy tools over the past decade, subsidies. The state has been able to use subsidies to other post-soviet states in the past as a political tool, for which it used Gazprom’s vast resources. Ever since Ukraine stopped paying subsidised prices for its gas, Russia’s political toolbox has been weakened (Orttung/ Overland 2011: 84). Henderson (2016) provides another perspective on the way Gazprom’s exports act as a policy tool to the Russian state. He argues that Gazprom’s supply contracts itself are often designed in a way that anticipates conflict or even facilitates it. By remaining vague on conditions for debt and allowing for demands of repayment to be made at an opportune time, concessions like debt extensions and reductions on high prices can be made in exchange for political favours to the Russian Federation (Henderson 2016: 481). Gazprom’s price politics have also been subject of analysis by other scholars (e.g. Godzimirski 2013) and a reoccurring observation is that Gazprom offers lower prices to countries that have alternative sources for natural gas or LNG ports at their disposal and higher prices to those that solely depend on Gazprom’s delivery. This too, has to be seen as not only an economic, but also a political decision.

This brief review of contributions on interdependence theory and the concept of the state-society complex in the context of relations between the EU and Russia and Germany and Russia shows that it is warranted to attempt a combination of both theoretical avenues when analysing the topic of Russian natural gas import dependency. So rather than merely analysing the interdependence between states, the interdependence and interconnectedness between state- society complexes should be considered.

1.1.3. Energy Security and Diversification

There is no universally accepted definition for energy security, because different actors perceive of energy security in different terms, often laden with ideology or political agenda. What can be agreed upon is that the security of something necessarily entails a discussion of its insecurity. Risks and threats to the security of energy are multifaceted and can stem from human, geographical, (geo)political or technical sources. In effect, energy is often regarded as being secure, when it is available. The definition of the International Energy Agency (IEA) underscores this by defining energy security as “the uninterrupted availability of energy sources

at an affordable price” (IEA 2019). The latter part of this definition points to another necessary condition for the security of energy: Its affordability. The Asia Pacific Energy Research Centre (APERC) coined the concept of energy security described by the ‘Four As’. Accordingly, energy security is “the ability of an economy to guarantee the availability of energy resource supply in a sustainable and timely manner with the energy price being at a level that will not adversely affect the economic performance of the economy” (APERC 2007: 6). The ‘Four As’ following from this are Availability, Accessibility, Affordability and Acceptability. The APERC’s concept has been well-received in the scholarly community, but Cherp and Jewell (2014) note that it fails to identify a referent object for the security concern and therefore provide a more simplistic and flexible definition, arguing that energy security is the “low vulnerability of vital energy systems” (Cherp/ Jewell 2014: 418). Risks and threats to the security of energy can be summarised in different dimensions. In the context of this thesis, the dimensions of diversification and geopolitics are of elevated relevance. The diversification and geopolitical dimensions of energy security are particularly important to understand the ability of a country to mitigate the effects of a supply disruption. Relying on a single supplier for energy resources, a single route for imports, or a single source for energy generation poses a risk to the availability of energy. Geopolitical issues critically affect the energy security of a country. Reasons for supply disruptions can be outbreaking wars, destabilising regimes or failing states, regional tensions or embargoes (Ang et al. 2015: 1081). Even sudden trade wars can make it energy resources or other important imports unfeasible or unaffordable. Thus, good political relations to suppliers are one way of protection against interruptions. But because threats and political tensions are often unforeseeable, diversification is indispensable. Diversification can take many forms. A diverse energy mix means to generate energy from different resources using different methods. Source diversification means to import necessary resources form different suppliers. This is especially relevant in the field of natural gas imports. While most diversification focuses on cases of supply disruption of energy imports, meaning non-indigenous, fossil resources, in the case of intermittent renewables it is important to diversify technologies. If a country heavily relies on wind or solar energy, the development of hydropower or geothermal energy technologies can help mitigate disruptions and reduce intermittency (Sovacool/ Mukherjee 2011: 5345). Another diversification measure is to evenly distribute vital energy infrastructure across the available territory. This kind of diversification is called ‘spatial diversification’. This reduces the vulnerability of an energy system and reduces transmission losses (Li 2005: 2241). According to Yergin (2006) the energy security of natural

gas and oil will continue to rely on the principle of diversification. Reflecting on the geopolitical dimension of energy security and its larger context, he adds that “in a world of increasing interdependence, energy security will depend much on how countries manage their relations with one another, whether bilaterally or within multilateral frameworks” (2006: 82). This contribution points to another crucial aspect of increasing energy security that will be highlighted in this thesis: Multilateralism. Correljé/ Van der Linde (2006) compare a multilateral ‘storyline’ of markets and institutions with a noncooperative ‘storyline’ of regions and empires in the context of international energy security. They find “that the security of oil and gas supply will be the greatest in a Markets and Institutions world, as a consequence of the multilateral approach and the strength of the collective policies in the context of a functional market” (Correljé/ Van der Linde 2006: 549). The main contribution of multilateralism to increasing energy security is that its preventive policy tools are a highly effective means to mitigate effects of import dependence (Ibid.). To conclude, the theoretical framework of this thesis will employ the dimensions of diversification, geopolitics and multilateralism as beneficial to energy security. In this thesis, energy policies will be analysed against the background of these three dimensions to determine their effects on energy security.

1.2. Argumentation and Hypothesis

The research question will be approached through a number of sub-questions. The first sub-questions concern the political context for European energy policy in the EU. Considering the energy situations of EU member states in the Visegrád group and the Baltic republics, as well as Germany, the challenges to gas supply security in the EU will be explored. The first set of sub-questions therefore is: “What is the energy situation in the European Union and in Germany?” and “What are the challenges to EU member states in Central- and Eastern Europe and the Balticum and gas supply security and through which strategies have they been approached?” This will provide important information about the individual energy policy priorities of the member states that are arguably most directly affected by German-Russian gas relations. It will be argued that the external relations of member states and their perception of Russia significantly contributes to the strategy they employ to meet the challenge of a lack of resources. The diversity of energy strategies and the influence of external relations will illustrate the challenges towards defining a common energy policy. The next set of sub- questions explores the development of policy measures undertaken by the European

Commission to manage the dependency of the EU on Russian natural gas imports. This sub- question is two-fold and reads “How has the EC’s energy policy been influenced by the threat of a Russian supply disruption of natural gas and which policy tools and strategies have been developed to reduce the EU’s vulnerability?” By analysing the energy policy development of the EC against the background of Russian natural gas import dependency and the dimensions of energy security discussed in the theoretical framework, it will be shown that the EC’s strategy to engage Russia and reduce the vulnerability to a Russian supply disruption primarily rests on two pillars: An integrated liberalised energy market, and supply diversification. This frame will be applied to the research question. This means that the German natural gas strategy would be complementary to the EC’s natural gas strategy if (i) it furthered the liberalisation and integration of the European energy market and if (ii) it contributed to the diversification of natural gas supplies on the European energy market. The third step of the argumentation will foster an understanding of the involved actors, social and political forces in German-Russian natural gas relations. The sub-questions that will be investigated in this step are “How have commercial and political interests been linked in German-Russian natural gas relations?” and “Are Germany and Russia symmetrically dependent?”. By analysing the interactions between the different spheres and comparing them to Germany’s natural gas import strategy over time, as well as political developments on a national and international scale, their impact on German energy policy will be highlighted. In order to illustrate the close ties between commercial and political spheres in German-Russian gas relations, it will be argued that Russia’s foreign energy policy is organised in an authoritarian type state-society complex. Elaborating on personal connections between Gazprom and the Russian state, the Russian state-society complex will be modelled. By highlighting the implicit and explicit functions of Gazprom for the Russian state, the argument will be made that Gazprom’s commercial activities are necessarily to be treated within the context of the geopolitical ambitions of the Russian state. In the synthesis of the above the following hypotheses will be discussed:

1.3. Data and Methods

The argumentation will primarily be grounded on qualitative research methods. A qualitative case-study will be performed on German-Russian natural gas relations and the Russian State-Society-complex. The relations between Germany and the Russian Federation have been shaped by a long-shared history of rivalry, conflict and cooperation. The natural gas relations between Germany and Russia have to be examined against the background of the specific historic conditions that formed them. In order to appropriately assess the trajectory of sequences of interaction, the qualitative case study as a methodological approach is deemed best to explain complex relations with inferred causality (Bennett/ Elman 2006: 264). Furthermore, because of Germany’s federal architecture and market-led energy strategy, there exists a plethora of relevant state, sub-state and private actors on the German side of German- Russian relations, making the notion of Germany as a unitary actor implausible. For cases like this one, in which the specific underlying conditions drastically limit the number of available N, an in-depth study of “cases within the case” holds more benefits for sound explanations than a cross-case comparison (Gerring 2004: 351). That is why German-Russian natural gas relations will be analysed using a qualitative exploratory case study. In the case study, business ties between the involved economic actors and companies, as well as their connections to the political class of the two countries will be considered. A social network analysis will be conducted about personal ties between Gazprom, the Kremlin and the German energy companies within the context of identifying relevant policy-planning network in German- Russian natural gas relations. One very insightful publication that helps foster a better understanding about Gazprom’s inner workings and its connections to the Kremlin is Vavilov’s (2015) book on Gazprom. The author has been a manager for Gazprom for many years, as well as an employee for Russian governmental bodies and has published the book together with an American and a Russian university. An assessment will be conducted about Gazprom’s market position in Germany. For this, primary sources form the German Federal Network Agency (Bundesnetzagentur), the German Federal Competition Agency (Bundeskartellamt) and information from the operators of pipelines in Germany will be used. For the analysis into the

economic interdependence between Germany and Russia, primary data reported by the German Federal Authority for Foreign Trade (Bundesamt für Außenhandel) and the UN COMTRADE will be used. The European commission publishes the most recent general energy data of all member states twice a year in the form of Energy statistical data sheets. These will be used in order to determine the energy situations of Germany, the EU28, the Visegrád states (Hungary, Poland, Czech Republic and Slovakia), and the Baltic republics (Estonia, Latvia, Lithuania). Additionally, the annual World Energy Trilemma Index of the UN accredited World Energy Council will be consulted. Primary data on exported quantities will be taken from Gazprom and Gazprom Export, as well as the latest BP World Statistical Energy Review. A wide body of peer-reviewed scholarly contributions will provide insight into the academic debate about different aspects of the research topic.

1.4. Structure of the thesis

This thesis will address the research question by analysing three different dimensions: (i) Challenges to EU member states’ energy security and the role of Russian natural gas, (ii) EC energy policies aimed at reducing and managing the EU’s dependency on Russian natural gas and Germany’s role in energy policy integration, and (iii) Actors and interests in German- Russian natural gas relations. The second Chapter will investigate the energy situations of Germany, the EU28, the Visegrád group (V4) and the Baltic states. Particular attention will be paid to the individual strategies for diversifying natural gas imports and their perception of Russia as an importer for natural gas. This way, it will be illustrated how different EU member states have employed various strategies to meet the challenge of a lack of resources. Considering the political realities in the EU, this will elucidate how challenging it is to find a common European energy policy. The third Chapter is devoted to an analysis of the proposed energy policy by the European Commission. In a first step, the development of European energy policy will be reviewed against the background of the threat of a Russian supply disruption. Close attention will be paid to the current policy proposal, the ‘Energy Union’. Two principal strategies to reduce the EU’s vulnerability vis-á-vis a dominant supplier for natural gas will be identified: Import diversification and market liberalisation. In two individual sub-chapters, both will be more closely examined as the EC’s market regulations for natural gas and the infrastructural

‘Projects of Common Interest’ are explained. Lastly, the duality of the German position in the process of the Europeanisation of energy policy will be shown. The fourth chapter analyses the influences of social and political actors on German- Russian natural gas relations and assesses the depth of their cooperation. This will be done through a detailed account of the historical development of natural gas trade between the Federal Republic of Germany and the Soviet Union and later the Russian Federation. The insights will be used to characterise the German commercial approach to natural gas security. The depth of cooperation and possible interdependence between Germany and Russia will be analysed on the German gas market and in the overall bilateral trade relations. The intersection of commercial and political actors will be shown by highlighting the representation of special interests of German energy companies, Gazprom and political actors in important policy- planning networks, namely the Deutsch-Russisches Forum and the Ostausschuss/Ostverein der deutschen Wirtschaft (OAOEV). Finally, the functional and personal connections between Gazprom and the Russian state will be analysed using the concept of the state-society complex as a unit of analysis. In the fifth and final chapter, the results will be discussed and related to answer the research question and test the hypotheses. Furthermore, an outlook over trends that can be expected in the near future will be provided.

CHAPTER 2: The Energy Situations in the EU with a focus on Russian Natural Gas imports

This chapter explores the multifaceted challenges related to energy supply and energy security in the European Union and its member states. In the context of this thesis, particularly the situation of natural gas in Germany, the Visegrád states (V4) in Central Eastern Europe (CEE) and the Baltic states is of elevated importance. The sub-questions this chapter seeks to answer is “What is the energy situation in the European Union and in Germany?” and “What are the challenges to EU member states’ gas supply security in Central- and Eastern Europe and the Balticum and how and by whom have they been approached?” Throughout the chapter and in the corresponding tables and charts reference will be made to Germany, the EU28 and Russia. The impact these external actors have on energy security in the Visegrád states and the Baltic states will be highlighted. Differences in energy security approaches between the states of these two groups are partly caused by their external relations, which is why the regional level analysis should not be neglected. The vastly different realities EU member states face when it comes to their energy supply security in general and their natural gas supplies in particular make the quest to finding widespread consensus in the European Council for a European energy policy a challenge. Ever since the industrial revolution and the motorisation of armed forces, energy security has become a top priority for national security agendas of import-dependent countries. For many Eastern European member states energy supply issues are securitised due to their traditionally critical perception of Russian influence and the dependence on Russian imports. At the same time, the origins of much of Eastern Europe’s energy infrastructure and the geographic proximity to the Russian Federation contribute to Russia’s strong position on their respective energy markets. In the following chapter, the energy security situation of the EU as a whole, Germany, the Visegrád states and the Baltic states will be highlighted in relation to Russia as the supplier.

2.1. The Energy Situation of the European Union

The energy situation of the EU is shaped by its high demand and low natural resources, making it the largest net-importer of energy in the world (Amineh/Crijns-Graus 2018: 150). The energy-resource-rich Russian Federation is a territorial neighbour of the EU and in direct

proximity of many of the countries studied in this chapter. As shown in Figure 2.1., The EU’s total energy supply is dominated by fossil fuels (Oil/ Petroleum, Hard Coal, Lignite and Natural Gas), which account for 72,7%. The remaining share is fairly evenly split between renewable energy at 13,9% and nuclear energy at 12.6% (EC 2019a).

EU28 Total Energy Supply

15% 9% 5%

13%

33%

25%

Hard Coal Lignite Oil/ Petroleum Natural Gas Nuclear Renewables

Figure 2.1.: EU28 Total Energy Supply 2017 Note: Oil sands, waste and peat account for approximately 1% combined and are excluded. Source: EC 2019a.

The EU produced 759 mtoe (million tonnes of oil equivalent) of energy in 2017, which covers roughly 45% of its demand. Almost 30% of the domestically produced energy is renewable and 27% is nuclear. Solid fuels and Natural gas combined amounted to 30% of production (EC2019a). The production output of fossil fuels in the EU will not increase in the future, because both geographic and political factors prevent this. To illustrate, the EU is believed to possibly have a significant potential for shale gas production, which is unlikely to ever be explored due to the strong environmental opposition against extraction methods like fracking (Amineh/ Crijns-Graus 2017: 34). Because the EU’s indigenous reserves of fossil fuels do not suffice to meet its demand, it depends on imports. For all fuels the EU28 currently has an import dependency rate of 55,1% and only one member state, Denmark, has been a net exporter of energy in the past decade (EC 2018a: 66). At 70.4% the natural gas import dependency of the EU28 is even higher. The Netherlands and Denmark are the only two member states that are currently net exporters of natural gas and only Romania comes 30

somewhat close to satisfying is domestic demand for natural gas from indigenous sources, but still falls short of it and thus depends on imports for 13% of its demand (Idem: 72). The largest individual importer of natural gas into the EU is Russia, which accounts for almost 40% of all EU natural gas imports (Idem: 26, see Figure 2.2.). As illustrated in Figure 2.2., Russia’s dominance as a supplier to the EU is rising despite of a slightly decreasing gross domestic consumption. Even though the EU has been able to decouple its economic growth from its primary energy consumption (see Figure 2.3.), European demand for natural gas is expected to remain stagnant and decrease only slightly over the next decades (Honoré 2014: 70). Against the background of an accelerated reduction of domestic production of natural gas from the Netherlands (IEA 2018: xiii) and the foreseeable depletion of Norwegian gas fields, the importance of Russian imports is set to increase in the future.

Gross Domestic consumption of Natural Gas EU28 in mtoe/ Russian imports in percent 500,00 45,00% 450,00 40,00% 400,00 35,00% 350,00 30,00% 300,00 25,00% 250,00 20,00% 200,00 15,00% 150,00 100,00 10,00% 50,00 5,00% 0,00 0,00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gross Domestic Consumption EU28 Russia

Figure 2.2.: Gross Domestic consumption of Natural Gas of EU28 in mtoe/ Russian imports in percent 2006-2016. Source: EC 2019a, Eurostat 2018, Figure by author.

Figure 2.3.: Primary energy consumption and GDP of the EU since 1995. Source: European Commission (2019e): Fourth report on the state of the energy union, p.5.

Russia’s role as an importer is equally dominant for the other fossil fuels: 31,6% of the EU’s crude oil imports and 30,6% of the EU’s solid fuel imports are of Russian origin (EU2018a: 26). As illustrated in Figure 2.3., the EU has set itself targets to reduce its primary energy consumption by 20% by 2020 and by at least 32.5% by 2030 compared to the 1990 base scenario. The EU is generally believed to be on track to meet its 2020 target, but a rise of primary energy consumption over the past three years has made this more doubtful (Eurostat 2019). Additionally, the EU has committed itself to reducing greenhouse gas emissions by 20% by 2020 and increase the share of renewables to 20% by 2020. As will be partly explored in this chapter, the energy portfolios of the member states of the EU differs greatly. It needs to be stated that due to these vast differences, it is difficult to argue that a single energy situation for the entire EU can be identified. For the sake of providing a general orientation for the energy security in the EU, the general discrepancy between the EU’s high demand and low production necessarily points to the fact that the EU relies on energy imports. The security of these imports depends on a wide range of factors. Particularly natural gas imports are relevant to determine the energy situation and the security of energy supply in the EU, because unlike the global markets for oil and coal, the gas market is not liquefied and the overwhelming majority of the EU’s natural gas imports are delivered through inflexible pipelines (Esakova 2012: 161). Map 2.4. shows the most important gas pipelines in Europe and illustrates the limitations for the EU to adjust its natural gas imports.

Map 2.4.: Major Gas infrastructure in Europe 2018 Source: DIW 2018: 591.

The EU imports almost 80% of its natural gas from its three big external suppliers, Russia, Norway and Algeria, using more or less diversified import routes. Norwegian gas is imported through multiple pipelines in the North Sea connecting to Germany, the Netherlands, Belgium, France, the UK, and Denmark (the Danish pipeline is not shown on the map) without having to pass through transit countries. The largest share of Russian gas is imported through three principal pipelines: Yamal-Europe passing through Belarus and entering the EU in Poland, multiple pipelines including Brotherhood transiting Ukraine and primarily entering the EU in Slovakia, and Nord Stream directly linking Russia and Germany. Algerian gas enters the EU through Tunisia into Italy and through Morocco into Spain. As will be explored in detail, particularly the Russian gas import routes play a decisive role for the energy security of many EU member states.

2.2. The Energy Situation of Germany

Total Energy Supply of Germany 2017

14% 11%

6% 12%

24%

33%

Hard Coal Lignite Oil/ Petroleum Natural Gas Nuclear Renewables

Figure 2.5.: Total Energy Supply of Germany 2017 Note: Waste accounts for approximately 1,4% and is excluded. Source: EC 2019a.

Germany accounts for almost a fifth of the EU’s total energy consumption. Three quarters of Germany’s energy supply are made up of fossil fuels, of which Germany is only self-sufficient for lignite. German domestic gas production was 7,2bcm in 2018 covering about 6-7% of demand and at the current rate of extraction is expected to last for 8 more years (BNetzA/BKarA 2019:330). Therefore, Germany has a high import dependency for fossil fuels: More than 98% of oil, 93,4% of hard coal, 91,4% of natural gas, and all of its nuclear fuel have to be imported. This results in an overall import dependency of more than 63,9%, which puts Germany above the EU28 dependency of 55,1% (EC 2019a). Benefitting from its central geographic location and high interconnectivity, Germany’s imports of hydrocarbons generally have a comparatively high degree of diversification, but Russia retained its position as the largest importer. In 2017, Germany imported roughly 40% of its oil, 30% of hard coal and 46% of natural gas from Russia (IEA 2018c). Germany is the largest market and most important customer for Gazprom in the world and the cooperation between the Germany energy companies and Gazprom are extensive (see Chapter 4.4.). Because of a policy change of the Federal Authority for Export Control in 2015, Germany no longer publishes the origins of its natural gas imports, which makes import statistics more difficult to obtain and less precise

(Westphal 2019: 168). Westphal (2019) estimates that Germany imported roughly 40% of its natural gas from Russia, 31% from Norway and 31% from the Netherlands in 2016 (2019: 167). The latest import statistics published by BP attribute 48,5 bcm of Germany’s 94,8 bcm total gas imports to Russia, of which 7,1 bcm are re-exported to the East, making for 43,6% (BP 2019: 34). Germany has no LNG terminals and relies on pipelines for 100% of its natural gas imports. For the moment, Germany can be considered to be in a largely good energy situation. The World Energy Council attests Germany the 7th highest ‘Energy Trilemma Index’1 rank globally with a rating of ‘AAB’ (WEC 2019: 90). Following its Energiewende policy, which will be explained in more detail in Chapter 3, Germany has increased its capacities of renewable energy and reduced nuclear energy production considerably. This is particularly visible in the country’s electricity mix, of which 22% consisted of nuclear energy and 17% consisted of renewable energy in 2010. In 2018, nuclear energy produced 11,8% and renewables 34,9% of electricity (EC 2019a, AG Energiebilanzen 2019). The energy situation in Germany will be determined by the Energiewende policy phasing out nuclear energy by 2022 and plans to fully phase out coal by 2038. Considering national and EU targets for the reduction of greenhouse gas emissions, natural gas is almost inevitably going to grow in relative size in Germany’s energy consumption. Despite of these political targets, traditionally the German government has kept from interfering in the energy market and private companies have negotiated supply contracts free form state intervention. This has decoupled political and commercial interests and contributed to a high level of energy security in Germany (Szulecki et al. 2016: 554). There is no state-owned energy company or national champion in Germany. This means that the ability of the government to strategically steer the market, for example to realign energy policy with its foreign policy, is limited, making the attractiveness of the German market the vital aspect for energy security (Westphal 2019: 175). The transition of Germany’s energy supply and the accelerated increase of renewable energy has put additional stress on the electricity grid and the grids of neighbouring countries. Because of the extend and intermittency of renewable energy production, the largest part of which comes from wind turbines in the North of the country, the German grid struggles to handle demand fluctuations causing loop flows through Poland and

1 The UN accredited World Energy Council publishes the annual World Energy Trilemma Index which measures the energy performance of countries according to Energy Security, Energy Equity, and Environmental Sustainability. Countries receive a grade ranging from A to F in each dimension. (WEC 2019: 9) 35

the Czech Republic. This has led to neighbouring countries seeking to disconnect their national grids from the German one, effectively reducing the integration of the European energy markets (Schlandt 2015). The German approach towards energy security is generally driven by commercial actors and increasingly by the German climate and environmental policy. Concerning Russian natural gas imports, Germany’s approach collides with the geopolitical and security concerns of its Eastern neighbours and the European Commission. This has been particularly apparent in the ongoing debate about Nord Stream 2, in which the German government often did not engage its critics in the EU and beyond by simply maintaining that the project is a commercial undertaking and that due to the liberal energy market structure state’s influence is restricted to ensuring the adherence to legal obligations (Fischer 2016a: 2). An analysis of the Nord Stream 2 debate in the Bundestag has furthermore shown that if the supply security argument is engaged, German lawmakers tend to argue along the lines of Russia, saying that the crisis in Ukraine warrants a new pipeline, because of the risks of relying on transit countries. Poland and other CEE member states in turn see the crisis in Ukraine as an indicator for Russia’s geopolitical use of natural gas working towards the intention of increasing its dominance in the region (Heinrich 2018: 80). Nord Stream 2 would double the existing capacity of direct natural gas imports from Russia from 55bcm to 110bcm. Considering Heinrich’s analysis, it is not surprisingly then, there is no noticeable German effort to reduce Russian natural gas imports or the dependency on them. Because of the primacy of the liberal energy market in Germany, Russian natural gas import dependency is not perceived as a threat to energy security or national security.

2.3. The Visegrád states

Table 2.6.: Gross Inland Consumption and overall Import Dependency of the Visegrád states and the EU28 in 2017. Poland Czech Rep. Slovakia Hungary EU28 Solid Fuels 47,4% 35,1% 19,9% 8,7% 13,6% Natural Gas 14,7% 16,3% 24,4% 29,7% 23,8% Petroleum 28,6% 21,8% 21,7% 33,4% 34,8% Nuclear 0% 15,8% 23,5% 16,0% 12,6% Renewables 8,5% 10,2% 9,4% 11,5% 13,9% Import Dep. 38,3% 37,4% 64,8% 62,6% 55,1% Source: EC 2019a, March 2019. Note: Shares will not add up to 100%, because ‘others’ (peat, oil shale and sands, manufactured gases, non-recyclable waste) are excluded in the table.

As Table 2.6. reveals, there are vast differences in gross domestic consumption and import dependency at the regional level of the Visegrád states. The situation of energy supply in the four Visegrád states, Poland, the Czech Republic, Slovakia, and Hungary, is shaped by their landlocked position (with the exception of Poland) and their past as states under Soviet influence. Both factors resulted in an infrastructural design that is biased for East-West gas trade from Russian sources. In the Visegrád states, energy markets are not very liberalised. In this part of the EU the state still plays a large role on the energy market through state-owned companies. Additionally, all four countries have traditionally had carbon intensive economies in which a lot of employment depended on the natural resources sector. The Visegrád states tend to adopt a more critical stance on projects of further political integration in the European Union but have been supporters of European policy aimed at increasing energy security and reducing dependence on Russia. The following sub-chapter will elaborate on some of the aspects that characterise the energy situation and policy of the Visegrád states.

Poland

Poland’s energy supply largely depends on solid fuels. Poland uses hard coal and lignite for 77% of its electricity generation, which results in almost half of the country’s total energy

consumption being met this way (EC 2019a, see Table 2.6). Even though the share of fossil fuels in Poland’s total energy consumption is still far above the EU28 average of 13.6%, the country has gradually reduced it form more than 70% of energy consumption in the mid 1990s (Ibid.). Poland views its indigenous reserves of coal as an invaluable asset against being dependent on energy imports, as well as an important economic factor. By exploiting its lignite reserves Poland has a high level of self-sufficiency and has even become a net-exporter of solid fuels (EC 2019a). The overall import dependency of its gross inland consumption is 38.3% and compares well to the EU28 average and the other Visegrád states (see Table 2.6.). Poland’s rating received by the World Energy Council has been ‘CAC’, earning it rank 41 globally. Its high A rating in energy equity is due to the cheap prices from indigenous coal, which also causes a low C rating in environmental sustainability. Poland’s energy security is rated C for its low diversification (WEC 2019: 123). The importance of coal for Poland has been highlighted by former prime minister Donald Tusk, who when he first proposed the Energy Union in 2014 added that “in the EU’s Eastern states, Poland among them, coal is synonymous with energy security” (Tusk 2014). As much as Poland’s coal dependent energy portfolio marginalises the role of other resources, the fact that coal is indigenous and oil and coal trade are global and liberalised, leads to the Polish discourse about energy security focussing on natural gas and its geopolitical implications (Gawlikowska-Fyk et al. 2017: 52). Natural gas accounts for 14.7% of Poland’s gross inland consumption and generates 7.2% of electricity (EC 2019a, see Table 2.6.). As a transit country for the Gazprom-operated Yamal-Europe pipeline, Poland’s gas imports have not been very diversified until recently. In the Polish discourse the issue of natural gas supply security surrounding Russian imports has been securitised and the diversification of natural gas imports has thus become a priority for the government (Gawlikowska-Fyk 2019: 197). Poland has undertaken a series of measures aimed at reducing gas import dependency on Russia. The construction of a Liquefied Natural Gas (LNG) terminal at Świnoujście has allowed Poland to import natural gas from other sources than Russia. Completed in 2014, the terminal has the capacity to satisfy between a quarter and a third of Polish demand. With Qatari and American LNG arriving at Świnoujście terminal, the terminal is widely perceived as Poland’s most significant step towards natural gas diversification away from Russia (Gawlikowska-Fyk 2019: 201). Another measure that is being discussed is to further the exploration of indigenous shale gas in order to increase domestic production, which currently satisfies roughly a quarter of Poland’s natural gas demand. By increasing cross-border interconnections with Germany and

the Czech Republic that allow for “reverse flow”, Poland is reducing its dependence on Gazprom’s Yamal Europe pipeline. Plans for the construction of the “Baltic Pipe” linking Poland with Norway have recently taken an important hurdle towards realisation when Denmark agreed to the construction of the pipeline passing through Danish territory (Reuters 2018). With Gazprom’s supply contract with Polish state-owned PGNiG expiring in 2022, the new 10 bcm pipeline could reduce Gazprom’s strategic leverage in the region decisively, which is why the European Commission included the project in its list of Projects of Common Interest (PCI) (IEA 2016a: 141). The priorities for Polish energy policy in a European context are highlighted, when Donald Tusk’s initial call for the Energy Union is compared to the European Commission’s policy proposal. Where Tusk’s proposal stresses the importance of indigenous fossil fuels as a means to combat import dependence and emphasises energy security aspects, the European Commission’s policy proposal makes decarbonisation one of its priorities and aims at reducing fossil fuels altogether (Tusk 2014, see Chapter 3). Furthermore, Tusk suggests a single European regime for gas purchases in order to reduce import prices for more vulnerable countries, but the European Commission merely raises the possibility of a “voluntary demand aggregation mechanism” (European Commission 2015a: 6). As has been argued by numerous scholars including Szulecki/ Westphal (2018), Godzimirski/ Nowak (2018) and Gawlikowska- Fyk (2019), Poland has successfully “europeanised” its securitised energy policy, especially after the Ukraine crisis, which is also mentioned as a pretext in Tusk’s proposal. However, even though Poland and its former prime minister played a significant in initiating the process that lead to the current European energy policy, today’s PiS-led government is critical of EU engagement and has given its energy security strategy a more international approach trying to promote Poland as a gas hub for the region (Gawlikowska-Fyk 2019: 205). The signing of long- term LNG supply contracts with three American companies, which even prompted visits by the Tump administration’s energy secretary Rick Perry to Poland, underscores this (Reed 2019). Despite of international LNG gas coming at a notably higher price for Poland, the political decision to diversify gas imports away from Russia’s Gazprom trumps economic concerns. Beyond the concrete measures to diversify gas imports, there are also plans to construct the country’s first nuclear power plant, which would contribute to electricity generation, thus reducing the role of natural gas as a fuel and decarbonising the energy mix (IEA 2016a: 113). It should be noted that Poland has opposed climate policy related decarbonisation efforts in the past due to the importance of its domestic coal. The development of nuclear power plants, as

well as so-called “clean coal technologies” also allow Poland to concede some ground to Brussels on environmental and climate concerns, while continuing to pursue its security centred energy policy (Szulecki et al. 2016: 557). Considering these various national efforts to diversify natural gas imports and reduce dependence on Gazprom, it comes as no surprise that Poland is one of the most vocal opponents of the Nord Stream pipelines. Nord Stream 2 poses a serious threat to the profitability of Poland’s diversification projects and could render them ineffective altogether. The impact of Poland’s external relations with Germany, Russia and the US on its energy security is underscored by Poland’s fierce rejection of the German-supported Nord Stream pipelines and its efforts to import American LNG. Furthermore, Poland and the US have started planning an American non-NATO tied military base in Poland called “Fort Trump” in order to engage Russia’s rising strategic leverage in the region.

Czech Republic

The Czech Republic has a more diverse mix of resources contributing to its gross inland consumption. Even though coal, both from domestic sources and imports, still accounts for 35,1% of the Czech consumption, of which almost three quarters are fossil fuels (see Table 2.6.), the government has been successful in strengthening renewable energies and nuclear energy over the past decade. By reducing the share of coal and lignite, two very inefficient fuels, and increasing nuclear and renewable energy, the Czech Republic has managed to reduce its overall demand by close to 20% since 2005, whilst maintaining economic growth (IEA 2016b: 18). It is estimated that this trend continues and will eventually lead to nuclear energy replacing coal as the largest resource in the Czech portfolio. With its indigenous coal reserves and power from nuclear and renewable resources, the Czech Republic has the lowest overall import dependency of all four Visegrád states and is well below the EU28 average. The Czech rating in the Energy Trilamma Index is AAC, ranking it 21st globally (WEC 2019: 15). The Czech Republic has to import all of its oil and natural gas. Because of its landlocked geographic position, interconnections with neighbouring countries are a key factor for Czech energy supply security. Having become a transit country for German gas passing from the German North East to Bavaria and the gas trading hub in Baumgarten in Austria, as well as transiting gas between Slovakia and Germany, the Czech “reverse flow” capabilities are some of the best in the EU. According to the European Commission, in case of a disruption of the largest piece of natural gas infrastructure, the residual supply to the Czech Republic would still be 373.5% of demand

(EC 2019b). However, Czech gas imports are not diversified and despite efforts to increase gas imports from Norway starting in the late 1990s, today more than 98% of Czech gas imports are of Russian origin having transited through Ukraine and Slovakia (IEA 2016b: 123). Even though the envisaged diversification of natural gas imports has not happened as planned, the early efforts led to the Czech Republic being well interconnected. Despite of its import dependency on Russia, the strategically important location of the Czech Republic and the Czech gas infrastructure makes it one of the few direct beneficiaries in the region of the Nord Stream pipelines (Westphal/ Lang 2017: 33). The Czech energy market is largely liberalised when it comes to commodity trade and consumer electricity, but the government still holds a large share of the once national energy company CEZ and access to transmission and distribution are still regulated (IEA 2016b: 79). It has been expressed by the Czech government that the state’s involvement in CEZ will be kept high and that policy will aim at reducing the influence of dominant importers, implicitly meaning Russia (Butler 2016: 22). Following from this, it can be said that the in the Czech context security concerns in energy policy are also prominent, although significantly less so than in Poland. Czech energy policy for the coming years will be shaped by the further reduction of coal whilst maintaining an overall low import dependency (Ibid.).

Slovakia

Slovakia has the most balanced energy consumption of the four Visegrád states but is more dependent on resource imports than the other three. Apart from negligible domestic production of natural gas and lignite, all energy resources have to be imported (EC 2019a). For natural gas, oil and nuclear fuel (Uranium), all of Slovakia’s imports originate from Russia. Half of Slovakia’s inland consumption is met by natural gas and nuclear energy and the baseload2 of the Slovak electricity grid can be generated from nuclear energy and hydro power alone, which makes Slovakia’s energy sector a lot less carbon intense than its neighbours’(IEA 2018b: 27). Two additional nuclear reactors to the country’s existing six are set to make nuclear energy the largest resource in the Slovak inland consumption in the near future (Butler 2017: 21). Slovakia’s large share of nuclear energy leads to low energy prices. This is reflected in the

2 The ‘base load’ is the minimum amount of demanded power that needs to be met constantly. 41

‘BAB’ rating in the World Energy Trilemma Index, which earns Slovakia rank 26 globally (WEC 2019: 130). Owing to its role as the main transit country for Russian gas transiting Ukraine, Slovakia’s interests in energy policy are determined by the geopolitics of natural gas. At 90 bcm, the annual transmission capacity of Slovakia is twelve times higher than its annual domestic consumption (IEA 2018b: 45). However, as Figure 2.7. illustrates, transit volumes and transit revenues have seen a sharp decline since the first Nord Stream pipeline came onstream and the future of Slovakia as a transit country is uncertain (Westphal/ Lang 2017: 30, see Figure 2.7.). Slovakia’s opposition to alternative gas routes that threaten Slovak supply security by circumventing Ukraine, Nord Stream in particular, is therefore not surprising. Following the supply disruptions from Ukraine in 2006 and 2009, which affected Slovakia severely, the Slovak government and the EC have undertaken various efforts to improve supply security through interconnections and “reverse flow” (Rodriguez-Gomez et al. 2016: 471-472). In order to maintain its position as a transit country and to mitigate threats to its supply security from declining transit volumes, Slovakia has increased its “reverse flow” capabilities and is now able to supply Ukraine from the West. Furthermore, the so-called Eastring project, which is listed as a PCI (EC 2017a: 7), will connect Slovakia with Hungary and Romania allowing for natural gas imports from South-Eastern Europe, Turkey and prospectively the Caspian Region. Interconnectors with Poland in the North and Hungary in the South will also allow access to the LNG terminals in Krk (Croatia) and Świnoujście (IEA 2018b: 53). Considering these benefits, somewhat paradoxically, a 2018 study about the integration discourse of the V4 Transmission System Operators (TSO) found that the Slovak TSO is critical of further infrastructure and market integration as it increases the uncertainty about the Slovak infrastructure’s utilisation in the future (Osička et al. 2018: 194). Slovakia’s consumer energy market is fully liberalised but the state-owned gas company SPP has a de facto monopoly on distribution and the national TSO Eustream is the sole importer of natural gas from Gazprom (IEA 2018b: 47). Eustream’s current contract with Gazprom is set to expire in 2028, which means that security of supply from Ukraine and transit revenues are safeguarded in the medium- term (Westphal/Lang 2017: 23). Like is the case in Poland and the Czech Republic, the Slovak state’s involvement in energy companies reflects the policy to maintain state ownership over strategically important actors and infrastructure on the energy market. This has been apparent in the negotiations about the commissioning of the new nuclear reactors, for which both Russia and China have offered to grant credits or state-proxy investment. Slovakia declined initial offers over political transparency and prevented state-proxy investments from Russia’s

Rosatom over strategic concerns (Butler 2017: 21-22). However, as a statement by Slovak Foreign Minister Miroslav Lajcak suggests, Slovakia seeks to maintain pragmatic and constructive long-term relations with Russia in energy trade (Lajcak 2018). Compared with Poland, Slovakia’s bilateral relations with Russia are outright friendly.

Figure 2.7.: Cross-border natural gas volumes in Central and Eastern Europe 2010-2015 in bcm Source: International Energy Agency, Graph retrieved from: Goldthau 2016: 26.

Hungary

Hungary’s final energy consumption contains fewer solid fuels but more natural gas and oil than the other Visegrád states’. Domestic production of natural gas and oil in Hungary is marginal and continues to decline, while domestic lignite meets more than half of the country’s demand (EC 2019a). As Hungary too is landlocked, its supply security is closely connected to its infrastructural integration in the region. Hungary has full capacity bidirectional interconnectors with Romania, Croatia and Slovakia, as well as “reverse flow” interconnections to Ukraine and Serbia (ENTSO-G 2017). Hungary’s interconnectedness delivers an important contribution to the region’s energy security and, at least theoretically, enables Hungary to diversify its imports. It also makes Hungary a transit country, for example for Russian gas that is delivered to Serbia (IEA 2017a: 125). Hungary received a ‘BBA’ rating and rank 29 in the

World Energy Trilemma Index (WEC 2019: 15). Currently however, more than 95% of Hungarian gas imports are Russian and delivered via Ukraine (IEA 2017a: 124). As this is due to long-term supply contracts between Hungary’s state-owned MVM group and Russian Panrusgaz, which expire this year, Hungary’s import portfolio is set to change and utilise LNG terminals and the access to the German market in the future (Ibid.). Plans to construct another two nuclear reactors at Hungary’s ‘Paks’ facility are underway. As Butler (2017) remarks though, the reactors are financed through a Russian loan, which raised questions in the EU about transparency (2017: 21). The deal about the commissioned nuclear reactors bears political weight and prompted an investigation by the European Commission into compliance with its state aid rules, because the Hungarian state is the sole owner of the Hungarian nuclear plants and the prime minister’s office exercises all stakeholder rights (IEA 2017a: 102). This exemplifies Hungary’s overall more accommodating attitude towards geopolitical concerns connected with Russia. Unlike Poland or Slovakia, Hungary rarely voices foreign policy arguments in the discussion about Nord Stream 2 and has already consulted Russia about a new contract for Russian gas supplies through Nord Stream 2. Hungary’s friendly pragmatism showed at a meeting between Hungarian prime minister Orbán and Russian president Putin in Budapest in 2017, where both announced to seek closer cooperation in energy matters and condemned the EU’s economic sanctions against Russia (ZEIT 2017). Despite of similar configurations of their energy sectors and geographic context, Budapest’s friendly attitude towards Moscow sets Hungary apart from the other V4, all of which are highly critical of Russian dependence and influence. Hungary has a fairly centralised state-society complex in energy, as indicated by the strong involvement of the Hungarian state and the prime minister’s office in particular on the energy market and in energy policy.

This section highlighted the challenges for the V4 in regard to their energy imports with a focus on natural gas. Poland and Slovakia are amongst the most critical EU members vis-á- vis Russia and Gazprom. Their positions as important transit countries are seriously threatened by the German-Russian Nord Stream pipelines and especially Poland fears consequences for their national security. The Czech Republic on the other hand could become a more important trading and transit country in Central Europe. For the Czech Republic the prospect of economic benefits and enhanced supply security could ultimately trump political concerns. Hungary is the most politically accommodating of the V4 towards Russia and chose to negotiate new contracts with Gazprom ahead of changing import routes. What becomes clear however is that

new transit routes for Russian natural gas and the geopolitical implications this has, gravely impacts energy security and the discourse about national security in the CEE region. The starkly differing political approaches towards Russia within the V4 make German-Russian energy cooperation a particularly divisive issue in this region and frustrate intra-Visegrád cooperation.

2.4. The Baltic States

Table 2.8.: Gross Inland Consumption and overall Import Dependency of the Baltic States and the EU28 in 2017. Estonia Latvia Lithuania EU28 Solid Fuels 0,2% 0,9% 2,5% 13,6% Natural Gas 6,8% 21,8% 29,0% 23,8 Petroleum 3,5% 34,3% 43,9% 34,8% Shale 71,8% 0,6% 1% 1,3% Renewables 17,7% 42,5% 23,6% 13,9% Import Dep. 4,1% 44,1% 75,6% 55,1% Source: EC 2019a, March 2019. Note: ‘Shale’ refers to the consumption of Oil shale and sand, and biomass. Nuclear energy is excluded because there are currently no nuclear reactors online in the Baltic States.

The Baltic States, Estonia, Latvia and Lithuania, are located on the North Eastern shores of the Baltic Sea and are surrounded by Russian territory. Except for a small border stretch that links Lithuania and Poland, the three Baltic States do not have inner EU borders and are wholly surrounded by Russia, the Russian exclave Kaliningrad, and Belarus. Borne from their geographically separated locations, the Baltic states are so-called ‘energy islands’, which means that they are not yet connected to the European natural gas network (see Figure 2.9.). The small size of the Baltic gas markets in relative terms and their infrastructural disconnect from larger markets makes them particularly vulnerable to supply disruptions. What is more, because of their Soviet legacy, the Baltic states’ electricity grid is still synchronised with the Russian grid. For these reasons, the interconnection of the Baltic states with the rest of the EU, namely Finland in the North and Poland in the South, features very prominently in the EC’s list of PCIs (EC 2017a). The so-called BEMIP (Baltic Energy Market Interconnection Plan) is a cluster of PCIs, that aims to improve the Baltic states’ energy security by ending their status as energy islands. Important gas infrastructure projects are a pipeline linking Estonia and Finland 45

(“Balticonnector”), as well as the “Baltic pipe”, which will connect Denmark with Poland, and an interconnector between Poland and Lithuania (EC 2017a: 9). The relationship with Russia is a difficult one. Because all three Baltic states have sizeable Russian minorities, they regularly see themselves at the frontline of Russian attempts to retain political and cultural influence (Esakova 2012: 186). As Table 2.8. shows, despite of their geographic and geopolitical similarities, the energy situation and strategies of the three Baltic states are very different. The individual characteristics of the energy situations in the Baltic states will be discussed in the following.

Figure 2.9.: Flow map of gas interconnections in Europe. Source: Rodríguez-Gómez et al. 2016: 467. Edited by author to highlight ‘energy islands’.

Estonia

Estonia has the smallest population of all three Baltic states at just over 1.3 million inhabitants and one of the lowest overall import dependencies in the entire EU. The low import dependency of Estonia can be attributed to its exploitation of indigenous shale oil and biomass resources, which amount to more than 71% of its inland consumption. Adding natural gas, petroleum products and crude oil, Estonia is one of the most carbon intense economies in the

EU, second only to Bulgaria (EC 2019c). The dominance of fossil fuels in Estonia resulted in a rating of ‘ABD’ and global rank by the WEC (WEC 2019: 86). As much as the low overall import dependency of Estonia makes is more resilient, it remains highly dependent on Russia for its natural gas imports. Natural gas cannot be substituted for in the Estonian energy mix as it is mostly used for district heating (Ministry of Economic Affairs and Communication of the Republic of Estonia 2019, hereafter ‘MKM’), which gives Gazprom more strategic leverage than the small share of natural gas of the inland consumption suggests. The opening of the Lithuanian LNG terminal at Kaleipéda is seen as in important chance for Estonia to diversify its natural gas imports. Estonian imports from Lithuania are increasing since the LNG terminal came onstream in 2014, but for now Russia remains the dominant importer of natural gas (Eurostat 2018). Access to the Latvian gas storage facility further helps to increase energy security, because supply disruptions in winter, when demand and with-it strategic leverage of Gazprom are peaking, can be mitigated. The Estonian gas market is liberalised but Eesti Gas AS, which imports its natural gas from Russia, dominates the market and has a share of almost 90% of the retail market (MKM 2019). Plans for the construction of an Estonian LNG terminal, as well as the two PCIs linking Lithuania with Poland and Estonia with Finland are seen as chances to strengthen Estonian resilience in the coming years (Ibid., EC 2017a: 9).

Latvia

Latvia lacks the indigenous shale resources of Estonia and does not have an LNG terminal like Lithuania. Still, at 44% the Latvian overall import dependency is considerably lower than Lithuania’s. This is thanks to the large share of renewable energy sources in the Latvian energy consumption. The traditionally critical attitude towards Russian energy import dependency in Latvia is seen as one of the main reasons for Latvia to pursue a strategy focussing on alternative sources for energy early on (Vizgunova 2018: 103). Latvia now has the second highest share of renewables, second only to Sweden, in its energy consumption of the entire EU. The largest share of Latvia’s renewable energy consumption is made up of wood and biomass, with smaller amounts of hydro power (EC 2013: 158). For its fossil fuels, Latvia remains highly dependent on Russia, from where it imports all of its natural gas (Eurostat 2018). Latvia’s energy security received the highest mark for its energy security giving it an overall rating of ‘ABB’ and a global rank 25 in the World Energy Trilemma Index (WEC 2019: 106). There have been positive developments in recent years that improved Latvia’s energy security.

Apart from the Lithuanian LNG terminal, which is perceived as an important asset for all three Baltic states, Latvia has liberalised its energy market in 2017 (EC 2017b). Furthermore, with the ongoing development of the electricity and gas infrastructure, Latvia’s role as a transmission country is strengthened. What has to be noted is that Lativa only reluctantly unbundled its transmission system and liberalised its energy market after the Lithuanian LNG terminal ended the Baltic states’ complete isolation thus terminating the applicability of an exception for unbundling and liberalisation requirements for isolated markets (Pakalkaité/ Posaner 2019: 223, see Article 49, Directive 2009/73/EC). Latvia has a strategically important underground gas storage (UGS) at Incukalns, which reduces the Latvian and Estonian vulnerability to supply disruptions in winter, when demand is particularly high. Even though Latvia’s UGS is state- owned, it is also utilised by Russia, which is why Gazprom remains a shareholder of the facility in Incukalns (MKM 2019, EC 2014b: 135).

Figure 2.10. Primary Energy Consumption in mtoe 9

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Lithuania Latvia Estonia

Figure 2.10.: Primary Energy Consumption of the Baltic states 2006-2016 in mtoe Source: EC 2019d

Lithuania

Lithuania has the largest population of all three Baltic states at 2,85 million and the largest energy demand (EC 2019a). It also has the highest import dependency and consumes more conventional fossil fuels than the other Baltic states (see Table 2.2.). Lithuania’s rating

by the WEC is ‘BAB’ (WEC 2019: 108). Lithuania used to operate a nuclear power plant, which it was forced to decommission upon entering the EU due to the reactor’s similarity to the one in Chernobyl (Nowak 2017: 34). The closure of the power plant together with Lithuania’s complete dependence on Russia for natural gas imports made it the most vulnerable country in the EU (Pakalaité/ Posaner 2019: 218). Ever since the opening of the “Independence” LNG terminal at Kaleipéda in 2014 Lithuania has been able to diversify its natural gas imports thus reducing its import dependency on Gazprom. “Independence”, which is a floating regasification and storage unit (FRSU) that has been leased from a Norwegian supplier with a purchase option after 10 years, is widely seen as the most important contribution to energy security improvement in Lithuania and the Baltic region (Idem: 223). Following Lithuania’s implementation of the EU’s unbundling requirements for its gas infrastructure in 2009/2010, in which Gazprom held shares, Lithuania suffered a s stark increase of Gazprom’s gas import prices between 2009 and 2011 in the midst of economic recovery from the financial crisis 2009 (Pakalkeité 2016: 16). This highlighted Lithuania’s vulnerability towards Gazprom and not only accelerated efforts to construct an LNG terminal in the Baltic states, but also led to an unprecedented drop of Lithuanian primary energy consumption (Idem: 14, see Figure 2.10.). Because Lithuania’s primary energy consumption stabilised after this incident, Lithuania shows the best progress in the EU towards the Energy Union goal of demand reduction (EC 2019d). Norwegian LNG supplies have since reduced Gazprom’s monopoly on the Lithuanian gas market. The long-term supply contract with Norway’s Statoil acts as a minimum import quota with set prices that are coupled to the British import prices for natural gas (Schulte/ Weiser 2019: 175). Because the main shareholder of the LNG terminal is the Lithuanian state, there were concerns about negative effects from the inflexible long-term supply contract for Lithuania’s national welfare, especially because Statoil’s LNG import price is higher than Gazprom’s. However, as Schulte/Weiser (2019) show in their economic analysis of the terminal, the positive effects of the monopoly-breaking long-term contract with Statoil had a positive effect on Gazprom’s import prices, because Gazprom’s ability to exercise its market power was significantly reduced (Idem: 180-181). Lithuania’s state-controlled natural gas company Litgas estimated that LNG will make up 60% of Lithuania’s gas imports by 2016 (Litgas 2016). These estimations were exaggerated as Lithuania’s annual report on its natural gas market to the EC showed that Litgas, which is the sole importer of Norwegian LNG, only accounted for roughly 20% of natural gas imports in 2016 (NCECP 2016: 79). What follows from this is that, the positive effects on Lithuania’s supply security and import prices

notwithstanding, Gazprom has been able to remain in a dominant market position. In order to be less dependent on imports and to decarbonise its economy and energy sector, Lithuania has ambitious plans to replace all fossil fuels with renewables and develop new nuclear capabilities (Nowak 2017: 34). As this sub-chapter has shown, the Baltic states have developed three different approaches to address their dependency on Russian natural gas imports. Estonia has indigenous fossil resources which it exploits in order to reduce overall dependency on energy imports. Latvia’s large share of indigenous renewable resources keeps its import dependency low, while its large underground storage is an important asset to counter the effects of supply disruptions during seasonal times of higher vulnerability. Finally, Lithuania’s LNG terminal enabled import diversification, which broke Gazprom’s monopoly on the Lithuanian gas market and positively impacted import prices. Despite of this, the EC’s quarterly reports on the European gas markets cast doubt over the future of European LNG imports. Because Asian LNG markets are more attractive to importers on the spot market, overall European LNG imports continue to decrease noticeably (EC 2018b: 10). This has the effect that much of the European regasification infrastructure does not run on full capacity driving up costs. Liberalisation processes in the Baltics have only recently taken shape, but the state retained its stakeholder status in the large energy companies. Like is the case with the Visegrád states, energy security and scepticism of Russian import dependence borne from a past under Soviet rule are influential in national security discourses. Speaking with the dimension of energy security, the Baltic states’ efforts focus on diversification, rather than multilateralism. The fact that all three maintain plans to construct national LNG terminals and only reluctantly unbundled their energy markets highlights this. The challenge that remains for all three Baltic states is to develop the infrastructure of the BEMIP in order to end their energy isolation and improve energy security. As Pakalkaité/ Posaner (2019) point out, regional cooperation itself between the Baltic states has been another challenge in the past as unspecific EC priorities that excluded exact locations for important infrastructure drove up competition between the countries for the infrastructure and EC funding (2019: 231). In the meantime, Gazprom’s position in the region, although weakened, remains strong, if not dominant.

2.5. Conclusion

This chapter has assessed the energy situation in the EU, Germany, the V4 and the Baltic states under the prism of Russian natural gas import dependence. The first sub-question has been “What is the energy situation in the European Union and in Germany?” Looking at the energy situation of the EU, what is most important to note is that the EU as a whole has a high demand of energy but only few indigenous resources. Relations with energy suppliers are therefore decisive for the EU’s energy security. With three large suppliers for natural gas in its direct geographic proximity, LNG ports, and the possibility of extending its import routes to suppliers in the Middle East and Eastern Mediterranean, there are many possibilities for diversification. The energy situation for the EU is primarily shaped by integration efforts and climate policy. Germany amongst the most energy secure countries in the world. It maintains a diverse portfolio of resources to meet its energy demands. In light of its climate policy and the phase out of nuclear energy, natural gas is expected to become more important for Germany. This is not perceived as a problem in Germany, because it has three large importers and its commercial approach towards Russian imports trumps political concerns. The second sub- question of this chapter has been “What are the challenges to EU member states’ gas supply security in Central- and Eastern Europe and the Balticum and how and by whom have they been approached?” Reviewing the energy situation with a focus on natural gas in the two groups of states has revealed different strategies. External relations and the political perception of Russia shapes the natural gas policy in the V4. Hungary is friendly towards Russia and has plans for increased natural gas cooperation. Poland on the other hand is highly critical of Russia and Russian natural gas and has therefore undertaken a range of measures to reduce Russian natural gas import dependency like diversifying its energy mix as a whole and importing LNG. Poland’s perception of Russian gas in geopolitical terms is most visibly illustrated by the Polish-American cooperation on LNG and a possible ‘Fort Trump’. The Czech Republic and Slovakia are more pragmatic in their approach towards Russian natural gas. Both have an interest in maintaining their status as transit countries for Russian gas- be that form the East or the West. All of the V4 share a high degree of state involvement in energy matters, which shows in the fact that all four have state-owned energy companies. In the Baltic Republics the energy situation is very diverse. All three are critical of Russian influence, which is why the LNG terminal in Lithuania is perceived as a significant asset to the whole region. The V4 and Baltic States serve as a good example for the range of state-society complexes by exhibiting indicators

of a centralised type with state-owned energy companies and a clear connection between external relations and energy policy while being democracies with a certain guaranteed autonomy of the civil and business classes within the EU.

CHAPTER 3: European Commission and German Energy Policy against the background of Russian natural gas supply dependency

This chapter will provide an overview over the process that led to the EU’s current regulative framework for energy policy and identify the EC’s main policy tools and regulations aimed at improving natural gas supply security. As the executive branch of the EU, the European Commission has a decisive role in proposing legislation for EU policy and shaping its implementation. The sub-questions this chapter will seek to answer are “How has the EC’s energy policy been influenced by the threat of a Russian supply disruption of natural gas and which policy tools and strategies have been developed to reduce the EU’s vulnerability?” In order to address the first part of the sub-question, the development of EC energy policy against the background of Russian gas disputes will be analysed. The directives and regulations that are targeted at monopolistic practises on the European natural gas market are especially relevant in the context of this thesis. The Energy Union is the EC’s most encompassing energy policy proposal yet and its policy dimensions and their implications will be considered in detail. Together with statements from EC officials the Energy Union framework will be used to outline the EC energy policy priorities in general and its strategy to address Russian natural gas import dependency in particular. Furthermore, the list of Project of Common Interest serves as an indicator for the EC’s priorities because it entitles infrastructure projects to more funding and speeds up the bureaucratic process. Mapping out the projects that take direct aim at diversifying natural gas imports away from Russia will provide a more practical insight into the EC’s supply security strategy for natural gas. The German role(s) in the Europeanisation of energy policy will be discussed in the last sub-chapter. In its entirety, this chapter will frame the research question of this thesis by enabling a qualified perspective on what constitutes the EC’s energy policy. The EC’s energy policy will be analysed against the background of the energy security dimensions of diversification and multilateralism in order to assess the benefits for European energy security.

3.1. Development of EC energy policy

The following two sub-chapters will provide an overview over the development of European energy policy and highlight how natural gas import dependency, particularly on Russia, has been an influence. It will be argued that energy concerns have been at the core of the European integrative process from the beginning and that the prospect of European energy solutions have enabled much of the process that led to the EU we know today. The perception of Russian natural gas imports as a threat has been more present in the more vulnerable Eastern European member states, which is why European energy policy changed to incorporate demands for more natural gas supply security after the 2004 Eastern round of accessions. The Russian-Ukrainian gas disputes between 2007 and 2009, as well as the Ukraine crisis that started in 2014 have further brought the EU’s vulnerability to Russian gas supply disruptions to the attention of policy makers in Brussels.

3.1.1. From the European Coal and Steel Community to the Treaty of Lisbon

In the process of European integration energy policy has had an important role from the very beginning. In the earliest stages of European integration, the European Coal and Steel Community (ECSC) was founded in 1952 to end the long-standing rivalry between Germany and France by pooling resources that were indispensable for war fare at the time and making them subject to one common international body, the High Authority. The High Authority was the first supranational executive body in Europe and can be seen as the predecessor for today’s European Commission (EC 2017c). Robert Schuman famously called the ECSC “de-facto” solidarity by making war “not just unthinkable, but materially impossible” (Schuman 1950). The establishment of a common market for commodities under the supervision of a supranational executive that has the power to enforce market rules proved successful for economic competition during these initial steps of European integration and delivered on the demand for security assurances in post-world war times. In a similar spirit, the Euratom treaty of 1957 established a European body in charge of the market for nuclear energy. The first policy proposal of the Commission of the then European Economic Community (ECC) can be found in the 1968 document titled “First Guidelines for a Community Energy Policy” (EC 1968). Here the Commission recognises the dangers of its natural import dependency in the energy field and the problems arising from fixed supply routes for natural gas and the dominance of few sellers

over many buyers (EC 1968: 8). The similarity of measures proposed by the Commission then and those discussed nowadays, which will be discussed further down, is striking. Not only does the Commission call for a stockpiling policy for natural gas and generally proposes a market- led approach strengthening the position of consumers (Idem: 11), it also notes the dangers of ill-integrated infrastructure (pipelines) and lacking harmonisation (Idem: 12). Furthermore, addressing the dominant position of suppliers for natural gas and other resources, the Commission demands non-discriminatory access to supply sources (Idem: 14). However, as much as the Commission formulated guidelines that would deliver a remarkably deeply integrated energy market and policy, it remained unsuccessful in realising it. As Kurze (2009) points out, diverging energy policy priorities of member states prevented the implementation of a European policy and energy market integration. For example, Germany opposed the integration of electricity markets in order to protect its indigenous coal industry from cheaper nuclear imports from France (2009: 18). Importantly, the dominant supplier the EC referred to in 1968 is the Netherlands, one of the founding members of the European Communities. Furthermore, indigenous gas resources in Germany were still able to supply large parts of German demand. The EU’s perspective on energy security changed drastically after the 2004 round of accessions of Eastern countries. Out of the 10 countries that joined in 2004, eight were almost entirely dependent on Russia for their natural gas imports owing to their past as countries under Soviet influence. Considering this, it might not surprise that the EU greatly increased its effort to establish a European energy policy after 2004. In order to improve gas supply security and recognising the high dependence of the new member states, the EC’s directive 2004/67/EC introduced a set of measures making it mandatory to report gas storage levels and supply contracts and entitled the EC to monitor the gas supply situation and act on insufficiencies (Directive 2004/67/EC). Entering into force in 2006, the Energy Community Treaty, which primarily focussed at exporting EU energy market rules to third countries like Ukraine and Serbia, established the so-called aquis communitaire (Vinois 2017: 22). The Energy Community Treaty lacked an enforcement mechanism but included regulations to liberalise energy markets and established a legal framework for energy trade with non-EU members. It also exported technical standards and first requirements for cross-border connectivity to improve energy security (EC 2006). The 2007 ‘Strategic Energy Review’ lays out a holistic policy proposal reflecting the energy trilemma of sustainability, supply security and competitiveness. But as much as environmental sustainability and

competitiveness are prominent features of the policy proposal3, it explicitly mentions that the challenge that needs to be addressed is that “energy markets and geopolitical considerations have changed significantly” making the “need for EU action […] stronger than ever” (EC 2007: 3). Considering that member states have starkly different energy mixes and priorities in energy policy, it is remarkable that the Council unanimously agreed to the policy proposal. The fact that the Treaty of Lisbon is the first to include an energy title at all caters to the perception of energy as a security matter in the new Eastern member states. Article 194 serves as the legal basis for all action to be taken on a European level in energy policy and outlines the objectives of such policy. Accordingly, it should ensure the functioning of the energy market and the security of supply, and promote energy efficiency, renewable energy and interconnections between countries in a spirit of solidarity (Art. 194 TFEU). As vague as this might seem, it does address both internal and external aspects of energy policy and thus provides a primary legal basis for action to be taken in response to a wide range of energy related issues. One very important limitation to the EU’s competencies in energy policy is found in Art. 194 (2), which states that “measures shall not affect a member state’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply” (Art. 194 (2) TFEU). As much as this limitation assures the member states’ sole right to decide their energy mixes, there exists a possible exception to this allowing EU action to affect a member state’s energy mix under the ‘Environment’ title in Art. 192 (2) TFEU, which allows unanimous Council decisions to “significantly affect a member state’s choice between different energy sources and general structure of energy supply.” Considering that a unanimous Council decision cannot be reached against the will of a single member state’s government, EU action under this article seems unlikely. Most relevant in the context of supply disruptions is Art. 122, which can be seen as a response to the gas disputes between Ukraine and Russia. This article assigns emergency competences to the EC and the Council to make decisions in cases of supply disruptions (Art. 122 (1) TFEU). Considering the dimensions of energy security, this first part of European energy policy integration can be seen as a constant push for more multilateralism as a means to improve

3 The First Strategic Energy Review introduced the “20-20-20-goals” demanding that member states reduce their greenhouse gas emissions by 20%, achieve 20% of renewable energy, and improve energy efficiency by 20% by 2020 compared to 1990 levels. 55

energy security. Steps towards multilateral natural gas policy remained unsuccessful until the early 2000s brought new member states from CEE into the EU. Especially the Energy Community Treaty with the acquis communitaire stands out as a move by the EC to increase energy security by creating a better functioning market that included important transit countries.

3.1.2. From the Russian-Ukrainian Gas Disputes to the Energy Union

The gas disputes between Ukraine and Russia over unpaid debt in 2007 and 2009, which led to a partial supply disruption by Gazprom to the EU’s most important transit country, revealed the gas supply vulnerability of the EU. As a result, policies aiming at improving energy security along the diversification dimension became more prominent. Three important pieces of EC policy and regulations aimed at gas supply security were adopted in this context: The Second Strategic Energy Review, the Third Internal Market Package, and Regulation 994/2010. Published during the 2007-2008 gas dispute, the Second Strategic Energy Review has more of an explicitly external focus than earlier policy proposals (EC 2008: 17). It suggests measures to diversify import routes away from Ukraine and Russia by promoting the Southern Gas Corridor route, which would allow for gas imports from the Middle East and Caspian Region, and mentions the idea of bloc purchases for natural gas (Idem: 4). Bloc purchases have remained a popular demand by actors that emphasise supply security in the debate about European energy policy like Poland, as has briefly been outlined in Chapter 2. As has been the case in the first strategic energy review, while sustainability measures and those benefitting competitiveness are included, the paper argues that “political incidents in supplier and transit countries […] remind the EU of the vulnerability of its immediate energy supply” (EC 2008: 3). This formulation leaves little doubt that Brussels not only took notice of the insecurity of Russian gas imports in its Eastern neighbourhood, but specifically shaped its policy accordingly. The longest supply disruption to hit the EU occurred during the Russian-Ukrainian gas dispute in January 2009. It lasted for two weeks and critically affected multiple member states that relied on the Ukraine transit route in winter, when demand is highest. Slovakia and Bulgaria suffered almost complete cut-offs, while seven other member states experienced a supply disruption between 50% and 80% (Schmidt-Felzmann 2011: 577). Without sufficient cross-border connections that allow for gas to be supplied from other EU member states, the 2009 gas dispute left the EU unable to respond. This made the interdependence of the EU more apparent than it ever was before and the wide-ranging impact of the 2009 gas dispute prompted

EC policy action. As has been argued by Maltby (2015), the supply disruptions of 2006 and 2009 provided a ‘window’ for the EC to couple the national problems of energy insecurity with a supranational solution of policy- and market integration (2015: 439). The Third Internal Energy Market Package (TEP) and Regulation 994/2010 have to be understood in this context. The TEP created two European agencies tasked with the oversight and organisation of the European energy market, the Agency for the Cooperation of Energy Regulators (ACER) and the European Network of Transmission System Operators for Gas (ENTSO-G). The TEP directed member states to ensure that vertically integrated transmission systems are unbundled, meaning that ownership and operation of transmission systems have to be separated, or as stated in the corresponding Directive 73/2009/EC: “control over a transmission system or transmission system operator should preclude the possibility of exercising control or any right over a production or supply undertaking” (Directive 73/2009/EC, clause 8). The aim of this directive is to harmonise the gas system and avert discriminatory monopolistic practises of dominant gas companies by facilitating competition and ensuring third party access (TPA). TPA to unbundled gas infrastructure is regulated through network codes, which are prepared by ENTSO-G and regulated by ACER. Regulation 994/2010 responded to the supply disruptions by defining energy security as a shared competence between member states, the EC and gas companies (Regulation 994/2010: 6). Regulation 994/2010 has since been repealed in Regulation 2017/1938 with updated measures to safeguard natural gas supply security in accordance with the Energy Union policy (Regulation 2017/1938). It includes concrete measures to better prepare for supply disruptions and to identify risks to the continuity of gas supplies at an early stage, for example, through risk assessments conducted by ENTSO-G (Idem: 13). The European Court of Auditors affirms this in a special report stating that these measures ensure the functioning of the internal market “under exceptional circumstances” and delegated responsibilities for “preventing and reacting to supply disruptions” (European Court of Auditors 2015: 13). Agencies like ENTSO-G and ACER are vital organs for the EC, because competencies as defined in the Treaty of Lisbon are shared between member states and the EU. Acting under competencies regarding transnational networks and the integrated market are the most promising avenues for supranational executive action in energy policy. The TEP is the most prominent example of an energy policy tool that improves energy security along the multilateral dimension using market integration. Lastly, the still ongoing Ukraine crisis that led to the Russian military destabilisation of Eastern Ukraine and the annexation of Crimea can be seen as the most influential event in recent

history for EU energy policy as it sparked a new wave of policy integration. Particularly Eastern member states perceived the Ukraine crisis as an exemplification of the threat of Russian natural gas import dependency for their national security. Subsequentially, the diversification dimension of energy security became a priority in the European discourse. Donald Tusk’s op- ed in the Financial Times calling for a European Energy Union impressively underscores this. Tusk proposes a joint European body for natural gas purchases from Russia and demands a guarantee for energy solidarity among member states through gas storage and interconnected, uninterrupted gas infrastructure (Tusk 2014). Tusk’s appeal explicitly addresses the threat of Russian natural gas dependency by introducing six principles targeted at strengthening the EU’s resilience against supply disruptions. His priorities are diversification imports through LNG and new external partners, exploiting indigenous resources and delivering a single European market for energy. Tusk’s propositions clearly influenced the policy making of the EC, as it published the European Energy Security Strategy (EESS) only six weeks later, which widely agrees with Tusk. But one main difference remained: The EESS employed an internal demand-oriented approach, while Tusk’s approach centred around external supply-oriented policy. However, by demanding to end the South Stream project, which would have provided Russia with another import route to Europe and instead moderating demand and strengthening renewable energy production, the EESS targets Russia’s dominant market position (EC 2014: 20). Even though Russia or Gazprom are not mentioned directly in the EESS, formulations like “dominant suppliers” (Ibid.) and “one single gas supplier” (EC 2014: 4) leave little doubt about the addressee. The difference between Tusk’s proposal and the EESS can be attributed to the stronger influence of Western European positions within the EC, which changed the focus of the policy resulting in a more sustainable, long-term and demand-centred approach (Austvik 2016: 373). The Ukraine crisis started a wider European debate about energy security vis-á-vis Russia and raised the question about solidarity in an energy context. Building on the EESS, the Energy Union Framework, which the EC put forward in 2015, is the most encompassing policy proposal addressing European energy security responding to the Ukraine crisis (Goldthau/ Sitter 2019: 28). Realising the Energy Union officially became a priority of the Juncker-Commission, which even appointed one of its EC Vice-Presidents, former Slovak foreign minister Maroš Šefcǒvic, specifically with this task. In a speech to the European Parliament, then candidate for the EC presidency Jean-Claude Juncker clearly framed the Energy Union as a strategy to enhance European resilience against Russian import

dependency: “Current geopolitical events have forcefully reminded us that Europe relies too heavily on fuel and gas imports. I therefore want to reform and reorganise Europe’s energy policy into a new European Energy Union. We need to pool our resources, combine our infrastructures and unite our negotiating power vis-á-vis third countries. […][I]f the price for energy from the East becomes too expensive, either in commercial or in political terms, Europe should be able to switch very swiftly to other supply channels.” (Juncker 2014). The Energy Union’s policy dimensions and their implications will be closely examined in the next sub- chapter to facilitate an understanding of the EC’s strategy to reduce natural gas import dependency from Russia. In order to deliver the Energy Union, the EC has published the legislative “winter package” in 2016, which includes the “Clean energy for all Europeans” governance proposal. The “Clean energy for all Europeans” proposal has taken the last hurdle and has been adopted by the EP and the Council in May this year and could serve as a basis for more EC action in energy policy (EC 2019f). As will be more closely examined in 3.4. the package could allow the EC to take more binding measures in regards to member states’ energy policies through the 10-year integrated national energy and climate plans (iNECPs), in which member states have to define their national targets and contributions for the policy dimensions of the Energy Union.

The last two sub-chapters have reviewed the process of European energy policy integration. It has been pointed out that as much as energy has been a driver of European integration, significant progress towards a joint energy policy can only be observed since energy security and import dependency vis-á-vis Russia have had a stronger impact on policy discussions within the EU. The 2004 Eastern round of accessions has heightened the EU’s sensitivity for the topic because countries joined that were formerly under Soviet influence and as a result of that still highly or fully dependent on Russian natural gas imports. Speaking with the conceptual dimensions of energy security, the drive towards more multilateralism needs to be seen as an energy security tool specifically responding to the energy insecurity of CEE member states. The gas disputes between Russia and Ukraine in turn, which most severely affected these countries, made natural gas supply security in particular a priority of the EC. The gas disputes and the Ukraine crisis had a lasting effect on EC energy policy as measures adopted in response to these events shape the EC’s energy policy to this day and natural gas import diversification has taken a more concrete shape. At the starting point of the European integration process fragmented energy markets existed, in which often state-owned enterprises

produced gas and other fossil fuels, owned the transmission infrastructure and sold the energy to end-consumers. The goal of European integration in this regard is to create a single, integrated liberalised European market for energy commodities and electricity, in which producers, transmission system operators and owners, and final retailer of energy are legally separated entities. The EC has pursued an improvement of energy security along the multilateralism dimension building stronger markets and institutions. The perception of Russian gas import dependency as a threat and consequently a driver of EC policy is clearly visible in the documents reviewed in this sub-chapter. Relating this to Yergin’s (2006) energy security concept, it could be argued that the EC clearly acknowledges the increasing interdependence of the EU and Russia but expects a further deterioration of political relations with Russia and therefore has no choice but to seek a multilateral energy security strategy.

3.2. The policy dimensions of the Energy Union

„Our vision is of an Energy Union where Member States see that they depend on each other to deliver secure energy to their citizens, based on true solidarity and trust, and of an Energy Union that speaks with one voice in global affairs“ (EC 2015a: 2)

The ‘Framework Strategy for a resilient Energy Union with a forward-looking climate policy’(EC 2015a) has been introduced in 2015 by the Juncker-Commission with the stated vision to enable the EU to speak with one voice in foreign energy policy. Its purpose is to improve all three aspects of the “energy goal triad” consisting of energy security, sustainability, and competitiveness (EC 2015a: 4). Through five policy dimensions with multiple initiatives, which are mutually reinforcing and interrelated the EC addresses both internal and external aspects of an integrated energy market for the EU. This sub-chapter will discuss the five policy dimensions against the background of Russian natural gas import dependency to gain insight into the EC’s strategy for reducing the EU’s vulnerability against supply disruptions of Russian natural gas and improving overall resilience towards external suppliers. Corresponding to the theoretical dimensions of energy security, a focus will be on policies for natural gas diversification and market liberalisation as part and parcel of a multilateral energy security strategy. The first policy dimension of the Energy Union is called “Energy security, solidarity and trust” and contains four initiatives. Specifically referring to the EESS, it is the only policy dimension of the Energy Union with an external focus and as such contains initiatives that most directly aim to decrease the impact of Russian natural gas import dependency by making the 60

EU more resilient to disruptions (EC 2015a: 4). Reference to Russia can be found both implicitly and explicitly in the first policy dimension. Bearing in mind that the Energy Union has been introduced in the aftermath of the Ukraine crisis offset, the EC remarks that “the political challenges over the last months have shown that diversification of energy sources, suppliers and routes is crucial” and goes on to suggest the Southern Gas Corridor, which would enable imports from Central Asia, and LNG terminals as measures to diversify imports (Ibid.). The Commission identifies closer cooperation between member states during supply disruptions as a necessity to strengthen resilience and even acknowledges the assessment of a “voluntary demand aggregation mechanisms for collective purchases of natural gas during a crisis and where member states are dependent on a single supplier” (Idem: 6). This particular notion can likely be attributed to Donald Tusk’s initiative for an Energy Union calling for a single body for gas purchases (Tusk 2014). ‘Reverse flow’ capabilities are also mentioned as a necessity in order to ensure natural gas supply (EC 2015a: 5). In order to approach producers and transit countries linking energy policy and foreign policy, the EC notes that the EU needs to be able to project its weight on the energy markets. For this, market integrative policies of the past addressing the multilateral dimension of energy security, like the Energy Community and the EEA rules with Norway are revisited (Idem: 7). Russia and Ukraine are both named directly in this policy dimension. It is announced that a reframing of the relationship with Russia would be subject to a “level playing field in terms of market opening [and] fair competition” (Ibid). This points to the rules adopted in the wake of the Russian-Ukrainian gas disputes including TPA and network unbundling and underscores how the EC links liberalisation of the energy market to energy security. Regarding Ukraine in turn, it is stated that the Strategic Partnership will be upgraded to include various measures aimed at reducing Ukraine’s import dependency and strengthening its role as a transit country. Addressing the diverging approaches of different EU member states towards Russia in energy, increased transparency in deals with third countries through compliance checks and standard contract clauses are mentioned (Idem). Particularly relevant in the context of this thesis is the following: “Compliance Checks for Intergovernmental Agreements (IGAs) and related commercial agreements […] are currently being carried out after a Member State and a third country have concluded an agreement” (Idem, italics by author). This refers to the ex-post procedure of checking the compliance of IGAs over energy purchases after they have already been concluded, which the EC deems ineffective in this policy dimension. It therefore proposes to be involved before the conclusion of such an agreement (ex-ante) in order to better ensure

compliance with EU market rules (Ibid.). The EC has since conducted an assessment of the effectiveness of the ex-ante approach compared to the ex-post approach and found that earlier EC involvement would indeed be more beneficial (EC 2016a: 5) and the EP and Council have consequently adopted the ex-ante measure in 2017 (Decision (EU) 2017/684). This means that the EC is now entitled to review energy IGAs for their compliance with EU market rules before they are concluded, giving the EC more influence. This goes to illustrate how the Energy Union policy proposal has enabled the expansion of EC competencies in the energy field through a measure initially designed to ensure the EU’s market liberalisation rules. The other policy dimensions have more of an internal focus, but their effects extend beyond the EU. The second policy dimension of the Energy Union is the development of a “fully-integrated internal energy market” through infrastructural and regulative integration of national energy markets. The Ukraine crisis is once more referred to in this policy dimension (EC 2015a: 8: “in light of recent events at the European Union’s Eastern border”) and the infrastructural development that has taken place in response to it. In order to facilitate the development of interconnecting infrastructure, which the EC calls the ‘hardware’ of the internal market, it sets up interconnection targets and proposes an additional funding and co-financing scheme called the European Fund for Strategic Investments (EFSI) with an initial capacity of 315 bn € (Ibid.). For the regulative framework, or ‘software’, of the internal energy market the EC stresses the need to fully implement the Third Internal Market Package with its unbundling requirements and to strengthen the decision-making capacities of ENTSO-G and ACER. An emphasis is put on the integration of Central- and South Eastern European markets, which the Energy Union makes an “urgent priority” (Idem: 11). The full integration of the energy market has an external affect as it solidifies and, in some cases, enables solidarity between EU member states, strengthening their relative bargaining positions towards external suppliers. By introducing measures that increase competition between suppliers on the integrated market, their respective leverage over consumers and member states is weakened. The fact that the integration of regions and member states that are highly dependent on Russia as a sole importer for natural gas are made an “urgent priority” suggests that these measures too are designed specifically to counter Russian import dependency. The third policy dimension of the Energy Union focusses on demand moderation through increased efficiency in the housing and transport sectors. Particularly the housing sector is of interest in this context. Because heating and cooling of houses accounts for the largest single sectoral consumption of natural gas in the EU (Idem: 12, EC 2019a, EC 2018a: 111), a

significant improvement of efficiency driving down demand can be a promising measure to reduce the EU’s import dependency. In the Energy Union Framework, the EC incentivises this by setting up efficiency targets for member states and by financially supporting efficiency initiatives. The fourth policy dimension incorporates the EU’s climate policy into the Framework. Its two initiatives envisage the decarbonisation of the economy through the EU Emissions Trading System (ETS) and the promotion of renewable energy and low-carbon technologies (EC 2015a: 14). The binding targets to reduce Greenhouse Gas emissions (GHG) by 40% by 2030, to which all EU member states committed are the cornerstone of this policy dimension. The EC recognises that renewable energy needs to be made more competitive in order to meet the target of achieving 27% of renewable energy production by 2030 and therefore wants to roll out an investment framework and provide financing to attract investors (Idem: 15). As has been the case in the other policy dimensions, an emphasis is put on a market-based solution. In regard to external suppliers and the EU’s dependency on imported fossil fuels, the promotion of indigenously sourced renewable energy has a positive effect by reducing demand. Finally, the fifth policy dimension of the EU calls for more research and innovation in order to enable progress towards the delivery of the Energy Union. The Energy Union Framework furthermore includes 15 action points summarising the policy dimensions that more concisely formulating the commitments of the EC. Looking at these, it becomes apparent that natural gas import dependency is a driving force behind the entire Energy Union Framework. Of the 15 action points, nine would directly or indirectly strengthen the EU against external suppliers of natural gas and the second action point explicitly addresses the need to diversify natural gas imports by exploring alternative routes and developing LNG capabilities (Idem: 19- 21).

All in all, a closer evaluation of the Energy Union Framework revealed the EC’s energy policy preferences and priorities. The EC clearly pursues a market-led, multilateral strategy to achieve its targets and aims in energy policy. Various measures to reduce the EU’s dependency on Russian natural gas imports are prominent throughout the framework. In order to diversify natural gas imports LNG terminals and new import routes, specifically those connecting the EU to suppliers in Central Asia and the Eastern Mediterranean, are mentioned. Additionally, by voicing the possibility of aggregating European gas demand in order to achieve a better bargaining position the EC echoes a call by CEE member states to address Russian import

dependency. Demanding more reverse flow capacities and setting interconnection targets, the Energy Union policy proposal clearly seeks to reduce the vulnerabilities uncovered during the Russian-Ukrainian gas disputes. This examination of the Energy Union policy has highlighted the EC’s approach of improving energy security through multilateral market liberalisation and diversification. By expanding its ability to govern markets through neighbourhood policies like the Energy Community or the Strategic Partnership with Ukraine, the EC uses its wider competencies in the market field to act in the energy field. Liberalisation measures are a key here as the EC is able to enforce rules against competition distortion or discriminatory practises as a gatekeeper to the internal market. The case of the ex-ante compliance checks for IGAs impressively shows how the Energy Union as a policy proposal has enabled the EC to expand its ability to be an energy policy actor through its market competencies.

3.3. Projects of Common Interest for the diversification of Natural Gas imports

The Projects of Common interest provide a practical perspective on the EC’s energy security strategy as they reveal which infrastructure projects the EC deems most important. The definition for PCIs can be found in Regulation (EU) 347/2013, which is also referred to as ‘TEN-E Regulation’. Here it is stated that PCIs are entitled to funding from the EU because of their “significant positive externalities such as security of supply, solidarity and innovation” (Art. 14.2 (a), Regulation (EU) 347/2013). The List of PCIs is updated bi-annually and the development is coordinated in regional clusters which are comprised of multiple PCIs. Projects can lose their status as a PCI when they no longer fulfil the EC’s selection criteria or another project appears preferable (EC 2017a: 2). One example for this is the Nabucco pipeline project, which was initially considered a PCI. This sub-chapter will discuss the relevant Priority Corridors that enable diversification of natural gas imports to reduce the EU’s vulnerability to Russian supply disruptions.

Map 3.1.: Projects of Common Interest: BEMIP Gas Note: The map shows completed and ongoing PCIs of the Priority Corridor ‘BEMIP Gas’ only. Source: European Commission 2019, DG Energy, retrieved from: http://ec.europa.eu/energy/infrastructure/transparency_platform/map-viewer/main.html#&ui- state=dialog, accessed 25.04.2019.

The first relevant priority corridor is the Baltic Energy Market Interconnection Plan “BEMIP Gas” (see Map 3.1./ PCI 8, EC 2017a: 9). Some of BEMIP’s PCIs have been mentioned earlier, like the Balticonnector, the Lativan Gas storage facility, the Baltic Pipe or the Świnoujście terminal. The regional BEMIP High level group consisting of Sweden, Finland, Estonia, Latvia, Lithuania, Poland, Germany, Denmark and Norway as an observer was formed in 2009 and has been monitoring coordinating the development of PCIs in the region. The participating countries have signed two memorandums of understanding in which they recognise the particularly high vulnerability of the region to gas crises and commit to coordinating their efforts towards realising the EU’s security of supply policy (EC 2015b: 8). The approved financial assistance of the EC for the gas projects in the region according to the 6th progress report amounts to approximately 257million € (EC 2014c: 7). The stated priority of the BEMIP is to diversify gas sources and to end the isolation of the Baltic states and Finland. Accordingly, the most important PCIs in this region are the connector between Poland and Lithuania, the interconnecting pipelines between the Baltic states, the Balticonnector and the Baltic LNG terminal (Idem: 39). All of the countries in question were dependent on Russia as a sole importer of natural gas and the completion of the envisaged projects would allow for piped natural gas transports from other EU member states and LNG from international partners. It is estimated that these PCIs be completed by 2019 (Ibid.), but according to the Directorate- 65

General Energy and ENTSO-G, currently none of the projects are completed (ENTSO-G 2017, DG Energy 2019a). While there is no Baltic LNG terminal per se, the Lithuanian leased FRSU at Kalaipeda has opened the Baltic market to international suppliers. However, the Kalaipeda LNG vessel has been the result of unilateral action by Lithuania and has been developed outside the EC’s financing scheme after there has been competition between the Baltic states to get the EC to approve financing for a terminal constructed in their territories, thus hindering the development (Pakalkaité/ Posaner 2019: 222-224). In light of this one could question the effectiveness of the purely market led and finance incentivised strategy of the EC to implement its energy security strategy. As much as financial assistance can make the development of certain infrastructure more attractive, the competition between member states for funds can delay the process and lead member states in a particularly urgent situation to take matters into their own hands. Lithuania’s FSRU is a striking example for this. For the diversification of natural gas imports pipeline access to suppliers and reserves in the Caspian Region, the Middle East and the Eastern Mediterranean is crucial. The PCI priority corridors ‘North-South Interconnection (NSI) East Gas’ and the ‘Southern Gas Corridor’ include PCIs that would allow for new importers from those regions to access the European gas market and fosters interconnection between member states to increase supply security (see PCI 6, EC 2017a: 6-8). As has been mentioned earlier, CEE and South-Eastern European member states have been particularly dependent on a single transit route through Ukraine and have suffered the largest supply disruptions during the Russian-Ukrainian gas disputes. Diversification of suppliers and reverse flow supplies have been prevented because of lacking infrastructure. As Maps 3.2. and 3.3. show, multiple PCIs address this situation. NSI East Gas (Map 3.2.) includes projects to integrate gas markets in Eastern Europe, where cross border connectivity has been lowest in the EU. Gas storages in Romania’s depleted gas fields, Bulgaria and Greece increase resilience to supply disruptions, while LNG terminals in Krk, Croatia and Northern Greece further provide the region with the capability to diversify imports. Not shown in the EC’s PCI map (Map 3.2.) but included as a planned facility in the map provided by ENTSO-G is an additional LNG terminal in the Rumanian Black Sea port of Constanta (ENTSO-G 2017).

Map 3.2.: Projects of Common Interest: NSI East Gas Note: The map shows completed and ongoing PCIs of the Priority Corridor ‘NSI East Gas’ only. Source: European Commission 2019, DG Energy, retrieved from: http://ec.europa.eu/energy/infrastructure/transparency_platform/map-viewer/main.html#&ui- state=dialog, accessed 25.04.2019.

The Central and South-Eastern European Gas Connectivity (CESEC) High Level Group coordinates much of the NSI East Gas projects and monitors the progress of development. It estimates that the LNG terminals in Croatia and Northern Greece will be operational by the end of this year and next year respectively (EC 2018c: 3-5). Pipelines along the North-South axis, including the so-called Eastring project, connect the EU with Turkey and external suppliers. The Southern Gas Corridor (Map 3.3./ PCI 7, EC 2017a: 8-9) establishes the pipelines necessary to import natural gas from the Eastern Mediterranean, the reserves in the Caspian basin (most notably Azerbaijan and Turkmenistan) and the Middle East. The two most important PCIs for this ambitious priority corridor are the Transadriatic Pipeline (TAP) and the Trans-Anatolian Natural Gas Pipeline (TANAP). TANAP transits Turkey from the Turkish-Georgian border in the East to the Greek border in the West, while TAP further connects the Greek pipeline systems through Albania with Southern Italy. TAP will have an initial capacity of 10bcm and will be constructed by December 2019 but could be extended to transport 20bcm once it is operational in 2020 (EC 2018c: 1). TANAP’s capacity is set to be 10bcm and will also be operational by 2020 (Euractiv 2018). As much as TANAP’s and TAP’s transmission capacity is dwarfed by the existing capacity of over 160bcm (BP 2018: 35) of Gazprom fed pipelines into the EU, 67

imports of Azerbaijani gas would end Gazprom’s monopoly and amount to a large share of total consumption in smaller gas markets in the region. A good example is Bulgaria, which received 3.57 bcm from Gazprom in 2017 covering 100% of its demand (Gazprom Export 2019a). Bulgaria plans to import 1bcm per year from Azerbaijan’s state-owned oil and gas company SOCAR through TANAP and an interconnector with Greece (Gotev 2018). This would reduce Bulgaria’s dependence on Gazprom decisively. This not only exemplifies the importance of the Southern Gas Corridor for the EC’s overall energy security policy but it also shows how the dual approach of diversifying import routes and integrating member states’ gas markets works complementarily.

Map 3.3.: Projects of Common Interest: Southern Gas Corridor Note: The map shows completed and ongoing PCIs of the Priority Corridor ‘Southern Gas Corridor’ only. Source: European Commission 2019, DG Energy, retrieved from: http://ec.europa.eu/energy/infrastructure/transparency_platform/map-viewer/main.html#&ui- state=dialog, accessed 25.04.2019.

Having considered this, Süwe (2017) notes that compliance with the unbundling and TPA requirements of the Third Internal Energy Market Package means that access to the pipeline has to be guaranteed to Gazprom as well, which operates the direct Blue Stream pipeline to Turkey and could make use of TAP (2017: 19-20). Should Gazprom be kept from accessing TAP, for example by SOCAR which is a 20% stakeholder at TAP (Ibid.), the EC would be in a position where it would have to enforce measures originally designed to reduce Gazprom’s dominance on the European market to guarantee Gazprom’s access to a pipeline intended to diversify imports away from Gazprom. This interesting argument shows how the hardware and the software of the internal market can, hypothetically at least, clash. Gazprom signed a memorandum of understanding with Greek DEPA SA and Italian Edison SpA over the

coordination and development of the TurkStream pipeline and the Poseidon IGI Interconnector to deliver Russian natural gas via a southern route to Southern Italy and Southeast Europe (Gazprom 2017a). The Poseidon pipeline is a PCI as well (PCI 7.3.3., EC 2017a: 9), but according to the EC is intended to primarily transport gas from the Eastern Mediterranean (Ibid.). That is why the EC specifically mentions the “Offshore gas pipeline connecting Greece and Italy [currently known as Poseidon]” (Ibid., italics by author), thus excluding the IGI interconnector between Poseidon and TAP (see Map 3.4.).

Map 3.4.: Pipelines in the Greek section of the Southern Gas Corridor Note: Red circles have been added by author to highlight Poseidon, TAP, IGI and East Med. Source: European Network of Transmission System Operators for Gas 2017, retrieved from: https://www.entsog.eu/sites/default/files/2018- 09/ENTSOG_CAP_2017_A0_1189x841_FULL_064.pdf

The strategic considerations of the EC for the status of a project as a PCIs become visible against the background of Gazprom’s plans to establish its own southern gas route through Greece that would compete with the EC’s. So as much as a dispute over access to TAP seems unlikely because Gazprom’s involvement in the development of Poseidon indicates its preference for this route, Poseidon will be a multi-source pipeline and competition between Eastern Mediterranean and Russian gas could lead to conflicts. The question about access being granted to third parties also applies to the TANAP pipeline, of which SOCAR holds 58% of the shares (Goldthau 2016: 15). TANAP lies outside of the EU and has been planned with the possibility of eventually importing gas from multiple sources, including Turkmenistan or Iran. 69

As much as Turkmen and Iranian pipeline imports are a long way from reaching the EU at the moment due to numerous reasons, SOCAR could try to block either of the two from booking volumes in TANAP and the applicability of EU’s TPA requirements is questionable. These examples show that some PCIs only serve the EC’s goal of diversification when market rules and regulations are fully adhered to. These rules and regulations will be more closely examined in the following sub-chapter. This sub-chapter has put an emphasis on the infrastructure projects aimed at delivering the EC’s natural gas security policy objectives through integrating the European market and diversifying imports. By looking at the PCIs in the Baltic region, Central-Eastern and South- Eastern Europe in the context of Russian gas import dependency, it has been shown how the EC plans to counter Gazprom’s monopoly position in particularly vulnerable member states. What becomes clear is that a regional effect of diversification measures is only possible if national energy markets are fully integrated. The LNG terminals in South-Eastern Europe and the Baltic region serve as an example for this.

3.4. Regulations for Natural Gas and Market Competition

This sub-chapter will discuss natural gas regulations of the EU and how dominant suppliers of natural gas and monopolistic practises are targeted in order to improve European supply security. The EC’s competencies in the field of energy are limited, but it has wide- ranging power to regulate the internal market. This is why natural gas regulations have emerged as the most powerful tool of the EC to enforce its energy policy. Goldthau/ Sitter (2015) have coined the description of the EC’s regulative market powers as a means to achieve energy security policy targets as “soft power with a hard edge”. It is argued that by forcing external companies, specifically mentioning Gazprom, to play according to EU market rules, the EC is able to project its ‘soft’ market regulative power as an external policy (Goldthau/Sitter 2015: 960). Similarly, by incentivising infrastructure projects that complement its own energy policy objectives, the EC uses a market-led approach to realise ‘hard’ security of supply objectives (Ibid.). The Third Internal Energy Market Package (TEP) has been adopted in 2009 and contains regulations and directives with particular relevance to natural gas pipelines and trade. As mentioned above, it also established ACER and ENTSO as specialised executive sub-bodies of the EC in Regulations (EU) 713/2009 and 714/2009.

The first TEP directive that will be considered in the context of Russian natural gas dependency is Directive (EU) 2009/73 which sets out three important requirements for natural gas infrastructure and is also referred to as “gas directive”. The so-called “Gazprom clause” in Art. 11 allows national transmission system operators to reject the certification of suppliers from third countries if they cannot demonstrate “that granting certification will not put at risk the security of energy supply of the Member State and the Community” (Art. 11, 3(b), Regulation (EU) 2009/73). Because the article explicitly only applies to external companies from non-EU countries it has been argued that it has been designed to target Gazprom is particular (Goldthau/Sitter 2019: 36). What is more, despite the fact that the Directive and the entire TEP are primarily intended to regulate the internal market, meaning they act on the market competencies of the EC, the formulation of the condition in Art. 11, 3(b) arguably leaves room for energy political and foreign policy reasoning to reject external suppliers. Article 13 of the same Directive contains the earlier mentioned TPA requirement for system operators to grant access to competitors. The TPA is ensured through network codes which govern the transport capacities and modalities of cross-border operations (Westphal/ Lang 17: 12). The unbundling of pipeline ownership and operations can be found in Article 15, which states that “A transmission system owner […] shall be independent at least in terms of their legal form, organisation and decision making from other activities not relating to transmission, distribution and storage” (Regulation (EU) 2009/73, Art. 15 1). This means that the import and production end of a natural gas company needs to be clearly separated from the distribution end. Furthermore, the gas directive prohibits discriminatory tariffs for natural gas transit. In sum, the TEP aims at changing the dynamics of the relationship between the EU and a dominant supplier by transforming a status of dependence with little room of manoeuvrability into a state of reliance on a resource that is subject to market competition (Henderson 2016: 482). The gas directive has been amended in February 2019 and will enter into force in its amended form in July 2019. With the former directive only applying to infrastructure inside the EU, the new amendment extends the applicability of the unbundling requirement to a member state’s exclusive economic zone for pipelines from third countries (Yafimava 2019: 2). It is obvious that this amendment has been approved with Gazprom’s Nord Stream 2 pipeline in mind, which is supposed to be operational by the end of 2019, although recent developments concerning its passing through Danish territory have made this questionable. Yafimava (2019) argues that while Nord Stream 2 would likely be able to meet the unbundling requirements, the new directive could delay the start of operations and provide the EC with leverage in future

negotiations with Russia over Ukraine transit past-2019 (2019: 14-15). The earlier mentioned hard edge of the EC’s regulative power could surface by offering exemptions to the amendment’s capacity caps to Gazprom in exchange for a new transit contract including a ship- or-pay clause with Ukraine (Idem: 15). The “TEN-E Regulation” of 2013 (Regulation (EU) 347/2013) defining PCIs can be seen as an incentivising regulative tool as it provides funds for the development of infrastructure that benefits the EC’s energy policy priorities. The so-called “Winter Package” of 2016 included amendments to the Energy Union and the regulations of the TEP. Its focus lies on improving the governance of the EU’s climate policy and amending existing energy market legislation. Relevant for the regulative framework for natural gas is that ACER’s capabilities to make binding decisions for national TSOs has been extended (Hancher/ Winters 2017: 10- 11). The Winter Package also made it mandatory for member states to define their contributions towards achieving each of the Energy Union’s policy dimensions in integrated National Energy and Climate Plans (iNECPs). Member states have to regularly report on their iNECP progress and the EC may take action in case of insufficient progress (Ringel/ Knodt 2018: 213). Even though EC action in this regard is limited to recommendations, Ringel/ Knodt argue that these recommendations could take binding character. This appears unlikely at the moment as the protocol of the trilogue preparations about the iNECP regulation in the Council and the EP shows that neither is willing to accept the wording of the EC stating that member states “shall take utmost account of such recommendations” (Council of the European Union 2018: 36). The EC accused Gazprom of anticompetitive practises in natural gas trade with EU countries and launched investigations acting on its competencies in the field of market competition. Herein Gazprom is charged with breaching market rules set in the Treaty on the Functioning of the EU (TFEU), specifically Article 101, which forbids the distortion or restriction of competition, and Article 102, which forbids the abuse of a dominant market position (Siddi 2017: 114). In three investigations led by the EC’s Commissioner for Competition, Margrethe Vestager, the EC objects to Gazprom’s allegedly discriminatory treatment of customers from more vulnerable EU member states. These discriminatory practises are uttered in “destination clauses”4, which Gazprom included in contracts with CEE energy companies but removed from contracts with Western European companies, and constitute

4 “Destination clauses require the purchased gas to be used in a specific territory, thereby forbidding the re- export of imported gas.” (Siddi 2017: 114). 72

pricing mechanisms that charge CEE and Baltic member states more even though supply costs are similar or even lower, and contract conditions that make supply subject to concessions for Gazprom-led pipeline projects (Idem: 114-115). As Siddi points out, Gazprom proposed a settlement because the possible penalties arising from a legal case could amount to 10% of annual turnover, giving the EC significant leverage (Ibid.) This highlights the EC’s ability to engage Gazprom on its competences to regulate market competition and serves as an example for the EC’s ‘soft power with a hard edge’.

3.5. The paradox of German energy policy in the EU

Germany’s energy policy is often seen as a paradox. On the one hand, Germany has promoted ambitious climate policy goals on a European and global level. On the other hand, the German government struggles to address the criticism of other EU member states and the EC about German-Russian gas cooperation. Despite of its support for the Energy Union policy, the German government maintains its official position in favour of Nord Stream 2. In a similar fashion, while Germany advocates climate energy integration on a European level, Germany’s unilateral decision to phase out nuclear energy has been criticised for its lack of European coordination. This sub-chapter will explore the duality of Germany’s energy policy in a European context borne from the institutional make-up of the policy making process of German energy policy. Because of Germany’s market-led approach to energy security, there has never been a Federal ministry with the task to govern German energy policy. Instead, the competencies for the field of energy policy have been split between the Federal Ministry for Economic Affairs (BMWi) and the Federal Ministry for Environment, Nature Conservation and Nuclear Safety (BMU). Since 2013 the BMWi has officially become the Federal Ministry for Economic Affairs and Energy. Germany’s energy policy, like the EC’s, is shaped by the energy trilemma of realising the goals of energy equity and affordability, environmental sustainability, and security of supply (Duffield/ Westphal 2011: 171). Germany’s current political approach working towards these three goals can be characterised by the Energiewende [energy transition] on the one hand and the liberalised energy market on the other. The current binding targets of the Energiewende Germany has committed itself to are to fully phase out nuclear energy by 2022, produce 40- 45% of electricity from renewable energy sources, reduce greenhouse gas emissions by 55% by 2030 compared to 2008, and reduce primary energy consumption by 50% by 2050 (BMWi

2019b). Germany submitted the draft of its iNECP at the end of last year. The document contains detailed steps that Germany plans to take towards meeting its European obligations of the Energy Union and realising its Energiewende (see Figure 3.5.)

Figure 3.5.: Architecture of targets and objectives in Germany’s energy concept. Source: BMWi (2018): Draft of the integrated National Energy and Climate Plan, p. 15.

The roots of the Energiewende can be found in the 1980s when the Green party and the public environmentalist opposition started a wide discourse in Germany about a future without fossil fuels and without nuclear energy. In order to promote renewable energy, Germany has opted for a decentralised, market-based model, in which locally produced energy from renewable sources is sold to the grid. The model was first implemented in the early 1990s and has been amended by the Erneuerbare Energien Gesetz (EEG)[renewable energy act], which led to a boom of photovoltaic installations in Germany (Li 2017: 317). When the Greens first entered into government in Gerhard Schröder’s first term as chancellor, the governing coalition decided to limit the run time of German nuclear reactors to 32 years. In the following years, Germany moved closer to integrate its climate and energy policies, but remained inconsistent in the context of European policy integration. Regarding climate policy, it was under the German presidency of the European Council in 2007 that the EU’s ’20-20-20 goals’ were introduced and Germany has been a vocal advocate for more mandatory emission targets and

policy integration. The German model of decentralised electricity production by private consumers has also been successfully Europeanised and is promoted in the 2018 “Clean energy for all Europeans” package (EC 2019f). Regarding energy policy, the German government preferred to go it alone. In 2010, Merkel’s coalition of CDU/CSU and the liberal FDP decided to extend the runtime of German nuclear reactors. Just a year later, following the Fukushima incident, the same coalition turned their earlier extension around completely and decided to immediately shut down the eight oldest reactors in Germany and to phase out the remaining reactors by 2022 (Westphal 2019: 169). At a time when many thought that nuclear energy could be the key to solving the problems of energy dependency and greenhouse emissions alike, Germany’s decision undermined the internal market and triggered a de facto re-nationalisation of energy policy (Vinois 2017: 40). Paradoxically for Germany, even though the phase-out decision was taken in the context of environmental safety and sustainability, its immediate effect was an increase of GHG emissions. This is because the void that the sudden phase out of nuclear energy left for the country’s electricity generation, Germany had to increase the share of conventional hard coal and lignite (see Figure 3.6.). More significantly though, the capacity of renewables has been more than doubled since the Energiewende was decided.

Figure 3.6.: Power Generation from different resources in Germany in TWh Source: AG Energiebilanzen

Germany’s vast increase of renewable energy sources after the decision to phase out nuclear energy has put stress on the German grid and the connected grids of CEE member states

leading to black outs and reduced interconnection (discussed in Chapter 2.2.). Furthermore, Germany’s unilateral nuclear phase out has been used as an argument by other member states expressing their preference for national energy policy (Szulecki/ Westphal 2018: 191). This illustrates how Germany’s unilateralism has not only hindered policy integration, but actually reversed earlier integrative steps. Speaking with the energy trilemma, it could be argued that the focus of German policy on a European scale has been on the sustainability dimension, rather than on supply security or energy equity. Westphal (2019) attributes Germany’s disregard for supply security questions to the traditional market-led approach in energy policy. In Germany the role of the state has been restricted to oversight and guaranteeing a stable market framework. Therefore, energy security in the sense of security of supply is primarily seen as a responsibility of market forces like private energy companies (Westphal 2019: 170). Against this background, it might surprise that Germany was the last EU member state to create an independent energy regulator and unbundle its distribution system in accordance with the TEP. The reason for this can be seen in traditional interpretation of stable market conditions by the BMWi. Until Germany fully implemented the TEP, the BMWi ensured stable market conditions through regional monopolies in which regional energy companies are vertically integrated and the distribution networks are not unbundled (Fischer 2016b: 321). Compliance with the TEP meant that the BMWi had to succeed competencies to the Bundesnetzagentur (Federal Network Agency), which subsequently became another important federal agency in the field of energy policy in Germany (Sack 2018: 96). Another case of Germany opposition against energy policy integration could be observed in the process towards the development of a constitution for the EU, which eventually resulted in the Treaty of Lisbon. Germany made it very clear that the rights of member states to determine their own energy mix should not be touched and its insistence can be seen as one of the main reasons why the energy chapter in the TFEU had to be watered down (Duffield/ Westphal 2011: 176). The initial reluctance of Germany to implement the TEP and allow the EC to interfere with energy mix once more exemplifies Germany’s less integrative position on energy policy and sheds light on the underlying actors in energy policy making. Going back to multilateralism as a concept in energy security, it could be argued that Germany’s implementation of the TEP terminated the German approach of primarily ensuring energy security by bilateral means. The duality of Germany’s role in the EU in energy related matters reflects the domestic policy making process between the two ministries that are primarily in

charge of energy political decisions: BMWi and the Federal Ministry for Environment (BMU). As much as the BMWi has refused to succeed competencies to the supranational level in the energy policy field, for climate policy on the other hand, Germany has pushed for European policy integration because it would legitimise its own national agenda, which is a competency of the BMU (Fischer 2016: 324). This would offer a different explanation for Germany’s support of action towards the sustainability dimension of the energy trilemma and its disregard for the security of supply dimension. Because of this, on the supranational level Germany has only been able to decisively formulate its priorities and shape European energy policy, when the Federal Chancellery took executive action (Fischer 2017: 363). Whenever this was not the case, the BMWi opposed many EU initiatives, while the BMU saw EU initiatives as a way to legitimise its agenda. Angela Merkel in turn appears to favour the position of the BMU. Not only has Merkel been the Federal Minister for Environment leading the BMU herself before becoming Chancellor, her policy entrepreneurship for international and European climate policy has earned her the nick name Klimakanzlerin [climate chancellor] in Germany. Another aspect that underlines the argument that Germany’s divided stance on the European integration of its energy and climate policies is the result of conflicting approaches of the BMU and BMWi is that both ministries are traditionally in the hands of different parties within the government coalition. In Merkel’s first term (2005-2009) the BMWi (at that time Federal Ministry for Economic Affairs and Technology) was assigned to the Bavarian CSU (Christian Social Union), while the BMU was assigned to the SPD. In Merkel’s second term (2009-2013) the BMWi was in the hands of the FDP and the BMU belonged to the CDU. During these years the BMU has pushed for integration in climate policy while the BMWi slowed down integration in energy policy (Fischer 2016: 328). At the beginning of Merkel’s third term, the competencies of the BMWi in energy policy were extended and the title of the ministry subsequently changed to the its current form specifically incorporating energy as part of the BMWi’s competencies. Making ‘energy’ a part of the BMWi’s competencies rather than creating an energy ministry arguably underscores the German commercial-led approach to energy security in a very explicit fashion. In this third coalition (2013-2017), the second “grand coalition” of SPD and CDU/CSU after 2005-2009, the BMWi and BMU were put into the hands of the same party, namely the SPD. The new political coherence and distribution of competencies in the institutional framework of energy policy-making in Germany resulted in a more coordinated approach towards EU energy policy integration. In 2014, the BMWi agreed to reform the EEG, which had been criticised for years by the EC for competition distortion

because it gave the guaranteed feed-in tariffs for renewable energy gave German companies an unfair advantage (Fischer 2017: 336). During the second Merkel cabinet, the FDP led BMWi blocked the so-called ‘back-loading’ of EU emission trading certificates.5 After the reform of BMWi competencies and the party coherence in both the BMWi and the BMU, Germany’s position in the European Council changed immediately and allowed the back-loading of 900 billion ETS certificates (Idem: 337). In 2017, Germany agreed to the long-standing demand of the EC to liberalise its electricity market and further reform the EEG by removing the guaranteed feed-in tariffs of its EEG for an auction based, market liberal model. Additionally, the 2017 EEG reform considered the loop flow problem and thus contained a clause that new renewable capacities can only be added at the same pace as the grid develops (Kuittinen/ Velte 2018: 7). However, the new coherence in Germany’s institutional and political energy policy making should not be overstated. There is reason to doubt that Germany will adopt a decisively pro-integrative stance in energy policy. As Duffield/Westphal (2011) explain, the intricate relationship between the large German energy companies, specifically on the gas and electricity markets, and the BMWi have proven to be influential enough to successfully oppose EU market liberalisation policies in order to retain their vertically integrated structure. The traditional German approach of leaving energy supply security to commercial actors meant that leading government officials and agencies perceived these clearly self-serving influences from the energy industry to be serving Germany’s national interest (Duffield/ Westphal 2011: 182). Looking at the consistent influence of societal interest groups on German energy policy (see Chapter 4.4.3.) and the current development of increasing public protest against fossil fuels and for climate protection, another aspect of energy policy making surfaces. Through energy policy the federal government can address the interests of both industrial, as well as civil interest groups. This is particularly apparent considering the different roles the BMWi and the BMU have played within an EU context. Wide-ranging decision-making competencies in the field of energy policy are an effective means to balance pressure from the industrial and civil sides. One could argue that Germany, or indeed any actor trying to balance two strongly opposing interests on their energy policy, would not have an interest in allowing too much supranational

5 ‘Back-loading’ means the reduction of available ETS certificates in order to react to a surplus of ETS. Since the financial crisis, the surplus of ETS certificates increased drastically. Without the back-loading reform, there would have been a 40% surplus of ETS certificates. (EC 2019g) 78

involvement into its energy policy. By maintaining an allocation of competencies in the field of energy policy on the national level, Germany is able to quickly respond to either of the two large interest groups, should the rising pressure necessitate it. Through the duality of German energy policy and climate policy in Brussels, the federal government can react to pressure from environmental interest groups through the BMU and at the same time protect the interests of its energy industry through the BMWi. This limbo between the multilaterally approached environmental sustainability dimension and the unilaterally handled security of supply dimension is set to become an even greater task in the process to realise the Energiewende. There is a wide agreement that Germany’s high level of energy supply security in the context of Russian natural gas stems from the approach to let commercial actors take the lead in German-Russian energy relations. In this sense, protecting the interests of the energy companies is in the interest of energy security in Germany. Considering this, the German government and the BMWi in particular, it is unlikely that Germany is going to become strong advocate for European energy policy integration in the future.

3.6. Conclusion

The sub-question approached in this chapter has been “How has EC energy policy been influenced by the threat of a Russian supply disruption of natural gas and which policy tools and strategies have been developed to reduce the EU’s vulnerability?” An examination of the EU’s energy policy in the integrative process has shown that steps towards coordinating European energy policies have primarily occurred following the Russian-Ukrainian gas disputes, which left EU member states, particularly in the East, without gas supplies. These ‘windows of opportunity’ have been utilised by the EC and CEE member states alike to push for a deeper integrated energy policy and moving concerns over Russian natural gas import dependency higher up on the agenda. This has allowed the EC to gain more competences in the field of energy policy. However, while the CEE and Baltic member states have applied an external focus aiming at strengthening the de-facto energy solidarity in the EU, the EC and Western European member states have favoured a market-led and demand-centred approach. The Energy Union proposal and PCIs reveal the strategy of the EC for combating the vulnerabilities arising from Russian import dependency. The Energy Union policy itself has one externally focussed dimension and four dimensions with more of an internal focus. By seeking to diversify import routes to enable imports from more suppliers, as well as by

moderating overall demand through increased efficiency and renewables, and strengthening the internal market for energy, the EC wants to improve EU’s position vis-á-vis Russia. In terms of tools at the disposal of the EC, regulating market access and ensuring non-discriminatory competition are the most far-reaching. Here, the TEP and the ex-ante IGA checks are especially important. Due to the limitation of the EC’s competencies in the field of energy, the EC has to make use of its wider competencies in other fields, like the market, competition, infrastructure and environment. By explicitly linking the internal market and environmental sustainability to energy security, the EC has brought energy security questions into a domain it is a stronger actor in. The allocation of funds from the EFSI for infrastructure labelled as PCIs serve as an incentive for member states and energy companies to work towards the EC’s energy strategy. In the sub-chapter on the PCIs the complementarity of diversification and market-liberalism has been demonstrated. A broad stream of literature has assessed the securitisation of energy policy in the EU and in CEE member states in connection with Russian import dependency and supply disruptions (see for example Szulecki/ Westphal 2018, Heinrich 2018, Judge/ Maltby 2017). The argument brought forward in securitisation theory is that an issue is successfully securitised when its location in a security context enables actors to apply extraordinary means, that would not be acceptable under normal circumstances (Buzan et al. 1998: 171). Market liberalisation would usually not constitute extraordinary means and in fact is often said to de- politicise and de-securitise commercial relations as the economic realm is decoupled from the political. However, Kustova (2018) makes a particularly interesting point by arguing that market liberalisation and the rules-based market organisation too can constitute a securitisation once they “come into conflict with the established modes of interactions regarding resource exchange between states” (2018: 217). Considering this, it can be said that the EC’s push to restructure the energy market and its commercial relationship with Russia in energy trade can be taken as evidence for a securitisation of energy policy. This is also where the effectiveness of the EC’s policy tools lies. Because Gazprom’s position on the European market is expected to remain dominant and because diversification of suppliers is a medium-term prospect at best due to infrastructure development, the EC acts on its internal market competencies to confine Gazprom’s ability to abuse its dominant position. Germany has been a highly ambivalent influence in the process of European integration in the field of energy policy. By pushing for European integration in climate policy and hindering it in the domain of the energy market, Germany has consistently acted rather opportunistically. It is questionable whether Germany can be expected to be an active supporter working towards a common European energy policy.

With its priorities set on realising the Energiewende, which it has only been able to partially Europeanise, Germany is unlikely going to support Brussels in playing a bigger role in its national energy policy. Germany has been criticised by its European partners, its two neighbours Poland and France among them, for unilaterally phasing out nuclear in an uncoordinated fashion and has adamantly defended the decision. To some extent, not being able to deliver on this would mean losing face. Both the assessment of the development of EC energy policy as well as Germany’s role in energy policy integration suggest that energy policy interests are highly complex. There exists a constant exchange between commercial interests and sustainability issues and the formulation of policies is limited by institutional factors like actor competencies and political factors like coalition make-ups. The sub-chapter on the German position within European energy policy integration has shown that German interests in the field of energy policy are multi-faceted and not unitary, but instead influenced by a wider range of different political and social factors. Comparing Germany’s energy and climate interests within the EU to those of other member states (see Chapter 2), it is noticeable that the German position seems to exhibit a stronger influence of domestic social forces rather than external relations. For example, Germany has a higher import dependency than most of the member states considered in chapter 2, the only exceptions are Slovakia and Lithuania, but unlike any of them pursues a commercial approach with very limited state-involvement. This facilitates the notion that the relative weight of interests of commercial actors and the economic sphere in Germany plays a more decisive role than it does elsewhere. Furthermore, the strong independence of individual federal ministries on the supranational scale highlight the importance of considering different levels Germany’s institutional architecture, including sub-state actors. Both of the relevant ministries, the BMWi and the BMU, have acted as advocates for different interest groups: The BMWi has safeguarded the interests of German energy companies and the BMU has been a voice for German environmentalists. The multi-layered interests that shape the German position and their specific historical roots make the benefits of a sole comparison of the German case to other EU member states questionable. As will be explained in Chapter 4, the persistence of Germany’s commercial approach to energy security can only be understood against the background of the history of German-Russian relations. Here, a path dependent trajectory as a causal explanation for German-Russian natural gas relations could be inferred. Path dependence describes a social process in which early steps in an interaction into a certain direction induce further steps into that same direction, because the relative benefits to stay on that path increase with every step

(Pierson 2000: 252). In order to more thoroughly assess the trajectory of German-Russian gas relations and a possible path dependency, an in-depth qualitative assessment is warranted. Gerring (2004) argues that under circumstances which drastically limit the number of available N, like the specific historic and cultural conditions that impacted the formation of German- Russian relations, a single-N case study holds more explanatory power than a cross-case comparison (Gerring 2004: 351). This means that rather than only focussing on the apparent similarities and differences between Germany and other member states and their energy situations and state-level approaches towards Russian natural gas, an in-depth analysis of different actors and interest groups, federal and sub-state, commercial and political, social and institutional, in German-Russian natural gas relations provides for a more elaborate explanatory framework. For cases with an anticipated path dependency, the case-study method of process tracing holds particular benefits because interaction terms are difficult or impossible to deduct without intimate knowledge of a critical juncture (Bennett/ Elman 2006: 265). For this reason, in the following chapter German-Russian natural gas relations will be explored in an intensive explanatory case study that traces the historic development of natural gas relations between Berlin and Moscow.

CHAPTER 4: Actors in the nexus of natural gas between Germany and Russia

This chapter will discuss the actors that shape German-Russian natural gas relations. It will be assessed, how commercial interests and political interests have influenced the genesis of German-Russian natural gas relations and how Germany’s approach in the matter has evolved. The characteristics of the German natural gas market and the most important federal and commercial actors will be considered against the background of the state-society-complex concept. This way the interactions between the public and private sector will be highlighted and their mutually influencing relationship. Important actors in German-Russian natural gas relations and their connections will be considered using the theoretical concept of the policy- planning network. German-Russian economic relations will be analysed under the prism of interdependence theory by highlighting the sectoral extent of commercial trade and overall relative weight for the respective economies. The underlying sub-question of this chapter are “Who are the involved actors in German-Russian energy relations and how have commercial and political interests been linked in Germany?” and “Are Germany and Russia interdependent on natural gas?” Lastly, assessing the relationship between Gazprom and the Russian state the case will be made for an analytical framework that perceived of Gazprom and the Russian state as one authoritarian type state-society complex.

4.1. The origins of German-Russian natural gas relations and Ostpolitik

This sub-chapter will analyse the origins of German-Russian cooperation on natural gas with an emphasis on the interactions between the political and private spheres. By revisiting the early stages of natural gas trade and their political implications it will be demonstrated how the commercial and political logics of the exchange have been linked and how this improved bilateral relations. The term Ostpolitik describes the new Eastern Policy of the FRG under Chancellor Willy Brandt to seek détente with the Eastern bloc through a rapprochement led by commercial exchange. Western Germany and the Soviet Union started approaching the topic of Soviet natural gas deliveries to Western Germany in the late 1960s. At a time when German-Soviet relations were strained and mostly shaped by mutual mistrust, a change in the German Chancellery marked a new chance for Soviet-German cooperation. Willy Brandt was elected chancellor of the Federal Republic of Germany in 1969 after having served as Foreign Minister and Vice- 83

Chancellor to Kurt Georg Kiesinger. Because Brandt and Kiesinger disagreed about the political approach towards the Soviet Union, Brandt chose to focus his détente-related efforts on the economic exchange, explicitly avoiding a linkage to political issues (Högselius 2013: 106). In the earliest stages of German-Soviet negotiations Brandt, then as Foreign Minister, raised the possibility of a German-Soviet natural gas pipeline as a point of departure for a revival of bilateral relations. Notably, he did so stressing the need for “all-European cooperation in large infrastructural projects” (Idem: 108). This can be seen as a point of departure for Brandt’s Ostpolitik, which aimed at reconciling relations with Eastern European countries. Against the background of Chancellor Kiesinger’s mistrust of the Soviets and Foreign Minister Brandt’s efforts to intensify efforts to establish good relations, the first issue of the German side in the negotiations becomes clear. An initial main question in the early negotiations for the German side was to determine who would be entering into official negotiations. Wanting to avoid the impression that natural gas deliveries would be coupled with foreign policy, the federal government did not send a high-level representative to participate in the negotiations (Idem: 109). Within Germany the federal government and the state government of Bavaria also favoured different gas companies to be leading the principal negotiations. Arguing that Bavaria would be the main market for Soviet gas imports, the Bavarian government wanted local Bayerngas and an envoy of the state government to lead negotiations, while the federal government favoured Ruhrgas as the largest player on the German market and owner and operator of much of the German gas infrastructure (Idem: 111). Being unable to settle the disagreement between the Bavarian side and Ruhrgas, a delegation partly led by Ruhrgas chairman Scheldberger and Bavarian minister for economy Schedl started the official negotiations with the Soviet side in June 1969 (Idem: 114). As has been noted by Bros et al. (2017), Bavaria initiated talks about Soviet natural gas imports to reduce its dependence on Northern German coal (2017: 12). The Northern German side in turn sought to explore Soviet natural gas imports as a means to reduce its dependence on and the dominance of Dutch natural gas on the market (Högselius 2013: 107). Another question for the German side was whether Soviet natural gas imports were deemed necessary at all. With indigenous gas production and imports from the neighbouring Netherlands, Soviet gas imports and a growing role of natural gas per se were seen as not necessary and possibly harmful to the local coal industry at first. The key point of contention during the negotiations was the price to be paid for Soviet gas at the German border. The argument brought forward by Ruhrgas was that the Soviets would have to meet the Dutch border price as a base for

negotiations and undercut it in order to compensate for a lack of flexibility of deliveries and the need for Ruhrgas to invest into underground storage facilities in order to harmonise fluctuating demand and inflexible supply volumes (Idem: 114-115). Interference of the German government was less constrained after Brandt’s election as chancellor. This became particularly visible when the natural gas expert of the Ministry for Economy expressed his dismay with lobbyists from Germany’s foreign-owned domestic gas producers who declared their opposition to Soviet gas imports, stating that the Ministry for Economy supported Soviet imports “for political reasons” (Idem: 123). As much as this might suggest a deep involvement of the political sphere in these negotiations, the German government only reluctantly participated in the official negotiations between the Soviet government and German gas companies Ruhrgas and Bayerngas by sending an observer. Esso, as one of the large foreign- owned producers of domestic gas in Germany, even lobbied the US government to put pressure on the German federal government to reject Soviet gas imports, although unsuccessfully (Idem: 124). The negotiations sparked interest from other Western-European states as well. Both France and Italy were seeking to import Soviet gas and a cooperation between Western- European states was seen as a way to increase security of supply. By negotiating for Soviet gas to be transported through Germany into France and possibly Italy, the European delegations sought to improve their bargaining position and made politically motivated supply cut-offs less likely (Idem: 127-128). The Italian negotiations were concluded in 1969 and a contract over the delivery of up to 6 bcm of Soviet natural gas annually transiting Austria in exchange for Italian steel pipes and compressor stations (Idem: 128). This pipe-for-gas deal between the Soviet Union and Italy, which resembled the deal between Austria and the Soviet Union, became a model for the German-Soviet contract. The German-Soviet gas deal was finally signed in February of 1970 in Essen, where Ruhrgas AG is headquartered, after less than nine months of negotiations. Political weight was added by the two attending representatives of the governments, Karl Schiller, the German Federal Minister for Economy, and Nikolai Patolichev, the Soviet minister of foreign trade (WDR 2005). The contracted volume between German Ruhrgas AG and Soviet Mingazprom was 3 bcm annually over 20 years. Additionally, the German and Soviet sides agreed that 1.2 billion D-Marks worth of steel pipes manufactured by Mannesmann and Thyssen in Düsseldorf would be used to construct the 2000km pipeline necessary for the deal (Bösch 2013). An earlier attempt to deliver German steel pipes to the Soviet Union failed after NATO decided to enforce an embargo on the Soviet Union in reaction to the Cuba crisis in 1962 (Schöllgen 2017).

Apart from the economic aspects of the deal, it was widely seen as the start of political cooperation between the Federal Republic of Germany (FRG) and the Soviet Union. As Högselius (2013) notes, it was no coincidence that the foreign ministers of the FRG and the Soviet Union, Egon Bahr and Andrei Gromyko, met for high-level diplomatic talks in Moscow at exactly the same time as the contract was signed in Essen. The two touched upon difficult foreign policy issues like the status of Germany’s post-war borders and the gas-for-pipes deal provided a new impetus to successfully conclude these talks on the highest diplomatic level (Högselius 2013: 130). What is particularly interesting in the context of this thesis is the discussion within Germany that followed the signing of the contract. Critics were concerned about growing dependence on Soviet gas imports and possible risk of a political supply disruption. The solution proposed by the federal ministry of economy was to develop a fully integrated gas network in (Western) Germany, something that was still lacking at the time. This way it would be possible to compensate the effects of a Soviet supply disruption to the South through Dutch imports and indigenously sourced gas from the North (Ibid.). One cannot help but notice the striking argumentative similarities between this proposal and the means aimed at increasing supply security in the Energy Union proposal. Another argument brought forward in modern day discussions about market integration and import dependence might as well be taken from the developments that occurred in 1970: Although Soviet gas did not physically enter the German market before 1973, the contracted volumes already had an impact on the Dutch border prices. The prospect of an alternative supplier on the market allowed Ruhrgas and Thyssengas to renegotiate the price paid at the Dutch-German border, which consequently reduced by 13,5%. This in turn gave Italian ENI the opportunity to renegotiate its Dutch import contract and achieve similarly favourable conditions (Idem: 131). This highlights the economic impact of the German-Soviet gas contract on the German and European gas market. The interwoven fabric of the economic deal and the political move by Brandt’s Social-Democrat-led governing coalition is in turn highlighted by statements of two of the government’s top ministers. At the signing ceremony of the contract, Federal minister for economy Schiller announced the start of “tight cooperation […] between the Federal Republic and the Soviet Union”, shortly before coming to an agreement with his Soviet counterpart that the deal signified a positive turn that would enable the solution of many political issues (Högselius 2013: 129). Federal foreign Minister Bahr’s attaché in turn stressed the security character of the gas-for-pipe deal to the Bundestag, arguing that the position of the Federal Republic as a transit country for other Western-European markets, which the Soviets

are interested in exploring, will act as an guarantee for the FRG’s security (Idem: 130). The Soviet side pursued foreign policy interests as well. After Soviet troops invaded Czechoslovakia, leading to a further deterioration of West-East relations, the Soviet leadership sought a new impetus to détente policy in Europe. The announcement of the gas-for-pipe deals with Austria and Italy in 1969 and the German-Soviet deal in the following year have to be seen in this context, as their timing was designed by Soviet leadership to further foreign policy goals (Vavilov/ Trofimov 2015a: 74). In fact, Vavilov/ Trofimov (2015a) argue that the importance of the political aspect of the deal for the Soviet side led to an unwillingness to calculate the de- facto economic risks and costs of the investment. The higher attributed political value over economic considerations is made abundantly clear by Soviet leader Leonid Breshnev himself, who has been quoted saying “the détente is more valuable for us than the cash value of the gas” (Idem: 75). The political rapprochement between the Soviet Union and the FRG in 1970 finally epitomised in the signing of the Treaty of Moscow in August 1970, in which both parties commit to non-violence and the permanent status of both the border between (East-)Germany and Poland and the border within Germany between the FRG and the German Democratic Republic (GDR). Additionally, with the treaty the German delegation handed over a letter declaring the intentions of the FRG to pursue German reunification under the conditions of “free self-determination of the German people whilst maintaining peace” (BPB 2015). This started a process called Wandel durch Annäherung [Change through rapprochement] that led to numerous inter-governmental agreements between the FRG and the Soviet Union during the tenures of Social-Democrat chancellors, that came to be known as Ostverträge [East treaties] (Schöllgen 2017/ BPB 2015). After Soviet natural gas started flowing to Germany in 1973, Ruhrgas and other German gas companies reacting to a surge of demand in Germany and down-stream markets in Europe, quickly increased import volumes of Soviet gas. The successful signing of the German-Soviet contract and the promising record of Austrian-Soviet cooperation sparked the interest of other Western countries in Europe. Due to the increasing popularity of natural gas as a resource and the political model of East-West rapprochement through gas deals, by 1973 five European countries had signed natural gas deals with the Soviet Union and six other (global) capitalist countries had taken up negotiations (Högselius 2013: 133). Over the first decade of Soviet gas deliveries to the FRG, import volumes were continuously increased. After years of competing in the cold war arms race with the US, the Soviet economy was strained and the country was suffering from embargoes on Western technology and in need of currency. Adding to the gas-

for-pipe and gas-for-technology contract the Soviet Union had with other European partners and Germany, the new German contract included a low-interest 1.2 billion D-Marks credit granted to the Soviet Union by a consortium of German banks (Bros et al. 2017: 13). Apart from the agreements to increase gas volumes signed in 1972, 1974 and 1979, an intergovernmental agreement called ‘Orenburg agreement’ signed in 1974 enabled the supply of German labour and know-how to develop Soviet gas fields and transport infrastructure (Gazprom 2013). The imported volumes of Soviet gas into Germany increased ten-fold over the span of the first ten years (Bros et al. 2017: 13, see Figure 4.1.).

Figure 4.1.: Development of Soviet natural gas exports to (Western) Germany until reunification as supplied volume in billion cubic metres (bcm) and share (%) of German natural gas imports. Source: International Energy Agency/ Kahlert 1988, retrieved from: Bros et al. (2017), p. 13.

Soviet natural gas exports 120 100 80 60 40 20 0 1973 1975 1980 1985 1990

Exports in bcm Figure 4.2.: Development of Soviet natural gas exports to Europe between 1973 and 1990 Note: “Exports to Europe” mean deliveries to European countries outside the Soviet Union. Source: Gazprom Export 2019b: Delivery statistics, online at: http://www.gazpromexport.ru/en/statistics/, accessed 13.05.2019, graph by author.

The increasing demand can in part be contributed to the oil price shocks of 1973 and 1979, which convinced politicians across the political spectrum in Germany to support a diversification of resources and import regions away from oil and the Middle East. This led to a surging popularity of natural gas as a resource (Gross 2016: 4). The enormous increase in demand in Germany and other export markets necessitated the development of new gas fields in the more remote parts of the Soviet Union (see Figure 4.2.). Because of the geographical challenges these undertakings posed, which included perma-frost ground, swamps and lacking transport infrastructure, Western engineering like the aforementioned Italian compressor stations and German steel pipes were indispensable (Högselius 2013: 134). This fostered cooperation between East and West as both sides had a strong interest in furthering gas exploration in order to meet the rising demand in the domestic Soviet market and the export markets in Europe. What emerged was a largely interdependent relationship at the time. German companies were so keen that a consortium of large companies, namely Deutsche Bank, Mannesmann, Siemens and Ruhrgas, approached the Chancellery about a new pipeline project to import more Soviet gas offering a 10 billion D-Marks credit to be granted to the Soviet Union for the project (Gross 2016: 5). Two important factors contributed to the German business community’s strong interest in increasing in new import deals with the Soviet Union. The German heavy industry was still more energy intensive than its Western European competitors, but increasingly successful on the global market, which meant that access to cheap resources was a priority. More relevant from the perspective of the Federal Government was that Germany was hit by a strong recession in the early 1980s. The new pipeline deal was significantly important to struggling producers of steel pipes and machinery tools who were dependent on Soviet exports and employed hundreds of thousands of workers (Gross 2016: 9). The development of economies-of-scale in the European gas market meant that European countries moved to closely integrate their gas markets. All of this can be seen as reasons why West Germany and other Europeans did not implement the US-demanded sanctions on the Soviet Union. Bros et al. (2017) point out that the conditions for gas trade to flourish between the Soviet Union and the West were ideal in the decade leading up to the end of the Cold War. Because political interests and economic interests overlapped on both sides, a pragmatic win- win approach towards Soviet gas imports to Germany was established. Furthermore, despite the fact that the capitalist West and the socialist East operated under two different economic systems, both were perfectly compatible for gas trade as the business model that was established

provided long-term security for importers and producers (2017: 14). The perceived stability of the authoritarian Soviet Union provided another reason for Soviet imports to be considered reliable. There was a broad consensus that intentional supply disruptions from the Soviet Union were unlikely because of their grave economic and reputational damages to the exporter and the inability to target individual customers. Interestingly though, the authoritarian Soviet regime also provided an assurance against unintended supply disruptions. When Norwegian gas supplies to the UK and continental Europe were disrupted in 1981 because of a strikes on Norwegian gas fields, Western media noted that this would not occur under the authoritarian conditions in the Soviet Union, thereby making natural gas supplies from the East more secure (Högselius 2013: 192). As Gross (2016) points out, the German government revised its energy programme in 1981 and promoted cheaper Soviet natural gas as a way to improve energy security because oil had become too expensive (Gross 2016: 8). Reliable supplies and stable conditions resulted in growingly integrated gas infrastructure in Europe and low-risk investments in the upstream exploration of gas fields. But there were problems, too. The pressure to overtake the US in terms of gas production and to solidify the position of the Soviet Union on the European market resulted in rushed construction of the Yamal pipeline, which was inaugurated in 1983 (Högselius 2013: 197). This new pipeline would deliver up to 40bcm from Siberia to Central Europe transiting Poland, leading to a geographical shift away from Ukraine (Ibid.). However, supply security seriously suffered from the extreme rush during construction, resulting in malfunctions and multiple explosions averaging some 28 supply interruptions a year. The worst explosion occurred in 1989 and caused more than 600 casualties (Idem: 198). At the same time the dawning German reunification and the end of the Cold War significantly changed to the logic that had been governing German-Soviet gas trade until then. This will be explored in the following sub- chapter. This sub-chapter has analysed the origins of German-Russian natural gas relations. It has been shown that the development of natural gas trade between the FRG and the Soviet Union has greatly benefitted from convergent political and economic factors. Natural gas trade has been a driver of the Ostpolitik of Willy Brandt and the subsequent rapprochement of the FRG with the East. This meant that despite of the lead of commercial actors in energy policy, the political sphere was able to exert a great deal of influence. It can be said that the German pragmatism towards Soviet and consequently Russian natural gas imports is historically rooted. Unlike the Eastern European perception of natural gas imports from the East as a factor that

undermines security (see Chapter 2), Germany actually associated it with the opposite. The strategic importance of the German market for Soviet exports on a European scale provided a security guarantee for Germany. This guarantee is not merely one of supply security, but in fact one of realist security. The duality of the Treaty of Moscow assuring non-violence and the first gas-for-pipes deal between Ruhrgas and the Soviet Union in 1970 stand as an exemplification of this. Considering this it can be said that bilateral relations greatly benefitted from natural gas trade as it opened new channels for political exchange. Willy Brandt’s disagreement with then- Chancellor Kiesinger in the late 1960s, forced him to explore economic relations as a means to pursue his political agenda of rapprochement, which implicitly provided a linkage between political and commercial relations. The commercial relations had a positive effect on the political perception of the Soviet Union in the West and reduced mistrust between the blocs. The traditional restraint of the German government in regards to natural gas negotiations that persists to this day, has its roots in the internal disagreements between different political entities.

4.2. German-Russian natural gas relations after the Cold War

The end of the Cold War meant a drastic change to the geopolitical landscape and the imperatives of trade between the West and the East. After the breaking up of the Soviet Union, the Russian Federation as the successor had lost control over much of the former Soviet territory. For gas trade this meant that Russia was, unlike the Soviet Union, not in complete administrative control over all parts of the value chain. Gas fields in Central Asia and transit routes through Eastern Europe were now located in different political entities, reducing Moscow’s leverage considerably. What is more, without centralised coordination these new political entities were now able to develop their own export strategies (Smeenk 2010: 127). The case of Ruhrgas is a good example here. Where Ruhrgas had import contracts with the Soviet Union and Czechoslovakia before, it now faced a situation where these two countries did not exist anymore and its supply routes now passed through five new countries: Russia, Belarus, Ukraine, the Czech Republic and Slovakia (Högselius 2013: 203). What has to be noted is that Moscow’s energy policy did not stay idle as more and more former Soviet republics declared their independence. Lithuania for example was swiftly cut off from receiving natural gas and oil after declaring its independence. Estonia and Ukraine experienced Moscow’s use of the ‘energy weapon’ in a similar way. Bösch (2013) argues that this showed how Moscow’s

pipelines, which were named ‘Friendship’ and ‘Brotherhood’ turned into a powerful instrument at Moscow’s disposal, or ‘arms of a kraken’ (Bösch 2013). The former Soviet gas export monopoly Mingazprom turned into Gazprom in 1989. A fully-owned subsidiary, Gazprom Export, was established as a monopoly for gas exports. Unlike Mingazprom, which was a state ministry rather than a company, Gazprom’s strategy had to be much more focussed on running commercially viable export operations coping with the new realities of a capitalist market imperative (Vavilov/ Trofimov 2015a: 76). Gazprom also had to face the challenge that it had lost a third of Mingazprom’s pipeline capacity and a quarter of the compressor capacity after the disintegration of the Soviet Union (Smeenk 2010: 134). In order to gain a stronger foothold in the European market and the domestic German market, Gazprom turned to its long-standing partner in Germany, Ruhrgas, and proposed the formation of a joint-venture. Even though Ruhrgas rejected the offer and increasingly found itself in competition with Gazprom for domestic market shares, the traditionally good relations in the import business between Ruhrgas and Gazprom continued (Vavilov/ Trofimov 2015a: 76). The special status of relations between Ruhrgas and Gazprom is most prominently expressed in Ruhrgas’ seat on Gazprom’s board of directors, which will be elaborated further down in this chapter. Gazprom’s eagerness to gain a stronger presence in the German domestic market led to the formation of a joint venture with another major player on the German gas market. The subsidiary for oil and gas of BASF, Wintershall, accepted the offer that was made to Ruhrgas earlier and entered into two joint ventures with Gazprom following an agreement in 1990. The first joint venture is WIEH (Wintershall Erdgas Handelshaus), which was designed to handle and facilitate cross-border trade. Gazprom and Wintershall both held 50% of the shares of WIEH (Idem: 77). Three years later, Wintershall and Gazprom formed Wingas, another joint venture, in which Gazprom initially held 35% of the shares and Wintershall the remaining 65% (Wingas 2019a). Wingas was designed to handle marketing and distribution and subsequently the construction of downstream gas infrastructure in Germany (Vavilov/ Trofimov 2015a: 77). Because of the reunification and the two separated gas systems there was a need for infrastructure development. This brought about vulnerabilities for Eastern Germany, which remained unconnected to the pipeline network in the West until 1993. The monopolist gas company in the former GDR was Verbundnetz Gas (VNG), which was used to paying a subsidised price for Soviet natural gas. After reunification VNG refused to accept the higher, non-subsidised prices insisted on by Gazprom and Wingas (Högselius 2013: 206). Having been the principal supplier to VNG, Gazprom had a keen interest in acquiring VNG when it was

privatised in 1991 but Ruhrgas managed to get the controlling share of VNG, for which Gazprom’s bid was declined due to competition regulations (Vavilov/ Trofimov 2015a: 80). Gazprom exploited VNG’s particular vulnerability owing to the East’s isolation and threatened to cut off supplies to VNG the same year. Being in a position of full dependency and high vulnerability, VGN finally agreed to sign a short-term supply contract with Gazprom over a year, in which both Gazprom and Wingas exploited their leverage over VNG in price negotiations. Astonishingly, this episode did not change the German perception of Gazprom as a reliable partner, even though Gazprom clearly attempted to install a pricing regime on one of its competitors (Bros et al. 2017: 20). Because of this exposure of the East’s vulnerability, this leverage would only last one year as both Ruhrgas and Wingas swiftly constructed pipelines connecting the East to alternative suppliers (Högselius 2013: 206). Between 1993 and 1999 Wingas commissioned three pipelines and a major gas storage facility, including the JAGAL pipeline, which provides access to the Belarus and Poland transiting Yamal-Europe pipeline (Wingas 2019a). This provided Gazprom with direct access to the German market as of 1993 (Gazprom 2013). Wingas quickly became a major force on the German gas market as it owned strategically important infrastructure providing access to the Yamal-Europe pipeline and the largest underground storage facility in Western Europe (Vavilov/ Trofimov 2015a: 77). Gazprom changed its shareholder structure in 1998 and became an open joint-stock company. This allowed Ruhrgas to acquire a minority share of 2,5% which it later increased (Smeenk 2010: 133). As much as the 16 year tenure of the Christian-Democrat Helmut Kohl as chancellor was not characterised by political moves that explicitly benefited German-Russian natural gas relations the way his predecessors did, looking at the story of Wingas after reunification, it could be argued that this inactivity from the political sphere constituted a political move. This argument seems particularly interesting, against the background that Kohl’s political career has been supported by BASF (Gamelin 2005), which effectively owned most of Wingas’s shares at the time and is located in Kohl’s native state of Rhineland-Palatine. With the election of Social-Democrat Gerhard Schröder as Chancellor in 1998, German- Russian gas relations experienced a new impetus. Schröder, who had been the Prime Minister of Lower Saxony before becoming Chancellor, had close ties to the energy industry. As Gamelin (2005) observed, Schröder’s connections to energy corporations date back to 1990, when his coalition of Social-Democrats and Greens in Lower Saxony threatened to phase out nuclear power. He was then quickly approached by top executives of the energy industry, who

influenced Schröder to appease his coalition partner into accepting more moderate demands for nuclear energy. By the time Schröder entered the Chancellery in Berlin, his connections to the energy industry were so close that he made Werner Müller, the former CEO of Veba6, Federal Minister of Economy. It was also Müller who in 2003 signed off on the merger of E.ON, the largest electricity provider, and Ruhrgas creating “E.ON/Ruhrgas” despite of a wide range of criticism and concerns from the political opposition, the Green coalition partner, the Federal Cartel Office, the consumer protection agency, and other market competitors (Gamelin 2005). The Federal Cartel Office ordered E.ON/Ruhrgas to sell its VNG shares, which it did to the benefit of RWE, in order to avoid downstream competition with Gazprom (Vavilov/ Trofimov 2015a: 80). This shows the oligopolistic practises between Gazprom and E.ON/Ruhrgas on the German market. On numerous occasions in the late 1990s and early 2000s, the German-Russian gas cooperation became visible in the cultural space as well. Gazprom and Wintershall hosted six art exhibitions in Germany and Russia displaying cultural ties between the two countries. Gazprom and VNG sponsored a Russian music ensemble in Berlin of the occasion of the 60th anniversary of the end of World War II and a Russian art exhibition in Leipzig. Ruhrgas and Gazprom collaborated in an environmental project and Ruhrgas sponsored the restoration of the Amber Room of the tsar residence in Saint Petersburg on the occasion of the city’s 300th anniversary (Gazprom 2013). Gamelin (2005) points out the prominent role of Burckhard Bergmann, the CEO of Ruhrgas, who was not just a personal friend of Schröder, but also a member of Gazprom’s board of directors (Gamelin 2005). The interconnected structure of German-Russian natural gas relations deepened during these times. Gazprom was able to strengthen its position in the German downstream market through joint ventures and acquisitions and the German gas companies increasingly acquired shares in the Russian upstream production (Bros et al. 2017: 19). Politically, interdependence with Russia on natural gas imports was still seen positively in Germany and much of Europe. The European idea was that through establishing institutions and fora to foster political and economic exchange with Russia, it would gradually adopt European market rules and values (Idem: 15). These hopes were frustrated when the Russian

6 Veba and Viag were two large energy companies in Germany that constructed nuclear plants and operated electricity grids. They eventually turned into E.ON which went on to acquire Ruhrgas, the long-standing partner of Gazprom in Germany (Gamelin 2005). 94

state, under the new leadership of President Putin, increased its share in Gazprom to 51%, making it the deciding shareholder. (Vavilov/ Trofimov 2015a: 83). As a result, the European (and German) hope to create a liberalised energy market spanning from Lisbon to Vladivostok increasingly clashed with Russia’s foreign and energy policy (Bros et al. 2017: 15). German-Russian bilateral relations on the other hand flourished in the early 2000s. During Schröder’s first tenure, various German-Russian institutions like the Petersburger Dialog (see Chapter 4.4.3.) were founded to foster political, cultural and economic exchange. Especially relevant are the regularly held fora for government consultations between Russia and Germany. It was also during this tenure in September 2001 that a Russian president, Vladimir Putin, addressed the German Bundestag for the first time ever. In his speech, which he mostly held in German, Putin praised the deep historical German-Russian ties and expressed his firm belief that Europe would only be able to realise its ambition to become an independent and powerful centre for global politics by uniting its capabilities with “Russian human, territorial and natural resources and the economic, cultural and defence potential of Russia” (Putin 2001, author’s translation). Schröder’s administration was also the first EU government to ease visa requirements for Russian’s traveling to the EU. Furthermore, as Adomeit et al. (2004) remark, Schröder has gained a reputation for sacrificing Germany’s moral-led foreign policy stances for the benefit of closer commercial relations to Russia (Adomeit et al. 2004: 2). An example for this that has been widely criticised in German and European discourse is the Chancellor’s non-criticism and “silent diplomacy” towards Russia in the Chechnya conflict, where he called for a “differentiated evaluation” (Erlanger 2001). One statement by Chancellor Schröder regarding Putin even gained a questionable cult-like status and has remained one of the most recognisable Schröder quotes in Germany to this day: In a TV interview in 2004, Schröder referred to Putin as a “flawless democrat” [Original: lupenreiner Demokrat] (Hamburger Abendblatt 2004). During the Schröder years, Germany emerged as Russia’s most important political and economic partner in the EU and Russia returned that favour on the international stage. An example for an accommodating political move from Russia that favours Germany is the Russian support for the German campaign to become a permanent member of the UN security council and Russia’s favourable treatment for Bundeswehr forces to obtain permission to transit Russian airspace and territory (Adomeit et al. 2004: 3). The good German-Russian relations under Schröder finally led to the signing of the agreement to construct the (first) Nord Stream pipeline. Schröder started supporting the project in 2003 and after gas disputes between Russian and Belarus and the Orange Revolution in

Ukraine in 2004, there was a general consensus amongst German and many European politicians that a direct pipeline between Central European markets and Russia is warranted (Högselius 2013: 215). The initial “basic agreement” established the “North European Gas Pipeline Co.” (NEGP) as a joint venture, in which Gazprom held 51% and E.ON/Ruhrgas and BASF (Wintershall) held equal parts of the remaining shares. The name later changed to “Nord Stream AG” in 2007 and the German companies’ shares were reduced to 15,5% each to benefit Dutch N.V. Nederlandse Gasunie and French Gaz de France (now Engie), who both acquired 9% (Nord Stream AG 2019). Schröder’s personal role in German-Russian gas relations was impressively highlighted by his appointment as manager of the board of directors of NGEP just weeks after he lost the 2005 election to Angela Merkel of the opposition leader Christian- Democratic Union (CDU). His very quick transition from the Chancellery to the Russian-led consortium has been heavily criticised, but as Schöllgen (2017) points out, is unlikely to have been planned, because when NGEP was announced, Schröder was running for a third term as Chancellor and therefore could not have had intentions to be working anywhere else than the Chancellery in Berlin (Schöllgen 2017).

This sub-chapter has reviewed the development of German-Russian natural gas relations after the end of the Cold War. It is clearly visible that Gazprom and the German gas companies eagerly pursued a stronger position in the respective downstream and upstream markets after the fall of the iron curtain. Through a joint ventures and acquisitions Gazprom was able to become a player on the domestic market in Germany. For German companies the engagement with Gazprom meant to have shares of the production segments, but also more competition on the domestic market. It can be said that Germany and Russia are very closely linked through a vast network of business ties in natural gas that result in an oligopolistic business relationship that encompasses all steps from production and transmission to distribution. Under Vladimir Putin the Russian state became the deciding shareholder of Gazprom, closely linking the business ventures of the company to the energy policy goals of the state. This characterises the Russian authoritarian type state-society complex. There are numerous indicators that the political sphere in Germany had a strong interest in deeper German-Russian natural gas relations. Lobbying efforts like the cultural events organised by German and Russian gas companies, some of which were attended by Schröder and Putin, suggest that the German- Russian gas community took a coordinated approach to exert political influence. With the end of the Cold War gas trade between Germany and Russia no longer had the security political

implications and therefore followed a stronger commercial logic. This commercial logic however was still imbedded in the bilateralism in the tradition of Ostpolitik. Despite of the close ties between Gazprom and the Kremlin and the support from the German political sphere, it can be said that the gas companies have been the driving force behind German-Russian natural gas relations. This being said, the closer political relations under Chancellor Schröder and his personal ties to the energy companies will undoubtedly have been to the benefit of both German and Russian gas companies seeking deeper commercial partnership. The Nord Stream project, which received personal support from Schröder stands as a symbol for this. This sequence shows that bilateralism, rather than seeking to coordinate using a multilateral European strategy, has been the principal concept behind Germany’s natural gas strategy towards Russian natural gas.

4.3. Political Pragmatism in the Merkel era

Angela Merkel was the first East-German to be elected Chancellor7, which is why she was expected to be a more critical voice in regard to Russia. To the surprise of many though, the attitude of the German government, consisting of Merkel’s CDU, the CDU’s Bavarian sister party CSU (Christian-Social Union) and the Social-Democratic SPD, towards Russia did not change significantly in the first years of Merkel’s leadership. As much as Merkel’s tenure marks a clear end to social-democratic Ostpolitik in Germany, German-Russian relations were not a priority for Merkel (Meister 2013: 29). In regard to natural gas trade between the two countries, Merkel’s administration lacked both the personal relationship and explicit ties to the industry Putin and Schröder shared, as well as the political motive of rapprochement through economic exchange that had been dominant during the Cold War. A display of this can be seen in Merkel’s rejection of a natural gas deal that was personally proposed to her by Putin in 2006. The proposal included a 25-45 bcm increase of Russian natural gas imports delivered by Gazprom to Germany and was supposed to be a base for a German-Russian energy pact. Merkel’s rejection of the offer followed the formation of an energy alliance between Germany and France (Vavlilov/Trofimov 2015: 93). On the one hand, the proposal highlights the implementation of Putin’s energy strategy in Gazprom’s activities abroad, on the other hand, Merkel’s reaction to

7 Angela Merkel was born in Hamburg but lived in the German Democratic Republic growing up. 97

demonstrate European unity shows the increasingly critical and geopolitically charged perception of Russian natural Gas in Europe. This is a first indicator for the end of the dominant German-Russian bilateralism on natural gas. Despite of this, while Gazprom was unable to make major acquisitions in most of Europe between 2003 and 2008 due to political resistance and the first EU Energy Market Packages, Germany was the only exception. In 2006 Gazprom was able to increase its stake in Wingas from 35% to 50% through an asset-swap arrangement offering BASF a 25% share in the Yuzhno-Russkoye gas field. The deal allowed Gazprom to strengthen its position within the German distribution system and its overall presence on the German gas market (Gazprom 2013). In a similar fashion, Gazprom planned to offer 25% of the gas field to E.ON/Ruhrgas in exchange for some of E.ON’s power capacities in Germany and other European countries. But after unsuccessfully negotiating over E.ON/Ruhrgas’ side of the deal, Gazprom had to resort to a scheme to buy back a part of the 6,4% stake E.ON/Ruhrgas held in Gazprom. Specifically, E.ON/Ruhrgas agreed to sell its 49% stake in Gerosgas, an E.ON/Ruhrgas-Gazprom joint venture, through which it held 1,44% of Gazprom’s equity, in exchange for 25% output of the Yuzhno-Russkoye gas field. Because the two companies had reached an impasse, a solution was only found once Russian authorities got involved (Vavilov/Trofimov 2015a:93). Vavilov/Trofimov (2015a) have analysed the commercial value of this arrangement for Gazprom and found that the asset swap did not make sense commercially for Gazprom, but instead delivered on the Kremlin’s strategic goal of involving German gas companies in Russia’s upstream energy projects (2015a:94). The German political side also welcomed the involvement of German companies in Russia, as it still had hopes that economic exchange would accelerate the liberalisation of the Russian economy resulting in Russia adopting European market standards (Bros et al. 2017: 19). The Russian-Ukrainian gas disputes of 2006 and 2009, as well as the Eastern round of accessions politicised and securitised Russian natural gas and, as a result of this, prompted EU member states to seek a European approach to manage their dependence on Russia and reduce their vulnerability to Russia’s use of Gazprom as a tool of foreign policy. The dispute in 2006 did not affect Russian gas exports to Germany. The 2009 dispute however led to a cut off of natural gas supplies transiting Ukraine that lasted two weeks and reduced gas supplies to the South of Germany by 60% and to the whole of Germany by 10% (Pirani et al. 2009: 55). Germany was able to fully substitute the reduced amount of Russian gas through increased imports from Norway and the Netherlands and did not have to resort to its gas storages, which

would be sufficient to supply the country for several weeks (Ibid.). This is visible in Figure 4.3., which shows that while Germany’s total natural gas imports grew from 2008 to 2009, Russian imports decreased.

Figure 4.3.: German Natural Gas Imports in TJ by country of origin 2000-2015 Note: Germany stopped publishing the country of origins for its natural gas imports after 2015 Source: Bundesamt für Wirtschaft und Ausfuhrkontrolle, graph by author.

With the Treaty of Lisbon, the EC gained competencies in the energy field and the Third Energy Package tackled Gazprom’s dominant business practises. Especially the unbundling and TPA requirements affected Gazprom’s activity in Germany. Even though Gazprom’s ownership of pipelines in Germany was not challenged through the TEP, it now had to reserve capacities for competitors and make volumes available on the spot market (Bros et al.: 24). This fundamentally transformed the European natural gas market from a sellers-market to a buyers- market. On a European scale, the shale gas revolution in the US and a surge of LNG from Qatar sent gas prices on the spot market plummeting, which meant that Gazprom’s long-term supply contract with fixed, oil-indexed prices lost competitiveness (Dickel/Westphal 2012: 3). This

price drop is clearly visible in Figure 4.4., which shows the average price for natural gas at the German border and the total amount of imported natural gas.

Figure 4.4.: Natural Gas imports in TJ and average annual import price at the German border in €/TJ. Note: The import price at the border is flexible and seasonal, the depicted price is the yearly average. Source: Bundesamt für Wirtschaft und Ausfuhrkontrolle, graph by author.

A number of political and economic developments made the late 2000s a challenging time for Gazprom. Gazprom had suffered heavy losses from the 2008/2009 global financial crisis, which reduced the value of the company by two thirds from $350b to $110b and limited its ability to pursue its interests in the European market (Vavilov/ Trofimov 2015a: 98). As much as the global economy suffered from the financial crisis and many companies had to deal with value losses, Gazprom’s decline continued for a long after. Due to the primacy of geopolitical benefits for the Russian Federation over a financially viable business strategy in the years after the financial crisis, the decline of Gazprom’s value reached 86% by 2014, which is the biggest collapse of any of the top 5000 companies (Burke 2015). Another factor that came at a disadvantage for Gazprom at the time was the move towards decarbonisation in Germany and the EU. This spelled uncertainty over the long-term development of natural gas demand in Gazprom’s most important markets. Lastly, following the 2009 election in Germany, Merkel formed a governing coalition with the liberal FPD, which was more critical of Russia than the 100

previous coalition partner SPD (Dyson 2016: 504). In 2011 Gazprom was able to secure the support of Wintershall (BASF) for the South Stream pipeline. Wintershall singed the Shareholder Agreement together with Italian Eni and French Energie de France (EDF). As has been the practise with Nord Stream, Gazprom would hold 50% of the shares and the European gas companies share the remaining 50%- 20% by Eni and 15% by Wintershall and EDF each (Gazprom 2011). Later in 2011, Gazprom signed a cooperation agreement with Siemens committing both companies to work closely together on the Russian market (Gazprom 2013). The same year also saw the peak of the German debate about the fate of nuclear energy, which had been a constant point of political discussion since the disaster of Chernobyl. In a very quick move following the Fukushima incident in 2011, the German government decided to phase out nuclear energy and redraw its earlier commitment to extending the lifetime of nuclear reactors. Following this announcement, Germany also committed itself to the emission reduction and decarbonisation targets of the Energiewende discussed in Chapter 3.5. Consequentially the focus of energy discourse in Germany shifted even more towards renewable energy neglecting energy security. Dyson (2016) argues that his led to a neglect of gas supply security issues, which countered the securitisation of Russian natural gas imports that occurred in the years before (2016: 510). Opposed to this somewhat positive outlook for German-Russian gas relations following the Energiewende policy, Bros et al. (2017) maintain that above all the Energiewende is a symptom of Germany’s at times reactionary energy policy and shows that long-term predictions of natural gas demand have become impossible (2017: 25). Westphal (2019) notes that the Energiewende highlights Germany’s conviction-driven, non-strategic, commercial approach towards energy security (2019: 189). Considering this approach, the implementation of the TEP is interesting. After being reluctant to liberalise its energy market following the first two energy market packages, Germany eventually did implement the TEP. The TEP fundamentally altered the way the German gas companies interacted with Gazprom. The bilateral long-term contracts had to make way for more short-term spot trading and multilateralism. Having to unbundle their vertically integrated value chains, German gas companies now faced competitive distributors and flexible demand in their downstream markets, while having to fulfil their long-term obligations with their upstream partner, Gazprom (Westphal 2014: 38). This weakened the relative position of the German importing companies vis-á-vis Gazprom Export, which were now pushing for more flexibility in their import contracts in order to be able to react to changing market situations (Bros et al.: 30). However, the TEP was not to Gazprom’s benefit either,

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because the removal of the destination clause from supply contracts had the effect that Gazprom competed with gas from its own supply on the spot markets driving down prices (Vavilov/Trofimov 2015b: 161). The TEP also affected Nord Stream, which was completed in 2012, but did not operate at near full capacity until 2017 (Nord Stream AG 2018), because the TPA requirements prevented Gazprom from booking more than 50% of the capacity of the connecting pipeline (Siddi 2017: 113). Considering the disadvantages the TEP brought for the coordination between the German energy companies and Gazprom, it can be said that its implementation marked the end of German-Russian commercial bilateralism on the gas market. Subjecting the gas market to the multilateral energy tool that is the TEP explicitly hinders a path dependent continuation of German-Russian bilateralism. The Nord Stream consortium approved early plans to double the capacity and construct Nord Stream 2 (Gazprom 2013). The TEP significantly changed the conditions on the German gas market for the second Nord Stream pipe, which unlike the first was not a PCI, slimming the chances of receiving exemptions from the TPA requirement. After the Bundestag election 2013 the newly constituted grand coalition of CDU and SPD devoted a full sub-section of their coalition agreement to the future of Germany’s relationship with Russia. In calling for a more critical approach in order to support democratic reform and avoid falling into a dependency, the coalition agreement declares that the coalition would end the ‘special relationship’ and instead seek to approach Russia through the EU (Dyson 2016: 305). It should be noted that a declaration in a coalition agreement generally does not necessarily have to constitute a policy, but it shows political agreement between the two parties, one of which is the SPD, which built the special relationship in the first place. The biggest upset in German-Russian and EU-Russian relations in recent history has been caused by the Ukraine crisis in 2014. What makes the Ukraine crisis particularly relevant for a study on natural gas relations is the explicit demonstration of the Russian energy weapon against dependent transit countries. The energy political response from the EC has been illustrated in Chapter 3. With energy security and Russian natural gas import dependency rising to the top of the European agenda, the Ukraine crisis significantly changed the way the Nord Stream pipelines were perceived within the EU. The German government was (and is) eager to find a diplomatic solution to the crisis by engaging both sides in the “Normandy” format and later sanctioning Russia. The political relations between Berlin and Moscow clearly deteriorated and the critical, but workable relationship between Merkel and Putin and their Foreign Ministers Frank-Walter Steinmeier and Sergeji Lavrov changed to distrust after Putin

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and Lavrov lied about Russian troops in Eastern Ukraine (Fordberg 2016: 40). The economic sanctions imposed on Russia did not specifically target the natural gas sector, but have indirectly affected Russia’s gas sector through investment restrictions, technology export bans, and restrictions on technological assistance (Bros et al. 2017: 35). Dyson (2016) attributes this to Germany’s role in the negotiations about the sanctions regime, in which the German side instated that sanctions on the gas sector should be off the table. The ambiguity of the German position to condemn Russia’s action in the strongest terms, but to be unwilling and unable to make the sanctions regime truly effective by sanctioning gas exports, shows the constrains of German foreign policy (2017: 305). Considering that EU member states have improved their ability to mitigate a Russian supply disruption since 2009 (Rodríguez-Gómez et al. 2016: 471) and that Germany has the largest storage capacities in the EU, this suggests a strong influence of commercial interests. This is a strong indicator for a liberal type state-society complex with a powerful autonomous business class. Despite the fact that Berlin and Moscow estranged each other as a consequence of the Ukraine crisis, the cooperation between Gazprom and the German energy companies continued to flourish. In 2015 Gazprom and BASF/Wintershall completed an asset swap giving Gazprom full ownership of Wingas and in turn giving BASF/Wintershall a 25% plus one share in the Achimov deposit holding oil and gas (Wingas 2015). In the same year, the German gas companies involved in the Nord Stream consortium, E.ON and Wintershall, signed the shareholder’s agreement for Nord Stream 2 in 2015 and called for an end of the economic sanctions against Russia (Siddi 2016: 671). The divergent positions of the German government and the large gas companies in this matter, as well as the dominance of the commercial interest over the political declaration again point to a liberal state-society complex. In light of the Ukraine crisis and Nord Stream 2, maintaining Ukraine as a transit route became a priority for the EC. As a result, German-Russian natural gas relations and Nord Stream 2 came under increased pressure from Brussels and the member states. Nord Stream 2 is perceived as a political tool to further undermine the security of Ukraine by making it obsolete as a transit country and relations between Germany and Poland have arguably hit a low point because of Nord Stream 2. As Riley (2016) notes, the German government not only failed to communicate and coordinate the Nord Stream 2 project with European partners, but in discussions between then-Vice Chancellor Sigmar Gabriel (SPD) and Vladimir Putin, it was revealed that the German government sought to try and keep “opportunities for external meddling” to a minimum and to “strive to ensure that all this remains under the competence of the German authorities”

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(Riley 2016: 21). This inexplicably shows the clear support of the German government for the project, it also clearly shows the disregard for a multilateral European approach towards Russian natural gas. Insisting on Nord Stream 2 being a purely economic issue, the German side has brushed aside concerns from Europe and the US about geopolitical implications of the pipeline (Fischer 2016: 2). More recently, in light of growing political pressure, the German position regarding Nord Stream 2 has changed. In a meeting with Vladimir Putin, Angela Merkel stressed the importance of taking political factors into account and maintaining Ukraine as a transit route even after Nord Stream 2 is in place (Wehrmann/ Wettengel 2018). An open letter by various US ambassadors has criticised Nord Stream 2 harshly and threatened to sanction European companies participating in the project. The letter has further upset German-US relations and broke diplomatic protocol. The official reaction by Peter Altmeier, Federal minister of the BMWi, was that Germany was “not impressed” and would not be intimidated (Wehrmann 2019). A compromise reached in February of 2019 between EU negotiators makes it likely that the EC would be given a mandate to lead the negotiations with the Russian side over Nord Stream 2 and its adherence to EU market regulations (Simon 2019). It could be argued that the compromise and Merkel’s statement show that even though the German side has not redrawn its political support for the project, it no longer treats Nord Stream 2 as a solely economic project and acknowledges the geopolitical impact of the pipeline. For the state of German- Russian gas relations this means that Germany’s commercial-led gas strategy is in political conflict with the EC and that Berlin’s political support for it could waver in the future.

Reviewing the development of German-Russian gas relations since Merkel became chancellor has revealed that deteriorating diplomatic relations between Berlin and Moscow did not significantly impact the cooperation between Gazprom and German energy companies. Even though bilateral political relations have cooled down substantially, large commercial projects like the Nord Stream pipelines and Gazprom’s increased investment into the German gas market have largely gone without any kind of political intervention from Berlin. It could be argued that this proves the resilience of the strategy to leave energy security to commercial actors. Importantly though, the development of German-Russian gas relations since 2005 have shown that the German idea of keeping commercial activities and politics separated no longer works in a politicised framework of European energy policy. German-Russian cooperation in the economic realm has affected Germany’s political relations. Berlin’s insistence not to

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involve itself in commercial affairs is perceived as a political move and has alienated Berlin in the EU to a certain extend. The German strategy to condemn the Kremlin’s political actions, but aid Gazprom’s commercial activities abroad appears hypocritical from the perspective of a member state with high state-involvement in its energy markets and companies. Indeed, considering the sanctions against Russia, which undoubtably constitute an explicit link between politics and economics, the reluctance of the German government to apply the same view to its energy relations appears inconsequent. Still, the implementation of the TEP has to be seen as a stark contrast to earlier days of the special status of the German-Russian natural gas relationship. Even though the German commercial approach has persisted, the conditions of natural gas relations between Germany and Russia have changed considerably. The bilateral economic and political consensus between Berlin and Moscow of the Ostpolitik and even the Schröder administration has come to an end. Berlin’s commercial-led approach follows more of a multilateral logic since the TEP. In could be argued that German-Russian natural gas relations have followed a path dependent trajectory because of the ever-deeper commercial involvement of the German gas companies and Gazprom. The TEP has made the continuation of relations along these lines unlikely, because the rationale of bilateral commercial interdependence as an influence for energy political decision making is now subjected to a multilateral energy policy.

4.4. Economic Actors, Interest Groups and Social Forces in German-Russian Relations

This sub-chapter will elaborate on the involved actors and social forces in German- Russian natural gas relations and the close commercial ties between them. Following from the first part of this chapter, it has become clear that Gazprom and the German gas companies share a common history on the German gas market. That is why the current situation on the German gas market will be analysed with a focus on Gazprom’s involvement in order to benefit a better understanding of the commercial interests behind German-Russian natural gas relations. An analysis of the larger economic relations between Germany and Russia will highlight the importance and impact of the natural gas sector for bilateral trade. Finally, using the policy- planning network concept, it will be assessed how the interests of these social forces are represented in lobby groups.

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4.4.1. The German gas market and Gazprom

The German Gas market has a total volume of 96 bcm, making it the largest gas market in the EU (BMWi 2019a). Currently 6,4 bcm are produced from indigenous sources, which amounted to roughly 7% of Germany’s domestic consumption of 90,2 bcm in 2017 (BP 2019: 28). Germany has bidirectional pipeline connections to all of its neighbours and the largest gas storage capacity in the EU at 24 bcm (IEA 2018a: II69). The importance of Germany as a transit market has been increasing in recent years because of the growing capacity of Nord Stream and the overall trend of more gas flows in a West-East direction in Europe (see Figure 2.7.). In 2017, 42% of the available gas volumes on the German market were transited to other countries (BNetzA/BKartA 2019: 339). Firgure 4.5. shows the flow of imports and exports of natural gas to and from Germany in terawatt hours (TWH). The Nord Stream pipeline delivering Russian gas is the largest source of imports, followed by Russian gas from the Yamal-Europe pipeline transiting Poland. Ever since the Ukraine crisis, West-East flows have increased. This is highlighted by the fact that exports to the Czech Republic mark the second largest trade flow to and from Germany. The discrepancy between the shares of Russian imports in bcm and in TWH can be attributed to the difference in heat value between Russian gas and Dutch and Norwegian gas (see below).

Figure 4.5.: Natural Gas Imports and Exports in TWH Note: 55,3 TWH of imports and 48,3 TWH of exports are attributed to ‘others’ and not displayed here. Source: BNetzA/BKartA 2019: 349-350, visualisation by author. 106

Because the development of the German gas market was driven by regional private actors, rather than a state-monopoly it is more structurally complex than other European markets. Traditionally, the German gas market was organised in a three-tier structure in which large producers of indigenous gas and importers of gas from other countries sold volumes to regional transmission companies, which sold then sold volumes to municipal and regional distributors (Bros et al. 2017: 17). There is a wide network of commercial involvement, supply contracts and cross-ownership between actors on all three tiers (Ibid.). The role of regional players such as Ruhrgas and Bayerngas has been highlighted in the earlier sub-chapters of this chapter. Owing to this bottom-up development and the regionally demarked distribution grids, the German natural gas market used to be highly fragmented and organised in 19 different market areas. Following a reform of the market areas8 in 2011, the German gas market now has two market areas: GASPOOL Balancing Services GmbH predominantly in the North and East and NetConnect Germany GmbH & Co. KG. predominantly in the South and West (see map 4.6.).

Map 4.6.: Natural Gas Market Areas in Germany Source: Fernleitungsnetzbetreiber (FNB) Gas

8 A market area virtually merges downstream transmission and distribution systems. Market areas constitute trading zones for entry and exit capacities that are balanced by a single balancing company (or market area coordinator) in order to simplify gas trade. The market coordinator operates a virtual trading point for transmission system operators and exit or entry network operators. The virtual trading point is not a physically existent hub, but a contract mechanism to trade gas quantities (FNB Gas 2019a). 107

The GASPOOL market area connects more than 400 downstream companies and is the landfall market area for import volumes from the Nord Stream pipelines, the Poland-transiting Yamal-Europe Pipeline, and most of the Dutch and Norwegian imports. The NetConnect market area connects more than 500 downstream companies and is the landfall trading point for imports transiting Slovakia and the Baumgarten Gas Hub in Austria. The total length of Germany’s natural gas network exceeds 530,000 km (FNB 2019). The cumulative market share of the four largest gas companies in the German market is 23% for private consumers and 30% for industrial consumers, which means that no gas company in the German market is in a position from which it could dominate the market and its competitors (BNetzA/BKartA 2019: 334). Furthermore, in the mid- and downstream market there is no risk of a monopoly or oligopoly as customers in 93% of the network area have access to more than 50 gas suppliers and customers in 56% of the network area have access to more than 100 suppliers for natural gas (BNetzA/BKartA 2019: 335). Figure 4.7. illustrates the high number of distributors in the German gas market. Of all distributors, 57% operate within a 200 km network (see Figure 4.3.3.). This is an indicator for the persistence of municipal and regional actors in the German downstream market.

Figure 4.7.: Gas distributors in the German market by length of pipeline network in km Source: Bundesnetzagentur/ Bundeskartellamt 2019: 340, chart by author.

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A structural transformation to harmonise gas types that affects much of the GASPOOL area is the largest current challenge to the German market. Natural gas from the Netherlands is classified as low-calorific L-Gas, as is natural gas that can be found in the North of Germany. Russian Natural Gas on the other hand is high-calorific and classified as H-Gas9 (Högselius 2013: 157). Due to the different gas qualities from Dutch and Russian gas, parts of the German gas market that are at the landfall of a certain type of gas are biased towards the one kind or the other. Because Dutch natural gas imports from the Groningen gas field will decrease drastically in the coming years due to earthquakes caused by extraction, Germany has started to transform all L-Gas parts of its network to H-Gas in 2015 (BNetzA/BKartA 2019: 333). Map 4.8. on the following page shows the German natural gas network and the market areas. The most important pipelines in the German transmission system are labelled with the commonly used abbreviation of their German names.

9 L-Gas and H-Gas cannot be combined in the same network because of their differing heat values. In order to make them compatible, their heat values have to be transformed, which requires additional expensive infrastructure. 109

Map 4.8.: Natural Gas pipelines and market areas in Germany Source: Fernleitungsnetzbetreiber (FNB) Gas

Through its joint venture with Wintershall, WIGA, and through the subsidiaries Gascade, OPAL Granstransport GmbH and NEL Gastransport GmbH, Gazprom has stakes in operators and distribution systems in Germany (see Table 4.9.). Even though compliance with the unbundling requirements of the TEP forced a restructuring of the ownership of some of the pipelines and operating companies, Gazprom is still very much involved. Gazprom’s subsidiaries on the German market are active along the entire value chain.

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Table 4.9.: Operators and Shareholders of major gas pipelines in Germany. Pipeline Operator Holding/ Shareholder NEL NEL Gastransport-GmbH • WIGA Transport Beteiligungs-GmbH (Wintershall + Gazprom) • Shares at pipeline order: 75% Wingas, 25% E.ON/Ruhrgas • Minority shares: Gasunie (NL), Fluxys (BE) MIDAL Gascade • WIGA Transport Beteiligungs-GmbH (Wintershall + Gazprom) STEGAL Gascade • WIGA Transport Beteiligungs-GmbH (Wintershall + Gazprom) JAGAL Gascade • WIGA Transport Beteiligungs-GmbH (Wintershall + Gazprom) WEDAL Gascade • WIGA Transport Beteiligungs-GmbH (Wintershall + Gazprom) DEUDAN OpenGrid Europe • Former E.ON subsidiary (until 2012) • Since 2012: Vier Gas Holding (independent) • Gasunie (NL) OPAL OPAL Gastransport • WIGA Transport Beteiligungs-GmbH GmbH (Wingas) (Wintershall + Gazprom) MEGAL MEGAL GmbH • OpenGrid Europe • GRTgaz Deutschland (Engie, FR) TENP TENP GmbH & Co.KG • Fluxys (BE) (49%) • OpenGrid Europe (51%) Sources: Europipe (2019), Gascade (2019a, 2019b, 2019c, 2019d, 2019e), NEL (2019), OpenGrid Europe (2019a, 2019b, 2019c), WIGA (2019), table by author.

Table 4.9. reveals Gazprom’s stakes in strategically important pipelines that connect to the Nord Stream pipelines, most notably NEL, OPAL and WEDAL. The last sub-chapters have focussed on Gazprom’ activity in Germany and on the engagement of the German gas companies with Gazprom in the upstream and downstream

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markets. It became clear that Gazprom, although not a ‘genuine German’ company, has established itself in Germany. Through joint ventures with BASF/Winteshall Gazprom managed to end the dominance of Ruhrgas on the German market. Ever since the asset swap arrangement with BASF in 2015, Wingas has become a full subsidiary of Gazprom. Through its German branch Gazprom Germania GmbH, Gazprom also holds WIEH and WIGA, which engage in trade and distribution. It is visible that German energy companies and Gazprom have created a deeply entangled network on the German gas market.

4.4.2. German-Russian Economy

In order to be able to answer the sub-question whether Germany and Russia are mutually dependent on each other, it is important to consider the broader scope of economic exchange between the two countries. Table 4.10 shows the value and relative significance of trade between Germany and Russia according to UN COMTRADE data. It is clearly visible that Germany is a more important trade partner for Russia than vice versa. Germany is the 3rd largest export market for Russia and the 2nd largest importer. In contrast, Russia is the 13th largest export market for German goods and the 15th largest importer (see Table 4.10.).

Table 4.10.: Imports and Exports between Russia and Germany 2018. Germany for Russia Russia for Germany Overall exports 7,6% of all Russian exports 2,0% of all German exports (34.2bn US$, 3rd) (31.4bn US$, 13th) Overall imports 10,6% of all Russian imports 2,3% of all German imports (25,5bn US$, 2nd) (30,3bn US$, 15th) Most traded Mineral fuels, oil, distillation Vehicles, other than railway, goods products: tramway: 6,9% of all Russian exports 1,7% of all German exports (16,4bn US$, 3rd) (4,5b US$, 16th) Note: All values are for goods trade only. Data for service trade between Germany and Russia is incomplete. Source: UN COMTRADE 2019, table by author.

There are differences in the industrial diversification of trade between Germany and Russia. Germany’s exports to Russia are fairly diverse. According to the Federal Agency for

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Statistics (Destatis), German exports from seven groups of goods have had a value of more than 1bn US$ in 2018: Pharmaceutical products, synthetic and plastic products, machines and mechanic devices, cars and land vehicles, aerial vehicles and optic and photographic products. Additionally, three groups of goods amounted to more than 500m US$: Chemical products, steel and iron products and paper and carton products. All of these combined contribute 76% of German exports to Russia, with the largest group, machines and mechanical devices making up 25,4%. Compared to that, imported goods from Russia are not as diversified. Three groups of goods amounted to more than 1bn US$ in value in 2018: Mineral fuels, copper and copper products, and aluminium and aluminium products. Two groups of imported goods valued higher than 500m US$: Precious stones, and Iron and Steel. The value of fossil fuels dwarfs all other German imports from Russia. Germany imported fossil fuels, consisting of oil, natural gas, coal and their respective products, worth 34,12bn US$ from Russia in 2018, which makes up more than 80% of all German imports from Russia. The five largest groups of goods amount to 90,6% of German imports from Russia (all calculations based on Destatis 2019). Figures 4.11 and 4.12 show the most valuable groups of goods in Germany’s foreign trade with Russia. The impact of the Ukraine crisis is clearly visible in Germany’s foreign trade with Russia. The decline of bilateral trade that started in 2013 turned significantly steeper in over the course of 2014 affecting German exports to Russia, as well as German imports of Russian mineral fuels and can be observed in both graphs.

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Figure 4.11.: German Exports to Russia: Six Most valuable groups of goods. In Thousand US$ Source: Statistisches Bundesamt (Destatis) 2019: https://www- genesis.destatis.de/genesis/online/data;sid=E3EE3989B0590942F5852B405182C97E.GO_1_5?levelin dex=3&levelid=1558970220195&downloadname=51000- 0007&operation=ergebnistabelleDiagramm&option=diagramm, edited by author.

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Figure 4.12.: German Imports from Russia: Five most valuable groups of goods. In Thousand US$ Source: Statistisches Bundesamt (Destatis) 2019, online at: https://www- genesis.destatis.de/genesis/online/data;sid=EFEFE91029CECCF0CDAD03A6ADBD47B1.GO_1_5?l evelindex=2&levelid=1558970939718&downloadname=51000- 0007&operation=ergebnistabelleDiagramm&option=diagramm, edited by author.

Considering all goods, Germany has had a foreign trade deficit with Russia of 1.19bn US$ in 2018, which is almost level with the record deficit of 1.2bn US$ in 2014 (Destatis 2019). Generally speaking, German imports from Russia are primarily resources and raw material. German exports to Russia are primarily manufactured goods like engineering products. Drawing from product cycle theory, Laaser/Schrader (2014) find that the economic exchange between Germany and Russia follows the general logic of “technology for resources” and that Russia’s exports to Germany show structural indicators of a less developed economy (Laaser/ Schrader 2014: 337). Accordingly, less developed economies have a comparative advantage for labour intense and resource products, whereas highly developed economies have an advantage for the production of technology and human capital intense products (Idem: 338). Looking at the most valuable groups of traded goods between Germany and Russia over the last decade, it can be said that the imports and exports between both countries consistently indicate a highly developed German economy and a less developed Russian economy.

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Laaser/Schrader’s (2014) analysis predates the sanctions imposed on Russia by the EU and the US responding to the Ukraine crisis. They conclude that sanctions would have a stronger impact on the Russian economy, because none of the main export industries’ existence in Germany depends on Russia, whereas Russia depends on Western and particularly German technology and investment for the modernisation of its, already back then, struggling economy (2014: 343). The economic downturn of Russia was not set off by sanctions, but by a combination of low oil prices and pressure on the Russian Ruble and limited access to international capital markets (Bros et al. 2017: 36). The sanctions, countersanctions and continuing devaluation of the Ruble accelerated the deterioration of the Russian economy after 2014. Due to the lack of economic diversification and the importance of resource exports, the Russian economy is particularly vulnerable to oil price changes. Because the sanctions occurred at a time, when the oil price was low, both influences multiplied the effect on the Russian economy. As a result, by the end of 2015 the Russian economy declined by 3,5% year on year and wages in Russia dropped by 10%, the Ruble lost almost 50% of its value against the US Dollar, and the national budget of the Russian Federation approached a deficit not seen since the 2009 global financial crisis (Lee 2016). This illustrates the sensitivity of the Russian economy. As a result of reduced demand, German exports to Russia declined by 39% and German imports from Russia by 35% by 2015 (Destatis 2019). Ever since 2016 bilateral trade relations have improved. Between 2017 and 2018 German foreign direct investment into Russia saw the steepest increase since 2007 at 14% totalling 3,3bn € (Brüggman 2019). These investments can be attributed to the policy of the Russian government to incentivise investments into the country by making them a precondition for sales to the Russian state, as well as promising favourable tax treatment for large manufacturing projects in Russia. Additionally, the weak ruble makes Russia particularly interesting to German export-oriented companies, that can set up shop in Russia and cheaply purchase raw material in exchange for Russian Ruble whilst paying low wages to employees and exporting products for more valuable hard currencies (Brüggman 2019). As far as the significance of bilateral trade between Germany and Russia for the respective economic output is concerned there is an asymmetry favouring Germany. However, a sole focus on the value of imports and exports and the respective significance within foreign trade conceals the particular dependence of individual sectors. German imports of Russian resources might seem less significant compared to the value of all German imports, but that does not alter the fact that a supply-cut of 37% of natural gas, 35% of crude oil, and 38,5% of coal is not easily substituted, especially for inflexible natural gas imports. The make-up of

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German imports from Russia However, considering the political economy of natural gas, it it cannot be argued that Germany is not at least sensitively dependent on Russia. It is doubtful how quickly an adjustment of policies would be able to provide a substitute for Russian natural gas. Therefore, maintaining that Germany and Russia are interdependent to a certain degree seems plausible.

4.4.3. Societal and Political Forces

The interests of German economic actors involved with Russia are explicitly expressed and represented by a number of interest groups. Particularly relevant ones are the Ostausschuss/Osteuropaverein der deutschen Wirtschaft (OAOEV)[Committee on East- European Relations of the German Economy], which represents the interests of German companies doing business in Russia and Eastern Europe and the Deutsch-Russisches Forum, which is a network of political and civil actors that have an interest in German-Russian relations. The OAOEV has 350 members ranging from small-and medium sized companies to global players. It is sponsored by six large German business associations: The federal association of the German industry, the federal association of German banks, the federal association for foreign trade and service, the association of the German insurance economy and the central association of German manufacturers (OAOEV 2019a). The OAOEV was founded in the 1950s with the aim to facilitate trade between East and West and became the most important tool of Brandt’s Ostpolitik (Siddi 2016: 672). The OAOEV offers its members access to the German federal government and high-ranking politicians, as well as support for business development in the respective foreign countries (OAOEV 2019a). It also contributes to the public discourse by publishing magazines and position papers as well as cosponsoring a media outlet specialised on Russia. Amongst the members are BASF, Gazprom’s Germany subsidiary ‘Gazprom Germania’, Innogy SE, the German subsidiary of Russia’s state-owned oil company ‘Rosneft Deutschland GmbH’, Shell Deutschland, VNG and Uniper SE (formally E.ON/Ruhrgas). The influence of the German-Russian energy industry is highlighted by the board of directors: The Vice-President of the board of directors of the OAOEV is Klaus Schäfer, who is the head of the board of Uniper SE, and with him on the board is Dr. Hans-Ulrich Engel, head of finance of BASF (OAOEV 2019b). It is also not surprising that the OAOEV advocated Nord Stream 2 and German-Russian LNG cooperation in its most recent position paper. Perhaps surprisingly, it also argues that investments into an upgrade of the Ukraine route should be

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made and called for the resumption of the EU-Russian Energy Dialogue that ended in 2005 (OAOEV 2019c: 14). The EU-Russian Energy Dialogue which was an influential forum in shaping the EU’s gas market liberalisation policy and was strongly criticised by Gazprom at the time (Högselius 2013: 211). The OAOEV’s positions, particularly regarding the Ukraine route and the energy dialogue are close to the German government’s and reflect the interests of the German energy companies, who have profited from market liberalisation and would likely make an effort to be involved in the upgrade of transit infrastructure in Ukraine. This is in line with Siddi’s (2016) observation that the new director of the board of the OAOEV, Wolfgang Büchele, is considerably closer to Merkel and more sceptical of Putin than his predecessor Eckhard Cordes, who vocally criticised the sanctions against Russia in 2014 (2016: 672). The German-Russian chamber of foreign trade [Deutsch-Russische Aussenhandelskammer (AHK)] lobbies the interests of German companies in Russia and supports German companies in developing their business. The AHK does not generally comment on political events, but explicitly offers access to its network to members. It publishes market and industry reports and provides business relevant information, for example on the sanctions imposed by the EU and US and the Russian countersanctions. Members of the energy industry in Russia include Gazprom, Rosneft, VNG and Wintershall Holding (AHK 2019). Finally, the Deutsch-Russisches Forum e.V. [German-Russian Forum] is arguably the most influential German-Russian network in the political sphere. Amongst its members are many German high ranking politicians from across the political spectrum and federal levels, CEOs of large German and Russian companies, Russian politicians and officials. Membership is available on personal invitation only. The Forum commits itself to facilitating German- Russian exchange on all societal levels and offers access to its vast network that reaches into the highest offices of the German and Russian government. Founded in 1993, the Forum was modelled after the Atlantikbrücke, arguably the most important social network between Germany and the US, and the Deutsch-Britische Gesellschaft [German-British Society]. The German energy companies were influential from the beginning and Ruhrgas AG’s former director of the board Klaus Liesen is mentioned as one of the founding supporters of the Forum (Deutsch-Russisches Forum 2019a). Today the presence of the energy companies within the Forum is still strong. Michael Sasse, who is the head of public relations at Wintershall Holding, is on the board of directors. Furthermore, the board of trustees seats representatives of all of the big players in commercial German-Russian energy cooperation: Elena Burmistrova (Vice- president of the board of directors at Gazprom), Brian Chesterman (Managing Director of

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Rosneft Deutschland GmbH), the aforementioned Dr. Hans-Ulrich Engel of BASF and Dr. Bernhard Reutersberg (President of the supervisory board at Uniper SE) (Deutsch-Russisches Forum 2019d, 2019e). The Forum is also associated with the Petersburger Dialog which is a platform for political and economic exchange initiated by Gerhard Schröder and Vladimir Putin in 2001 that is organised annually in either Saint Petersburg or Berlin. Attendees for the Petersburger Dialog have to be nominated by the organising committee (Deutsch-Russisches Forum 2019b). The Forum has been endorsed by Putin, Lavrov, the former German SPD foreign ministers Steinmeier and Gabriel and other influential members of the political spheres in Germany and Russia (Deutsch-Russisches Forum 2019c). As much as the Forum and the OAOEV do not generally have an underlying political founding principle beyond fostering bilateral relations that would exclude members of the Russian opposition or critics of the Russian government, Kiyak (2014) points out that attendees to their events are not usually those that have gained attention criticising Russia’s politics (Kiyak 2014). The German terms Putinversteher or Russlandversteher (literally describing someone who ‘understands’ Putin or Russia) have become synonymous with societal lobbying efforts to legitimise Putin’s military doctrine. Russlandversteher of every couleur are regularly invited to important German talk-shows and podium discussions and their messages are heard by millions. One of these is Alexander Rahr, a historian known for his close personal contacts to Putin, who chairs the research group of the Petersburger Dialog and now also works as a senior advisor for Wintershall Holding and as a lobbyist for Gazprom (Banse et al. 2014, Zschieck 2017). Rahr has received an honorary degree from Moscow’s school for diplomats and is a council member at the Valdai-Club, a Russian platform organising meetings and discussions with high- ranking Russian politicians (Banse et al. 2014). Another is Matthias Platzeck, formerly the SPD prime minister of the state of Brandenburg and in that office a member of the Bundesrat’s German-Russian friendship circle, who is now the director of the Forum (Deutsch-Russisches Forum 2019d). Platzeck has been an outspoken critic of the sanctions imposed on Russia and initially urged the German public to accept Crimea as a part of Russia (Siddi 2016: 659, Fordberg 2016: 32). The Forum and the OAOEV and some of their well-known members have received plenty of attention in the German press for its ability to provide access to the Kremlin in times when political relations between Berlin and Moscow are at a historic low. Der Tagesspiegel noted that Putin received delegations of the Forum and the OAOEV, including

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Platzeck, Rahr and Büchele, despite of the Kremlin’s rule that Putin, with few exceptions, only personally receives heads of state or governments (Von Salzen 2016). Another important social force in Germany’s relations with Russia are the Bundesländer. There are still tangible differences between the West and the East, which express themselves rather clearly along the political cleavage that is the question about Russian partnership. Platzeck, who has been a member of the last GDR government, regularly stresses the regional political differences in Germany arguing that the East has a different perception of Russia (Simon 2017). Surveys support that view and find that Germans in the former GDR generally express more understanding for Putin’s annexation of Crimea, while Germans in the West overwhelmingly oppose it (Köcher 2014). Furthermore, the minister of justice of the Eastern German state of Saxony, Sebastian Gemkow, is a member of the board of directors of the Forum (Deutsch-Russisches Forum 2019d). Bavaria has also advocated a regionally differentiated approach towards Russia, but unlike Platzeck, who holds no official public office, has done so in the person of the Bavarian prime minister and now Federal minister of the interior Horst Seehofer. Seehofer met Putin in his role as Bavarian prime minister and criticised Merkel’s approach and the sanctions against Russia. Putin in turn lauded the special relationship between Russia and Bavaria (Kuhr 2016). The prime minister of Saxony, Michael Kretschmer (CDU) has been received by Vladimir Putin at the international economic forum in Saint Petersburg 2019. In their meeting, Kretschmer called for an end to the sanctions imposed on Russia and invited Putin to Saxony. Manuela Schwesig (SPD), prime minister of Mecklenburg- West Pomerania, also attended the event and supported her colleague from Saxony (ZEIT 2019). Other members of state governments that attended the forum were Thuringia’s minister for the interior, Georg Meier (SPD) and Brandenburg’s minister of justice Christian Görke (Die Linke [The Left]) (ZEIT 2019b). All of the members of state governments are from Bundesländer in the former GDR. This could explain the interest in German-Russian relations and the opposition to the sanctions. This explanation seems particularly plausible considering that Saxony, Thuringia and Brandenburg all hold state elections this year. For politicians from these states, in which the general favourability of Russia and Putin is highest in the country, fostering German-Russian relations and criticising the sanctions is part of their election campaign. Furthermore, Mecklenburg- West Pomerania is the landfall state for the Nord Stream pipelines, which currently makes it the most important German state in German-Russian natural gas relations.

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Additionally, as discussed in Chapter 3.5., social movements have emerged as a strong influence on German energy policy. Ever since the Chernobyl incident, there has been a strong opposition to nuclear power in the German public. The Green party’s early successes have been fuelled by the anti-nuclear campaigns. Environmental protests have succeeded in delaying or preventing numerous large-scale projects in Germany over the last four decades. Last year’s protests against the expansion of lignite exploration that would destroy an old forest have gained global attention and further benefited the Green party in the polls. The Greens are now a well-established force in the political landscape in Germany. The European election in May 2019 saw a 9,8 percent point lead of the Greens in Germany and in the first polls following the European elections the Greens have overtaken the CDU for the first time ever (Bundeswahlleiter 2019, ZEIT 2019a). Considering the Greens climate policy and their stance against fossil fuels, they will be a decisive force for German federal energy policy in the coming years. This sub-chapter has explored the OAOEV and the Deutsch-Russisches Forum as the most influential social forces in German-Russian relations. It has been shown that there exists a widely-connected and influential network in which the interests of German and Russian energy companies are very well represented. Considering their personal make-up and position between the economic and political spheres, both the OAOEV and the Deutsch-Russisches Forum constitute policy-planning networks. The OAOEV and the Forum inexplicably connect economic and political actors with an interest in German-Russian cooperation and provide a platform for societal actors in Germany that oppose the Merkel government’s critical Russia policy and the imposition of economic sanctions by the EU and US. This illustrates the multifaceted nature of bilateral relations between Germany and Russia. Official relations between Berlin and the Kremlin might have cooled down substantially under Merkel and particularly since the annexation of Crimea, but there are influential social forces that maintain the special status of German-Russian relations. For the research question of this thesis this means that Germany in its natural gas relations with Russia can certainly not be treated as a unitary actor. Against the background of the deeply entangled German and Russian energy companies and the German energy market liberalism it can be questioned in how far opposition on political grounds from the Federal government would be able to prevent cooperation. The regional political and social differences in Germany make for another strong force in bilateral relations that undermine a unitary actor notion on the German side. Groups like the OAOEV and the Forum, as well as the politically differentiated approach of the German Bundesländer provide

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channels for communication and cooperation between the Russian state and influential political and social forces in Germany. Considering the popularity of environmental movements and the Green party in Germany, the resounding success of the Greens in the last elections and the Fridays for the Future movement will provide another strong influence and societal pressure on German energy policy. Their opposition to fossil fuels and infrastructure development that endangers habitats will have important implications for German-Russian energy relations. The findings presented in this sub-chapter are in line with the ideal type of the liberal state-society complex and highlight the independence of the economic and political spheres and the autonomy of the civil and business class.

4.5. The Russian state-society complex of natural gas under Putin

Gazprom is the monopolist pipeline exporter of Russian natural gas. Gazprom’s reserves currently amount to 16,7% of global proven reserves of natural gas and it produced 12,1% of the global production of natural gas (Statista 2019). Gazprom has an exclusive right to explore new gas fields in Russia and preferential access to the Russian pipeline network, most of which it wholly owns. The Russian state is the main shareholder of Gazprom. The state owns 38,37% of the shares directly, 10,97% through the state subsidiary Rosneftegaz and 0,89% through the state subsidiary Rosgazifikatsiya (see Figure 4.13.). Less than a quarter of Gazprom’s shares (24,13%) are currently free floating on global stock markets. These so-called ADR (American Depositary Receipt) shares are deposited with the Bank of New York Mellon and traded on stock markets around the globe. According to Gazprom, more than 470.000 different bank accounts hold its 23.673.512.900 stocks (Gazprom 2019b).

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GAZPROM OAO

Other legal entities and individuals 26%

Russian State 38%

ADR holders 24% Rosneftegaz * Rosgazifikatsiya * 11% 1% Figure 4.13.: Shareholder structure of Gazprom OAO 2019 Source: Gazprom (2019b), chart by author.

The Russian economy and the state budget of the Kremlin largely depend on revenues from exporting its natural resources. Just how much is disputed in scholarly literature. Vavilov (2015) argues that 14,8% of the Russian national budget directly depends on Gazprom’s revenues and another 6% of the budget are an indirect subsidy through below-market prices for domestic energy (2015: 40). Bilgin’s (2011) estimate predates the significant deterioration of Gazprom’s economic performance since 2014 and has Gazprom’s direct tax contribution to the federal budget at 20% (2011: 123). Lee’s (2016) account of Russia’s federal budget contributes 43% to oil and gas and mentions that oil revenues are more valuable than gas, meaning gas revenues cannot be more than 21,5%. The overall contribution of the oil and gas sectors to the Russian economy has been declining due to globally low prices for oil, which also reduce oil- indexed gas prices. Because of this, the Russia’s state budget has been running a deficit since 2014, which in turn has consistently reduced the budget. The expenses of the Ukraine crisis and sanctions have been a further strain on the budget and the Russian economy. In 2018, the Russian budget had a surplus for the first time since 2014, Kluge (2019) calculated that without the oil and gas revenues the balance of the budget would be approximately -6% (2019: 8). In her study on Russian state-owned companies, Kluge furthermore argues that in the case of Gazprom profits are less of a priority for the government than with other state-owned companies, because of Gazprom’s increasingly important role in the domestic media landscape. 123

Specifically, Gazprom’s subsidiary ‘Gazprom Media’s’ acquisition of media outlets allows for a more subtle nationalisation of the media landscape (2019: 37). There exist close personal ties between the Kremlin and Gazprom, as well as explicit links between Gazprom’s exports and Russia’s foreign and energy policy objectives. This sub- chapter will consider these personal ties and links between the Kremlin’s foreign policy objectives and Gazprom’s commercial projects to characterise the Russian state-society complex of natural gas as the principal actor in Russian energy policy under Vladimir Putin’s leadership. When Gazprom was privatised after the fall of the Soviet Union, the Russian state kept 35% of the shares. Holding ‘only’ this sizeable minority share did not serve a political purpose like wanting to credibly signal the willingness to implement market reforms to the West. Instead, Vavilov/ Trofimov (2015a) argue, the state simply was too weak to exercise control over Gazprom’s activity at the time (2015a: 83). This changed in the early years of Vladimir Putin’s first presidency. Russia’s new President was determined to strengthen the role of the Russian state after the weak Yeltsin years, and firmly establish Gazprom and Russia’s energy exports as a tool of the state. In this context it is worth pointing out that Putin in his PhD thesis argued that the state should make strategic use of its energy resources and regard them as tool (Henderson 2016: 463). After first installing close allies on Gazprom’s board of directors, the first Putin government increased the state’s stake in Gazprom from 35% to 51% in 2004, making the state the principal decider and Gazprom a powerful policy tool at the hand of the government (Vavilov/ Trofimov 2015a: 83).10 Putin appointed Alexey Miller as head of Gazprom shortly after he became President. Miller had been a confident of Putin’s during his times as mayor of Saint Petersburg. After working as the general director of the Baltic Pipeline System and becoming Deputy Energy Minister of the Russian Federation, Miller was named Chairman of the Management Committee at Gazprom in 2001 and Deputy Chairman of the board of directors in 2002 (Gazprom 2019a). Because of these explicit biographic links between Putin and Miller, Orttung/Overland (2011) argue that it has become difficult to see any strategic differences between the president and Gazprom, apart from the state subsidised domestic prices which reduce profits for Gazprom (2011: 75).

10 See Ministry of Energy of the Russian Federation (2009): “Energy Strategy of Russia for the period up to 2030”. 124

Another important figure from Putin’s past in Saint Petersburg is Dmitry Medvedev, who had worked under Putin in local politics, before becoming his chief of staff of the presidential executive office (Government of the Russian Federation 2019a). Medvedev was appointed Chairman of the board of directors of Gazprom in 2000. Unlike Miller, who has been in his position chairing Gazprom’s board of directors, Medvedev’s career has seen frequent changes, appointments and re-appointments between Gazprom and the Kremlin. During his official appointment on the board of Gazprom, Medvedev coordinated the Kremlin’s policy within the company (Orttung/Overland 2011: 75). Medvedev served as Prime Minister under Putin’s presidency from 2005 until 2008 before assuming the office of President of the Russian Federation himself. During his presidency Putin became prime minister. In 2012 this rotation occurred again when Putin won his third presidential term, making Medvedev his prime minister. Medvedev still holds the office of prime minster (Ibid.). The Chairman of the board of directors is Victor Zubkov. Like Medvedev and Miller, Zubkov has been active in local politics in Saint Petersburg before. Zubkov’s career on the national scale started when Putin first became president as Deputy Minister for Taxes and Deputy Finance Minister of the Russian Federation. He then became head of the Federal Financial Monitoring Service and briefly served as Prime Minister during Putin’s third term. After his post as prime minister he was appointed head of the board of directors in 2008. Already Chairman at Gazprom, Zubkov remained Deputy Prime Minister from 2008 until 2012 (Gazprom 2019c). Looking at the careers of Zubkov, Medvedev and Miller, the lines between posts at Gazprom and official positions in the Russian state and government become blurry. All three, like Putin have started their political careers in local politics in Saint Petersburg in the 1990s. Shortly after Putin first became president, all three have moved into higher positions of either Gazprom or the Kremlin and changed positions between both multiple times. There have been many instances of different commercial enterprises that were not profitable for Gazprom, but instead served the Kremlin’s political interests. The asset swap arrangement with E.ON which retrospectively came at a significant economic disadvantage for Gazprom (mentioned in Chapter 4.2.) is one of them. This clearly indicates that the decisive say in Gazprom’s enterprises lies with the state, which prioritises geopolitical calculations over an economic business strategy. Vatansever (2017) further notes that Gazprom also serves domestic political and private considerations of Putin and his inner circle. For example, the construction of Gazprom’s pipelines has benefitted the pipe and steel industry, which allowed it to flourish and become a major employer (2017: 6).

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Gazprom has become a versatile tool for the Kremlin to pursue its foreign policy. Smith Stegen (2011) analyses Gazprom within the framework of the ‘energy weapon’ concept and finds that Russia has been able to successfully deploy Gazprom as an energy weapon through strategic investments aimed at bringing all parts of the natural gas value chain at least partly under its control (Smith Stegen 2011: 6508). Using energy debt and longstanding credits owed to Russia, Gazprom has pressed other countries, most notably that used to be under Soviet control, into surrendering ownership shares of their national transmission system to Gazprom (Ibid.). Similarly, Gazprom has been known to offer more lenient credit schemes to governments that are politically pro-Russian. Granting cheaper prices for natural gas to countries in exchange for political concessions has been an effective way to reach geopolitical goals of the Kremlin. This makes the Russian state-society complex a power projector. The interactions between Ukraine’s Neftogaz and Gazprom stand as an example for this. In 2010 Gazprom offered Ukraine discount on its gas prices in exchange for a lease extension of 25 years for the Russian naval base in Sevastopol, Crimea. In the onset of the Maidan protests in Kiev in 2014, it is believed that Gazprom’s offer over a 35% discount on its gas deliveries convinced Ukrainian president Victor Yanukovich not to sign the association agreement with the EU. After Yanukovich’s ousting it was again Gazprom that handled Russian foreign policy, when it scrapped these discounts by arguing that they were granted to Yanukovich’s government, not his pro-Western successors (Van der Graaf/ Colgan 2017: 61). Gazprom’s supply contracts themselves are designed in a way that anticipates conflict or even facilitates it. By remaining vague on conditions for debt and allowing for demands of repayment to be made at an opportune time, concessions like debt extensions and reductions on high prices can be made in exchange for political favours to the Russian Federation (Henderson 2016: 481). As mentioned above, domestically Gazprom has become a strong player in the media landscape, giving the Kremlin even more control over public opinion. Finally, Gazprom’s taxes are the largest contribution to the Russian state budget (Vavilov 2015: 3). Furthermore, as a provider of guaranteed cheap energy to Russian consumers, Gazprom takes over a certain social responsibility of the state (Kreyndel 2015: 50). The relationship between the Kremlin and Gazprom also works to Gazprom’s advantage. Gazprom has been exempt from liberalisation processes on the Russian energy market and thereby has been ‘allowed’ to maintain its dominance by the Kremlin. By passing laws to prevent the acquisition of a blocking share (25%+1 share) by a non-resident, the Russian state effectively prevented foreign investors to exert any influence on Gazprom (Bilgin 2011: 121).

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Kreyndel (2015) argues that because minority shareholding rights are not protected in Russia, any majority shareholder in a company in Russia automatically owns the company (2015: 53). Even though this might suggest that the passing of the law was not necessary to protect Gazprom from foreign influence, it highlights how the Russian state protects its national champion. Most importantly, Gazprom’s monopoly position means that it is given privileged access to Russia’s gas fields (Vavilov 2015: 3). What emerges is a close and mostly mutually beneficial relationship (see Figure 4.14)

Gazprom Taxes contributing to State budget Russian State & subsidiaries Cheap Energy Kremlin-friendly Media Domestic: Russian State-Society Complex

Natural Gas Foreign Policy Exports Agenda provide

Privileges and Supply Contracts favourable market incorporating political conditions favours to Russia

Revenues/ Hard Currency External: Export Markets and Countries

Figure 4.14.: Model of Gazprom and the Russian state in the Russian state-society complex

As much as the Kremlin’s political intervention has meant that Gazprom was forced to perform business moves that by purely economic estimation would have been unwise, both sides within the Russian state-society complex create conditions through which they facilitate each other’s ability to project their strategic targets onto the external sphere. On the left side of the model, Gazprom is able to move its goods, Natural Gas, to the external sphere, global energy markets, through infrastructure, privileged access to Russia’s gas fields, and favourable market conditions that have been ‘provided’ or facilitated by the state. Domestically Gazprom provides cheap energy at below-market prices and effectively subsidises the state budget and takes over a social responsibility of the state. Furthermore, in addition to the directly state-controlled media outlets, the Kremlin indirectly controls parts of the media landscape through Gazprom Media. On the right side, the Kremlin is able to project its foreign policy agenda onto the 127

external sphere, other countries or regions, through supply contracts negotiated by Gazprom that incorporate certain political concessions to be made to the Russian state. This makes Gazprom a power projector of the Russian state-society complex. The conceptual perception of both as one authoritarian or centralised type state-society complex allows the treatment of both as a largely unitary actor. Gazprom and the Russian state are mutually dependent on each other. This year there have been unprecedented changes that could signal a change in the relationship between the Russian state and Gazprom. Tatiana Mitrova, a leading Russian energy expert and senior research fellow with the Oxford Institute for Energy Studies (OIES), in a recent interview with the OIES’s director for natural gas, James Henderson, noted that Gazprom has ousted three of its top level directors (Mitrova/Henderson 2019). In what Mitrova describes as “dramatic changes”, Miller’s position has been weakened by an anti-corruption investigation and arrest of one of his confidents. Beyond that, Gazprom’s top manager for the domestic market and upstream development, Valeri Golubev has been retired and Alexander Medvedev has been relieved of his post as Deputy Chairman of the managing committee (Gazprom 2019d). Andrey Kruglov, the former manager in charge of finances at Gazprom, has also been released from the company and now works in the Russian Ministry of Finance (Gazprom 2019e). Mitrova observed that all three have been replaced by Gazprom’s own rather than somebody from the Kremlin’s circles, signalling a fundamental shift in the relationship. Among the replacements has been Elena Burmistrova, who serves on the board of directors of the Deutsch-Russisches Forum and is the Head of Gazprom Export (Gazprom 2019e). According to Mitrova, top-managerial changes like this have not occurred since 2003 and never have three managers from the highest circles been let go within a few weeks. Considering all of this, it seems like there could be a new divide emerging within the Russian state-society complex.

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CHAPTER 5: The prospects for a common European energy policy

In this final chapter the results of the last three will be discussed against the underlying theoretical and conceptual framework of this thesis. The research objective has been to analyse the transnational actors and their influences in German-Russian natural gas relations in relation to an envisaged European energy policy framework. The research question has been “How do social and political actors co-shape Germany’s natural gas strategy towards Russia and what are the prospects for German-Russian natural gas relations within a common European Union energy policy?” For the first part of the research question concerning German-Russian natural gas relations and the involved actors, the results of chapter 4 will be considered. The second part of the research question will be elaborated by combining the results of chapters 2 and 3. The following discussion will relate both parts to each other and approach the prospects for the future of German-Russian natural gas relations within the framework of a common European energy policy. A thorough assessment of the social and political forces involved in the making of German-Russian gas relations has revealed how commercial and political interests have become divergent over time. With the Treaty of Moscow, Germany and the Soviet Union entered into a relationship in which commercial and political interests were explicitly linked. It not only delivered a basis for mutually beneficial commercial trade, but also ensured military non- aggression. This created a convergence of commercial and political interests in Germany. On a European scale, Germany’s rapprochement with the Soviet Union through natural gas provided an impetus for infrastructural integration and enabled a diversification of imports driving down prices. After the end of the Cold War, the German energy companies and Gazprom started creating a vast network of cooperation. With the involvement of German companies in the upstream market and Gazprom’s presence in the downstream market ended the territorial demarcation and through joint-ventures and asset swaps Gazprom and E.ON/Ruhrgas and BASF became deeply entangled and interdependent. The special relationship between Russia and Germany also flourished in the political sphere under Gerhard Schröder. In the persona Schröder, close personal ties to the energy industry, as well as the Russia-friendly ideology of the SPD combined. At the same time, Vladimir Putin extended the state’s role in Gazprom and explicitly established it as a tool of the Kremlin. Commercial actors in the German gas sector

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have, together with Gazprom, hosted cultural events in Germany and Russia, some of which were attended by Putin and Schröder. There a many indicators, not the least of which is Schröders appointment to the board of the Nord Stream consortium, pointing at the fact that commercial actors in German-Russian natural gas relations have been able to exert great influence on Schröder and that Schröder had a personal interest in furthering German-Russian natural gas relations. This has had a decisive impact on German-Russian natural gas relations, which still persist. Germany’s Ostpolitik ended with Merkel. Under Merkel’s leadership, political relations between Berlin and Moscow have undoubtably cooled down. The personal enthusiasm about deeper German-Russian gas relations of Schröder’s time made way for political pragmatism that decoupled the political and the commercial spheres of German-Russian natural gas relations. It could be argued that this made it necessary for Gazprom to seek even closer cooperation with BASF and E.ON/Ruhrgas. The asset swap agreement which was brokered by the Russian government and disadvantaged Gazprom commercially but led to a deeper involvement of German companies in Russia is a good example for this. Here, an argument could be made for Russia’s strategic use of economic path dependency. More precisely, E.ON/Ruhrgas’ acquisition of 25% of the very large Yuzhno-Russkoye gas field assures a keen commercial interest in continued cooperation regardless of political developments. The gas disputes and the Ukraine crisis displayed the key feature of Germany’s approach towards Russian natural gas: Market over politics. Despite of the political upset between Germany and Russia, natural gas cooperation was not only not affected, it was able to reach new depths with the Nord Stream pipelines. Implementing the TEP can be seen as a move away from Germany’s traditional bilateralism in energy security towards a multilateral energy security strategy within a European framework. However, in light of the continued political support for Nord Stream 2 and trying to apply for exemptions for the connecting OPAL pipeline, it can be questioned whether the TEP actually represents a commitment to multilateralism in energy or merely a necessary response in light of growing pressure within the EU. An analysis of the social and political forces in German-Russian relations has revealed that the interests of commercial actors are very well represented on the boards of policy- planning networks. Influential lobbyists with excellent contacts and access to the political spheres in Germany and Russia interact with managers and board members of all of the large German gas companies and Gazprom on the boards of the Deutsch-Russisches Forum and the OAOEV, both of which regularly host and visit members of the German government and the

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Kremlin, including various German Foreign Ministers, Chancellors Schröder and Merkel, Vladimir Putin and Sergeji Lavrov. Additionally, the German Bundesländer, particularly those in the former GDR and Bavaria, have repeatedly opposed the Federal government on the issue of sanctions against Russia and maintain their own channels for political exchange with the Kremlin. All of this suggests significant influence from various social and political forces on the Federal government to oppose Brussels on policies that would go against the interests of commercial German-Russian natural gas relations. The displayed autonomy of civil actors and the business class in Germany make for a high degree of liberalism in the German state-society complex and strongly undermine the unitary actor notion. Sub-chapter 4.4. elaborated on the involvement of Gazprom on the German gas market and on the bilateral economy of traded goods between Germany and Russia. Going back to interdependence theory, it is apparent that neither Germany nor Russia would be able to mitigate a sudden loss of bilateral trade relations, making both at least sensitively dependent. In terms of overall trade, there is a relative asymmetry favouring Germany, because bilateral trade with Germany accounts for a larger relative share of Russia’s international trade than vice versa. Germany is the most important market for Russian gas and Russia is the biggest importer for all fossil fuels into Germany. An interruption of natural gas trade would certainly be costly for both parties but considering Germany’s increasing importance as a transit country and its overall high diversification of imports and interconnectivity, it could be argued that after a policy adjustment, Germany could be in a relatively less costly situation. A consideration of the ownership structures of the distribution network in Germany has furthermore highlighted the involvement of Gazprom and its joint ventures and subsidies in strategically important pipelines. This makes for enough evidence to suggest that Germany and Russia are interdependently linked through commercial activities. Critical arguments in the debate about German-Russian natural gas relations, for example brought forward by representatives of the US, that an increase of Russian gas on the German market would make Germany asymmetrically dependent, do not consider the grander scope of economic exchange between Germany and Russia and the leverage that comes with it. All in all, the close commercial links between German and Russian gas companies, the policy-planning networks and their access to the highest levels of government in Germany and Russia, and the political channels between Moscow and Bundesländer that called for an end of the sanctions regime, illustrate the strong influences of actors that have an expressed interest in Germany maintaining its commercial-led approach towards Russian natural gas. Concerning

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the general Europeanisation of energy policy, it has been shown that Germany is a highly conflicted actor due to the politics of the BMU, which represents environmental policy interests and is in favour of a European policy, and the BMWi, which has represented the commercial interests of the German energy market and has opposed a supranational coordination. This has prevented a coherent German policy towards a common European energy policy in the past.

With the increased politicisation and securitisation of natural gas in EC energy policy, which has been discussed in Chapter 3, the radical pragmatism separating the political and the commercial sphere in its engagement with Russia has distanced Germany from the EC and the member states in CEE. Reviewing the different approaches and energy situations of EU member states that in CEE and the Baltic region revealed that external relations and the political perception of Russia shapes their strategies for overcoming the challenge that is a lack of resources. Member states that are highly critical of Russian influence, like Poland and Lithuania, go to great lengths to diversify their gas imports and reduce their dependence on Russian gas imports and vulnerability to a supply disruption. Poland undoubtably perceives of Russian gas imports as a geopolitical threat and sought to deepen its ties with the US in response to it by importing US LNG and opting for a higher military presence of US armed forces on Polish territory. Opposed to that, Hungary as the most Russia-friendly country in the region seeks to increase imports from Russia. Pragmatists like the Czech Republic or Slovakia try to maintain their relevance as transit countries for Russian gas for East-West flows and West-East flows alike. Because of a past as Soviet satellite states, the general perception of Russian gas import dependence as a threat is prominent in CEE and the Baltic region. These member states insist that Russian natural gas imports are first and foremost a political matter and seeking diversification and a reduction of vulnerability is part of a national security strategy. Assessing the development of European energy policy against the background of the threat of a Russian supply disruption has shown that the EC has partly adopted this perception. It is at this point that the state-society complex as a unit of analysis offers its strengths to an explanatory model. As has been argued in Chapter 4.5., the relationship between Gazprom and the Russian state exhibits various indicators of an authoritarian type state-society complex. This necessarily brings the German commercial approach into conflict with the EC’s strategy for natural gas, which has been influenced by these member states. Under the prism of a centralised Russian state-society complex, a strictly commercial interaction with Gazprom is not plausible. The EC’s measures aim at containing the ability of the Russian state-society complex to utilise

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Gazprom as a vehicle to project foreign policy agenda onto the external sphere. Four measures are particularly important: (i) Ex-ante IGA checks, (ii) the diversification of import routes and suppliers, (iii) the unbundling and TPA requirements of the TEP, and (iv) the fully integrated wholesale market. All four significantly increase the natural gas security of the EU vis-á-vis a dominant supplier by effectively turning the European gas market from a seller’s market into a buyer’s market. Crucially, two of them also conflict with the interests of German commercial actors in natural gas: (i) Ex-ante IGA checks by the EC allow for intervention by the EC before individual member states sign an IGA with a gas supplier. For member states with a small relative market size and little diversification, this would likely mean an improvement of contract conditions because competition is ensured. For commercial actors in Germany this means an end to preferential treatment and oligopolistic practices between Gazprom and the German gas companies, which benefit the involved actors by preventing competition. For the Russian state-society complex this means that contract clauses which incorporate credit schemes in which Gazprom can demand debt to be paid at any time will not be tolerated. These have specifically been used as a political tool by the Russian state, most noticeably in the onset of the Ukraine crisis. (iii) The unbundling and TPA requirements of the TEP have effectively weakened the position of the German gas companies towards Gazprom, as well as Gazprom’s profit margin. More competition between distributors means that importers face flexible demand while being obligated to fulfil inflexible import volumes. Gazprom’s profit margin is reduced because it has to compete with its own volumes on the spot markets, which drives down prices. These interests explain the German position to seek exemptions from the TEP for the Nord Stream pipelines and the reluctance of the BMWi to make the German energy market subject to European market regulations. These gained insights and results allow a discussion and test of the two hypotheses presented in the beginning of this thesis.

H1: Germany’s approach of letting commercial actors take the lead in German-Russian natural gas relations ignores the geopolitical concerns of other EU member states and is therefore not compatible with the EC’s idea of a common energy policy. H1 is largely correct. The German commercial-led strategy towards Russian gas has clearly reached an impasse with Brussels and the member states in CEE and the Baltic region. It has been shown in chapter 3 that the perception of Russian natural gas dependency as a geopolitical threat has been Europeanised and decisively shaped EC energy policy in the field

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of natural gas. The EC has explicitly opposed Nord Stream 2 because of the geopolitical threat it poses to member states in CEE. The PCIs clearly show that the EC prefers a diversification of import sources and promotes all means available to diversify natural gas imports away from Russia. The Energy Union proposal calls for energy solidarity and for the EU to speak with one voice, a call which the German insistence on a commercial approach largely ignores by refusing to transpose political relations with Moscow into energy policy. It has furthermore been shown that the desired effect by the EC to strengthen European energy security can only be achieved if diversification and market-liberalisation are complementary pursued. Speaking with the conceptual dimensions of energy security, this necessitates that EU member states implement measures along the diversification dimension, as well as the multilateralism dimension, both of which are clearly informed by the geopolitical dimension of energy security in the EU context. The example of the V4 impressively shows how the external relations with Moscow have a decisive impact on national natural gas strategies. The indicator of high state involvement in the energy market is present in all member states in the CEE and Baltic region, making for partly centralised state society complexes. This partly explains the influence of external political relations on the respective national natural gas security strategies. Germany’s commercial approach will continue to come at high political costs within the EU, because CEE member states and the EC have linked energy policy and foreign policy. To conclude, Germany needs to implement the EC’s energy policy tools following the logic of all of the discussed energy security dimensions. The TEP indicates a turn towards multilateralism, but the political support for Nord Stream 2 undermines the EC’s diversification efforts, which are decisively determined by the geopolitical concerns of member states in CEE.

H2: The fundamental difficulty to establishing a common EU energy policy are the different state-society complexes in energy within the EU, which complicate formulating a common approach to the relationship between the state and the energy market. H2 is partly correct. It has been shown that the state-society complexes of the EU member states exhibit different degrees of centralism. With their state-owned energy companies and the strong connection between external political relations and energy policy, it is clear that the energy business class in the V4 and the Baltic states is somewhat limited in formulating its own preferences. On the other hand, Germany shows few if any indicators for a centralised state-society complex. The state does not interfere in the energy market and has no stake in the energy companies. The German business class in energy is highly autonomous and maintains

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its own transnational channels with Russia and exercises influence onto the political sphere. These differences have proven to be a hurdle for the European energy policy integration because the highly liberal state-society complex in Germany follows a commercial rationale, while the party centralised state-society complexes of member states in CEE view energy policy through the political lens of the state. The EC is left having to find a balance between these two tendencies in its member state’s state society complexes. Its definition of natural gas security as a responsibility of member states, the EC and gas companies exemplifies this. Whether this discrepancy represents the fundamental difficulty in integrating European energy policy is debatable. As much as the different priorities of member states hinder the formulation of a common position, the ultimate effect is that the EC is not able to extend its competencies in the energy field.

To conclude, what are the prospects for a common European energy policy? The various influences on German energy policy and German-Russian natural gas relations suggest that it is unlikely that Germany becomes a driving force towards realising the EC’s framework for a common energy policy, which includes “speaking with one voice in global affairs” (EC 2015a: 2). On a European level there is a clear divide between Germany and member states in CEE. Germany’s traditional method of ensuring natural gas security is to leave is to commercial actors. Considering the history of German-Russian natural gas relations and Ostpolitik, this has been a certain guarantee for stability and security. However, this approach is not compatible with the current plans for a common European energy policy, as it this ignores the valid geopolitical concerns of CEE member states. To put it bluntly: Germany wants commerce over politics and the CEE member states want politics over commerce. Germany’s approach towards Russian natural gas is currently not compatible with the EU’s Energy Union framework. Considering the authoritarian type Russian state-society complex, it cannot be argued that a purely commercial interaction with Gazprom is possible. Any commercial exchange with Gazprom inevitably has a political dimension, because the close links within the centralised Russian state-society complex make for a unitary actor. Opposed to that, the German state- society complex with its autonomous business class and civil actors is not unitary. Discussions about the future of German-Russian natural gas relations within a European framework should consider this differentiation of the unit of analysis.

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Trends and further research

There are a number of current developments that will impact German-Russian natural gas relations, as well as the EC’s natural gas strategy. The first one concerns the ongoing negotiations between the Russian and Ukrainian governments and Gazprom and Neftogaz over natural gas transit after the expiration of the current contract on the 31st of December 2019. At the current state of negotiations, Pirani (2018) argues that a supply disruption in January 2020 is likely, because on the Russian side Gazprom’s commercial interests to maintain transit through Ukraine are likely trumped by the Russian government’s strategic priorities (2018: 19). This is underscored by communications between Gazprom and the Bulgarian and Hungarian importers, warning of an imminent supply disruption. There is much uncertainty surrounding the Ukrainian position, because the newly elected Ukrainian president is new to politics and has not indicated what kind of strategy he would favour. The fact that Neftogaz has filled up its storages to 20 bcm suggests that the Ukrainian side also expects an interruption (Pirani/ Ladesma 2019). If the negotiations fail and no new contract can be reached, Nord Stream 2 could become a new priority of the EC. Mitrova (2019) even states that in the case of a ‘no deal’ scenario between Ukraine and Russia, the EC would have no choice but to immediately endorse Nord Stream 2 (Mitrova/Henderson 2019). The recent European election also casts uncertainty over the future position of the EC. It is not clear how much of a priority the Energy Union, which has been a project of the Juncker-Commission, will be for the next president of the EC. However, the Spitzenkandidat of the largest party in the EP, the European People’s Party (EPP), Manfred Weber has been an outspoken critic of Nord Stream 2 and strongly opposed the position of the German government to which his own party, the CSU, is a coalition member. In Germany current political developments cast doubt over the future of German energy policy. The government coalition of CDU/CSU and SPD could be in danger of falling apart after SPD leader Andrea Nahles resigned and political support for a continuation of the Grand Coalition is fleeting within the party. Political observers have expressed that new elections before the end of the current legislature and possibly even before the end of the year are likely. With the Greens leading in current polls, this would significantly impact German energy policy. The Greens strongly oppose keeping lignite as an energy resource and oppose Nord Stream on environmental terms and because of Russia’s human rights record. With a strong or even dominant position in a government coalition, the Greens could be able to secure the BMWi and the BMU. Lastly, as Mitrova (2019) observed, a rebalancing between Gazprom

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and the Russian state might be underway (Mitrova/ Henderson 2019). Unprecedented staff changes at Gazprom, in which personnel with strong ties to the Russian state has been replaced by Gazprom’s own and an anti-corruption investigation into the business of a confident of Alexey Miller could signal a restructuring of the Russian state-society complex. These events indicating the various influences in energy policy making point to the benefits of inviting the state-society concept into the framework of scholarly analyses in the field of energy studies. For further research it could be interesting to more thoroughly analyse the transnational European state-society complex(es) in energy.

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