A necessary relationship
Relations between the E.U. and Moscow depend on a range of geographical and geopolitical factors, some related to Russian gas exports to the E.U., which have reached record highs. Interview with Konstantin Simonov, Russian political scientist and energy expert

Collaboration between the European Union (E.U.) and Russia in the gas industry is not a possibility but rather a necessity imposed by geography as well as geopolitics. This is the claim of Konstantin Simonov, Director General of Russia’s National Energy Security Fund, who highlights that Russian gas imports into the E.U. have risen to record levels despite the economic sanctions imposed on Moscow by the West.

Russia and the European Union seem to have reached an agreement to close the proceedings against Gazprom. The Russian gas giant will need to agree not to exploit its dominant position, and in exchange will obtain the possibility of expanding its activities within the E.U. In your opinion, what will the industrial and geopolitical effects of this be?

Effectively, we often talk of compromise. I would say that there’s nothing particularly extraordinary about what is taking place, except for the historical moment in which it is occurring. This is because the political situation seems to be exceptionally dramatic and it was not possible to predict that the European Commission would reach a decision apparently in agreement with Russia. The economic and political situation has actually required this logical and rational step to be taken. Besides, current data demonstrate that the accusations against Gazprom are highly questionable. Recently, we have seen decidedly low prices, which had not been observed for years in the European market. But this did not happen because Europe reformed the energy market in accordance with its own principles. To the contrary, prices declined thanks to gas and oil contracts. At the start of the year, oil prices were not so low. Then after nine months, between September and October, they fell sharply. This was the first factor. The second was last October, when European prices were higher than those offered by Gazprom, indicatively around $50. Although they are not officially fully accounted for by the European Commission, these figures represent the reality. Third, Europe has no alternatives to gas. Liquefied natural gas (LNG) terminals are two-thirds empty, all within a context in which Gazprom set its daily all-time record of supplies abroad. Last October alone, 15 billion cubic meters were delivered throughout the European Union. European customers acquired much more than the volumes agreed upon in the contract with Gazprom. These are absolutely unprecedented conditions, and with a situation of this nature it would be absolutely crazy for the European Commission to continue on the path of seeking an alternative to Russian gas. The import figure is absolutely without precedent. I also believe that in Europe, the feeling is emerging that Ukraine may embark upon the winter season with a very limited quantity of gas. And the bad weather has started earlier than in the last two years. Economically speaking, the difficulty is that fighting Gazprom in the winter is a particularly difficult proposition. And it is important not to lose contact with reality. What counts is that this year, quite unexpected decisions have been taken in Europe. Recall that in June, the Court of Arbitration issued a ruling in favor of Gazprom in the dispute with Lithuania. The Vilnius authorities summoned Gazprom to court in 2012 for allegedly taking advantage of its dominant position in the market to overcharge for gas. (According to Lithuania, Russia overcharged by $1.6 billion from 2004 to 2012, ed.). As also admitted by several Lithuanian representatives, the outcome of the arbitration proceedings was shocking, although there were not great prospects for success, and it is necessary to understand whether the Lithuanians managed to obtain anything from this dispute: perhaps the promise of faster access to the European hub project. However, this success was rather limited. Therefore, from the economic perspective, trends are not positive. From the political perspective, obviously not everything can be changed at once, but it is important that the precedent has been set. Even considering current conditions in Brussels, it was possible to take decisions that are apparently favorable to Gazprom. It is good to see that this type of compromise can be reached.

The project for doubling Nord Stream sparked lively criticism from the United States, Poland and the Baltic States, and from Italy as well. The doubling project would link Berlin and Moscow even more firmly, but it would also boost the specific importance of Germany in Europe, especially with respect to the former Communist countries. Is this an accurate portrayal of the situation? And do you believe that this is a good development for the Russian government?

The history of relations between Russia and Germany in terms of gas supplies started more than 40 years ago. The first gas supplies to Germany were delivered in 1973, and the country represents the primary end market for Russian gas. Gazprom is not only a partner in sales. It also owns the company Wingas (a joint venture between Gazprom and Wintershall), which is co-owner of the Opal gas pipeline infrastructure located in Germany. Opal continues to the Czech Republic through German territory. This special relationship is why German businesses and Gazprom have several points of contact. In addition, in a somewhat rare case, German companies are working actively in the Russian market by extracting gas in Russia. The Nord Stream project itself was carried out as an asset swap and was built jointly. Indeed, the connection is strengthened by the fact that the Germans are present in Russia in the upstream market, and that Gazprom is present in Germany in the downstream market. Therefore, there is an extremely high level of reciprocal relations, which makes it possible to look at the current political situation with tranquility. This is because everyone on which the United States has a heavy influence, such as German Chancellor Angela Merkel, needs to take into account economic aspects. But this does not stop market rules and the basic concept is that commercially, Gazprom has continued with existing partnerships. I believe it is necessary to underscore the fact that gas was not subject to the sanctions against Russia. There are sanctions, but not for Gazprom, whose activities are fully compatible with European legislation. In addition, in Germany there will be political elections next year, and in Russia we certainly will not be naive. The situation is not good for Merkel and there will likely be changes in the power structure. Perhaps Germany will be more cautious with regard to sanctions. In this environment, it is significant that in Italy, the Nord Stream 2 project gave rise to concerns from many political representatives, although the gas pipeline was conceived of precisely to supply the Italian market. For Brussels, this infrastructure would make it possible to unite Italy with the Baltic region, providing gas to Northern Italy while bypassing Ukraine. In our view, this is a project meant to bypass the ''dangerous route'' through Ukraine, since European customers do not want to deal with those risks. This is the lesson taught by the ''gas crisis'' of 2009 (the crisis began on January 7, 2009, when Russia suspended gas supplies to Europe through Ukraine. Moscow accused Kiev of violating transit obligations by illegally withholding supplies meant for European customers. After a series of negotiations and trilateral agreements between the European Union, Russia and Ukraine, an agreement was reached, ed.). I understand why there is some confusion in Italy about the project since, if it is carried out, Italy will receive gas through Germany and Austria. The Chairman of the Austrian company OMV, Rainer Seele, was at the helm of the German Wintershall and is German himself, demonstrating the close integration between the German and Austrian gas companies. This issue has a political aspect, because for Rome the project entails dependence on the companies that will manage transit through Germany and Austria. If Italian politicians fear that Germany and Austria may become more important, then they should have supported the creation of the South Stream. With this infrastructure, Italy would have received gas via a safer route through Greece. But Italy did not support it and indeed abandoned the project. Therefore, Russia had no option other than pursuing the doubling of Nord Stream.

In your opinion, does the Nord Stream represent the death knell for the old South Stream project?

The situation is such that the South Stream, in its first version, and later the Turkish Stream, were designed with four pipelines. By the will of Turkey, given the EU’s opposition, the two southern routes were transferred to Nord Stream. Previously, in Italy, it was expected that gas would arrive to the South through Bulgaria and Greece. This is why the issue of the two routes from southern Europe is still standing. One of the two will certainly go towards Turkey, to Istanbul, without a doubt. The second route is still an open question, because Turkey would like to establish a hub at the border with Greece and become the supplier of Russian gas to Europe. However, from the geopolitical perspective, there does not seem to be any agreement at the European level regarding whether this is the best solution. This is why Europe is now proposing to Russia the creation of a hub at the Bulgarian-Greek border. We are also analyzing the possibility of creating a southern route through Bulgaria, but we would like guarantees that Sofia will not block the project again this time, as took place for the South Stream. The fact is that the decision can no longer be put off: we have a precise date - January 1, 2020 - when the gas transit contract currently in force with Ukraine will expire. It is necessary to understand how to supply gas without necessarily transiting through Ukrainian territory by that date.

Konstantin Simonov

Konstantin Simonov

Konstantin Simonov is a Russian "new generation" political scientist and public expert on energy. Currently holding the title of Associate Professor at Moscow State University (MSU), he has been engaged in academic research in the fields of political and economic studies for over 15 years. Simonov is currently Director General of Russian National Energy Security Foundation.

After the failed coup d'état in Turkey, relations between Ankara and Moscow improved considerably: do you think that this will be a lasting consequence, or that things could change again in the near future? And in that case, what may the negative effects be for the Turkish Stream gas pipeline project?

As regards the first of the two Turkish Stream pipelines, I do not believe that anything will change. The work will be completed even if the political situation moves in a negative direction again. The second pipeline will depend on the E.U.’s position, on whether it will accept Turkey as the ''controller'' of gas being sent to European countries. The agreement signed during Putin’s visit to Istanbul concerns only one of the two southern pipelines. For the second, we have not entered into any commitment with the Turks and legally it is still an open issue.

All of the propositions of a Trans-Caspian gas pipeline have come up against the legal status of the sea, enabling Russia to impede the creation of the transport infrastructure. Do you believe that this situation could change in the future?

As you know, the Caspian Sea is different from other seas because it is actually a lake, bordered by five countries: Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. Russia has always had the same stance: the issue regards exclusively these five countries. The legal issue of the Caspian Sea has remained unresolved for 25 years now. We have yet to come to a compromise. This is not only a Russian issue; for example, Turkmenistan and Azerbaijan also have conflicting views. In addition, recently, the position of Iran, which has its own ideas about how to divide the Caspian Sea, has strengthened considerably. I do not believe that this problem will be resolved soon, as none of the countries in the region of the Caspian Sea is interested in stabilization. Russia does not need an open sea: the Trans-Caspian gas pipeline project is an alternative route for the supply of gas to Europe and, clearly, for Russia, it is useless to build alternative infrastructure to bring gas to Europe. It’s the same for Iran, since Tehran hopes to sell its own gas to Europe. On the other hand, Azerbaijan has already signed the contracts for supplies from the Shah Deniz field. Turkmenistan also has no particular interest, especially because Turkmen gas is sent primarily to China. The quantities are enormous. China has no interest in Turkmenistan continuing to sell to Europe, and the country cannot object to Beijing’s position, also taking into account its complex economic situation.

What is the current situation of gas supplies from Russia to China? And from Central Asia to China?

Relations between China and Central Asia are excellent. China is a great purchaser of Central Asian gas. It is a situation that plays against Russia's interests in negotiations with Beijing. In May 2014, we signed an agreement with China for the construction of the ''Sila Sibiri'', also known as the ''Power of Siberia'': the Yakutia–Khabarovsk–Vladivostok gas pipeline, which is in the construction phase in eastern Siberia, to transport the gas from Yakutia to China and countries in the Far East. There are a number of technical difficulties, for example in the separation of methane from helium, but the project is in fact proceeding. In terms of infrastructure, based on the plan LNG will be separated from methane and a large plant will be built to process gas in the Russian region of Amur. The contract envisages that deliveries will begin between 2016 and 2021. There are four years to complete the project and there is no reason to panic. In Yakutia, the infrastructure has already been operating for one year now. At the same time, we have the construction of a second pipeline, the ''Zapad'' (West), in the design phase. It will pass through the Altai Mountains, a series of mountains in Asia that spread through China, Mongolia, Russia and Kazakhstan. In this case, problems have arisen, as gas from Central Asia already arrives to Western China, and Beijing will have the upper hand in price negotiations. This is why negotiations continue, but they are decidedly complicated. Gazprom has not pushed particularly, but China has moved forward with its line in view of a favorable price. It has done this even more so because for the transit of these supplies, it would be necessary to approach China’s eastern border, and the question arises of who will pay for transport costs. Western China does not need this gas as much as Europe. Therefore, Russia would like to increase the volume of gas deliveries to China through the ''Sila Sibiri'', based on the certainty that Beijing will need more. This can be expected not only due to trends in the Chinese economy, but also because of the environmental issue. China has signed the Paris COP21 agreement for a constant reduction in carbon dioxide emissions. This means that it will decrease its use of certain resources, such as coal, in favor of gas. And we are counting on the fact that they will need more. However, it is difficult to negotiate with China - it can already count on gas from Turkmenistan and it uses this as a bargaining chip to pressure Russia.