Energetics in Kremlin’s geopolitics

December 30, 2020

Stalin proposed to use energy resources in order to solve geopolitical problems, leveling the needs of the state, immediately after the end of World War II.

Hegemony above everything.

For the first time such political tools of influence was tested in 1948, despite the acute shortage in domestic market, through supplying the oil and oil products to Finland and Bulgaria.

Along with energy supplies, Finland made concessions to the Soviet Union and undertook to renounce NATO membership and remain a de jure non-aligned state[1].

The personal relation of the dictator of the Soviet Union directly affected deliveries. For example, in1949, after the change of Stalin’s attitude to Tito, the export of the oils products to Yugoslavia completely stopped.

The Soviet government influenced global oil markets indirectly. An example is the support of Egypt with armaments[2] during the Suez Crisis in 1956. As a result, throughout the conflict crude oil supplies from the Middle East to Europe fell by 73%.

Such an intrigue on the blood opened new opportunities for Kremlin. In addition to selling energy to the socialist camps, the Soviet Union in 1957, after signing a contract for the supply of crude oil with the Italian company “Eni”, penetrated the markets of capitalist countries due to unreasonably low price and possibility of barter transactions.

Partial recovery of the USSR’s oil industry in 1959 made it possible to increase crude oil exports and sign an interstate memorandum[3] on the construction of “Druzhba” main oil pipeline[4] and oil refineries[5] for Soviet oil.

The first sanctions

The first US sanctions against the USSR were applied in December 1939 against the background of the exclusion of the Soviet Union from the League of Nations due to the bombing of Finnish cities by Soviet Aircrafts. A similar decision was made in relation to the Third Reich, which, among other things, after signing of Molotov-Ribbentrop Pact, sent a batch of oil and gas equipment to Moscow. As a result, the US State Department imposed an embargo on the supply of munitions, including fuel for aviation. The restrictions were lifted in 1941, which certainly affected the combat effectiveness of the Soviet army during World War II.

The events of the Caribbean crisis, as well as the rapid increase in dependence of European countries on Soviet energy resources prompted the United States to rapidly apply sanctions against the USSR in 1962 due to the embargo[6] on the supply of pipe products for the construction of the “Druzhba” main pipe line.

However, the first confrontations among NATO member states took place. The driving force of the disturbances were financial and industrial groups[7], in particular, of the Federal Republic of Germany, which saw this project as their own business interest due to low energy prices.

In addition, the sanctions were not supported by Italy and the United Kingdom, which supplied equipment for this pipeline and considered it solely as an economic project.

However, the sanctions didn’t stop the construction of the pipeline, the first deliveries started in 1964 and the export route was expanded 10 years later[8].

Increase of export. Gas helps with oil.

In fact, the first exports of natural gas were carried out by the USSR shortly after the liberation of Western Ukraine and Poland from Nazi invaders. At that time, starting from 1943, the Opary-Sambir-Stalyova Volya pipeline was already operating[9], and was supplying gas from Galicia.

During first two decades, the gas fields of Western Ukraine were the main source of exports to Poland[10] and customers in Kyiv, Moscow, Minsk and Riga[11].

The discovery of fields in Eastern Ukraine, the North Caucasus, Asia and Siberia allowed to increase the natural gas sales, but required an appropriate infrastructure. For this purpose, the construction of the main pipe line Brotherhood (“Braterstvo” in Ukrainian) was started, which in 1967 connected the gas transmission systems of Czechoslovakia and the USSR. After leading a group of Warsaw Pact troops to Prague, the communist regime was strengthened and a 20-kilometer interconnector between Baumgarten and the Czechoslovak gas-transport system was constructed.

This enabled the USSR and Austria to sign a contract at the end of 1968 according to which Vienna provided financial loans to the Soviet “Vneshtorgbank” (Zovnishtorgbank in Ukrainian) for the purchase of pipe products and equipment in exchange for natural gas coming through Czechoslovakia.

The first barter contract motivated the Soviet Union to pursue the policy of energy expansion. Based on this goal, in 1969 tripartite negotiations between the USSR, Italian company “Eni” and German affiliate group of corporations “Ruhragas” began.

The negotiations were successful; the Federal Republic of Germany began receiving fuel on October, 1, 1973, and a year later, after the completion of the pipeline construction in Austria, thy physical supply of natural gas to Apennine Peninsula began. At the same time, Italian ‘’Eni’ in order to balance relations with the United States[12] through the intermediary company “Snam Rete Gas” concludes a twenty year contract with USSR for the supply of 100 billion cubic meters of natural gas.

In order to receive additional volumes of natural gas from the USSR, during 1976-1980s the European gas transmission network was being developed[13].

It is interesting that the USSR in exchange for the annual supply of 3 billion cubic meters of natural gas to Germany, received a loan from Deutsche bank on concessional terms of 1.2 billion marks as well as from the company “Mannesmann AG” more than 1 million tons of pipe products.

All above mentioned, made it possible to put into operation “Soyuz” main pipeline, in 1980, which opened a new page in the history of Soviet gas export to the countries of Central and Western Europe.

The increase of Soviet gas supplies, in addition to rather favorable prices and conditions, was also caused by the desire of European countries to reduce oil dependence on Algeria and the Middle East due to the supply instability. It should be mentioned that non-fulfillment of the contracts was caused by the destabilization of domestic political situation in Africa and Middle East, to which the Soviet secret services were indirectly involved.

Taking into account this fact, as well as the desire of the Soviet Union to expand the horizons of energy expansion, the US presidential candidate, Ronald Reagan in his campaign speeches quite aptly noted that in the nearest future the European countries would face the fate of Finland, which after the first oil and gas molecules went to the politics and military concessions to the Soviet Union.

After Reagan had been elected, he logically continues his external policy and imposed sanctions against the USSR[14] due to the discriminatory treatment of Poland.

Thus, the new infrastructure project “Urengoy-Pomary-Uzhhorod” was a subject for sanctions, which at that time involved European companies and financial organizations[15].

The United States argues that this pipeline leads to the energy dependence of Western European countries on the Soviet Union and poses a threat to NATO. Because of this, official Washington tightened the embargo in 1982 by extending the ban not only on the products of American companies, but also on the equipment, manufactured by their branches abroad and foreign companies under American licenses.

After such a step the struggle for the future of the gas pipeline goes into an active phase. Such countries as the Great Britain, France, Federal Republic of Germany and Italy do not recognize the US sanctions and continue to cooperate with the USSR.

Despite the sanctions, in 1984 the construction of Urengoy-Pomary-Uzhhorod gas pipeline was completed. However, instead of the projected two pipelines there was only one line, mostly form Soviet materials and equipment.

 

However, in 1986 the main pipeline “Progress” was put into operation, which, actually performs the function of the second line of the gas pipeline “Urengoy-Pomary-Uzhhorod”.

Unrealized projects of energy expansion

The USSR, having consolidated its positions on the European continent, planned to expand its energy expansion to Japan and the United States.

The first project was to organize the export of crude oil[16] to Japan. There were two attempts[17] to implement such a plan and all of them ended in failure due to the disclosure of the military-political interest of the USSR in these supplies. At that time, in 1970 there was a deterioration of the relations between the Soviet Union and the People’s Republic of China, so Moscow began construction of the Baikal-Amur pipeline[18] and changed the model of the oil supply project to Japan[19].

The second project was aimed at the organizing of the sale of the natural gas to the domestic market of China. The Soviet Union, simultaneously with the negotiations on oil sales, offered Tokyo to purchase natural gas from Sakhalin fields. There were two attempts[20] and they were unsuccessful. In addition to the supply of resources, the construction of the underwater gas pipeline, which should have connected the gas transport infrastructures of Japan and the USSR, was planned. However, the United Stated blocked the Kremlin’s attempts to motivate Tokyo to purchase more liquefied natural gas through LNG-terminals.

The third project was called “The North Star” and had an ambitious scale – the organization of the natural gas supplies to the USA consumers from the fields in Siberia. The project provided the construction of the gas pipeline on Urengoy-Murmansk route and further transshipment of natural gas through LNG-terminals to the LNG tankers, which were planned to be sent to American ports.

This project was the result of temporary warming in relations between the USSR and the USA. However, the political preconception of  Kremlin’s energy diplomacy in Washington was revealed.  After that, in 1975 Jackson-Vanik amendments were adopted[21], which provided the most favored nation treatment only for those countries that do not restrict free migration[22].


It is likely, that the adoption of such a rule was lobbied by US senators, who disapproved the Soviet Union’s support for the Arab countries (Syria and Egypt) during the war with the State of Israel[23], as well as the Soviet Union’s imposition of restrictions on freedom of movement, in particular, towards Tel Aviv.

Later, in 1979, President Carter responded to the Soviet invasion of Afghanistan and announced sanctions against the Soviet Union. As a result, the North Star project remained ink on paper.

Schemes, corruption of communist leaders and collapse of the USSR

The paradigm of the Soviet policy was to support so-called “peoples democracy” with cheap energy resources in the socialist countries[24], which, actually, meant establishing Moscow’s direct influence on the economy of these states through resource dependence on the USSR.


The Soviet Union implemented two models of involving other countries into dependence: lending, subsidies and direct currency assistance. The first approach was carried out by means of predominance of the value of exports over imports of goods or services from partner countries. For example, in the contracts for the sale of energy resources there was a clause, that allowed the Soviet “Vneshtorgbank” to use currency earnings in order to purchase products in these countries, but at market prices.

The second approach, subsidization, was to create favorable contractual conditions through preferential prices and tariffs for transport services. Strategic cooperation was consolidated through fixed prices and long term contracts.

For instance, subsidization of oil exports to European countries of Socialist camp brought losses to the budget of the USSR at the level of $10 billion annually.

In addition, contrary to the state interests, there were cases, when preferential oil contracts were concluded with companies of Socialist countries that belonged to the entourage of members of foreign communist parties.

Later, the principle of cooperation between the USSR and the importing countries of Soviet energy resources demonstrated its helplessness by consolidating the principles of fair competition in global markets.

The crisis of 1989, during which there was a sharp fall in hydrocarbon prices, which prompted Moscow to begin a gradual transition to the world-class trade with minimal barter agreements.

This served as an impetus for the collapse of the Soviet Union. Thus, the events of 1990 confirmed once again that energy was one of the main tools of Moscow aggressive geopolitics.

In fact, the policy of low prices and dubious schemes became a trap for both, the USSR and the countries importing Soviet energy resources. The communist camp disintegrated, and the obligation of individual states in exchange for cheap oil or gas changed their history radically, weakened energy security and halted their further development.

The significance of the historical role of the USSR in the geopolitics of the Russian Federation and relations with China

From the first day of its formation, the Russian Federation was building foreign and domestic policy according to the principle of a sole successor of the USSR, which independently defeated the Nazi regime and then, in every possible way, supported the countries of Central and Eastern Europe, including available energy resources.

The imperial nostalgia was growing every year and started going beyond, after the President of the Russian Federation in a message to the Federal Assembly in 2005, had called the collapse of the Soviet Union to be the world’s greatest tragedy of the century.

Even then, it became clear that the modern Kremlin administration had determined a strategic course for restoring Moscow’s global influence in accordance with Soviet plans.

The practical steps for implementing this political line were the invasion of the Russian army in Georgia, Syria, the Ukrainian Crimea and Donbas[25].

Russia is also active at the energy front, building nuclear power plants, new pipelines[26], LNG infrastructure, developing the Arctic region, financing armed conflicts to eliminate competitors[27], and lobbying favorable terms by means of corrupt elites of other countries[28] for sales of Russian electricity, oil and other resources.

All these aggressive actions of Russia to restore Soviet hegemony and expand the zone of influence in the world would be impossible if Moscow didn’t rely on financial and political resources from energy exports, in particular, to the European Union.

In fact, the struggle for the role of the USSR in history became the main driving force for Russia for its aggressive geopolitics and a necessary condition for future existence. In particular, the Kremlin also needed the historical significance of the Soviet Union to strengthen the strategic cooperation with China, where communist ideology was the foundation of all state processes.

Therefore, the plan of some Western politicians to restore the relations with Moscow, including lifting sanctions until Ukraine gains complete control over its borders in Donbas and Crimea, in exchange for using Russia to contain China, is an unrealistic and dangerous illusion. Kremlin is well aware of the consequences of the conflict with China and would never go for it on its own initiative. One of the proofs of the long term cooperation between two countries is the development of the infrastructure for energy supplies from Siberia and Far East to China, as well as joint work on the implementation of the Northern Trade route through the Arctic.

In general, China’s policy is subject to only one goal – to gain the world leadership.

This goal has already being achieved today by dumping prices for Russian energy resources, using water resources in geopolitics, improving energy strategy, ratifying investment agreements on cooperation with Democratic People's Republic of Korea and Iran, and increasing the military presence in the South China Sea.

A special place in Beijing’s strategy is occupied by the Belt and Road Initiative logistics project, which is aimed at economic expansion of the EU markets. To achieve a new level of integration of Chinese goods and European consumers is possible by violating of internal unity as well as exclusion of global competitors. Here, the interests of China and Russia coincide and Nord Stream -2, in particular, should contribute to the achievement of common goals.

How to neutralize the Kremlin’s gas weapons?

Today, this question, probably, worries all conscious citizens of the EU ad Ukraine, who profess democratic values and want to get rid of the slightest chances of reincarnation of Soviet geopolitics.

More capacities than consumption

After the commissioning of Nord Stream 2, the nominal transit capacity for Russian gas will be more than 250 billion cubic meters, which is 20% higher than the peak consumption of Gazprom’s counterparties in the EU[29]

However, as a result of the pandemic, the increase in the share of natural gas supplies through LNG terminals, as well as the implementation of measures of economy decarbonizing through the development of renewable energy and hydrogen economy, natural gas consumption in Europe will continue to decline.

As a result, the demand for Russian gas will fall to about 140 billion cubic meters per year. Because of this, there is no economic and technical sense in the operation of excessive capacity of pipeline transport[30]. Against this background, the continued operation of the newly built underwater pipelines, despite the unprofitability of Gazprom[31], will once again confirm that the Russian Federation uses energy as a geopolitical tool.



The results of modeling a new scheme of gas flows discrimination and geopolitical change

Natural gas from Nord Stream-2[32] will enter the German transmission system through Lubmin gas-metering station. Further physical movement of natural gas is as follows. About 20 billion cubic meters will be transported for the customers in Hamburg and Denmark. The remaining volume will be delivered to Opal Eugal gas pipelines without identification of the owner for its further delivery to the border with Czech Republic. Before border gas-metering stations, 15 billion cubic meters will flow western regions of Germany though the Stegal and Megal pipelines. After that, Aubenhaus and Deutschendorf gas metering stations to which the Czech gas pipelines Gazela and Capacity4Gas are connected, will receive 85 billion cubic meters of Russian natural gas.

It should be noted, that the change of ownership of natural gas by non-EU residents within internal borders contradicts European Directives. EU law is also contradicted by the fact that most of the main gas pipelines in Central and Eastern Europe are blocked by long-term contracts with PJSX “Gazprom”, which acts as both, a transiter and a seller. All above mentioned creates discriminatory conditions in the European natural gas market, which is considered to be liberalized.

Despite such gross violations, gas will be distributed from Russia under long-term contracts to the domestic market of Czech Republic, as well as to consumers in France, Slovakia, Austria, Italy and the Adriatic coast.

Under such conditions, the congestion of the Ukrainian route will decrease sharply and will provide for the needs of Hungary, Poland and the Balkan region countries.

However, after the expansion of the Southern gas corridor, Ukraine will transport the minimum amount of natural gas for the EU countries, which will be needed only to cover the seasonal unevenness.

In this case, the importance of the Ukrainian gas corridor will be diminished, which will eliminate the precautionary mechanism for a new wave of Russian aggression and will further strengthen the Russian-German alliance in Europe as well as open new opportunities for China.

The rules are the same for everyone

The Kremlin’s gas weapons can only be neutralized by the European Union’s common position, in particular, in the issues of unblocking access to onshore gas pipelines[33], compliance with all market participants’ rules for separating transportation from sale and moving Russian gas reception points to at least the EU external borders.

In such a scenario, Ukraine has every chance to keep the annual volume of natural gas transportation for European consumers on a level of 40 billion cubic meters.

However, fair decisions may be hindered by the own interest of individual politicians[34], who were formed during Soviet era and finally capitalized in Nord Stream-2 project.

France and Italy, though, which depend on supplies from Russia for not more than 15%, together with other Central and Eastern Europe countries can become the critical force that will affect Germany’s position and ultimately establish the same rules for all.

It is the benchmark that the EU’s energy policy should keep to. The main thing is unity in thoughts and actions, as well as common desire to keep Europe democratic and strong.

 

 









[1] The Treaty of friendship, cooperation and mutual assistance between the USSR and Finland concluded on April 6, 1948, required neutrality and recognition of the special strategic interests of the Soviet Union by Helsinki.

[2] In1955 an agreement with Czechoslovakia was signed with the consent of the Soviet Union, mediated by Chinese Prime Minister Zhou Enlai. Egypt received: MiG-15bis jet fighters -120 pcs., IL-28 bombers -50pcs., T-34 tanks-230 pcs., armored personnel carriers -200 pcs., self-propelled artillery units – 100pcs., various guns – about 150pcs., submarines - 6pcs.,several warships, ZID-150 trucks – 100pcs..The coordination of personnel was carried out by military instructors from the USSR and Czechoslovakia. Due to the supplies, Egypt armed forces were four times larger than the Israel Defense Forces.

[3]Agreement between the USSR and Czechoslovakia, Poland, Hungary and the German Democratic Republic.

[4] The length of the pipeline is 5,500km.

[5] Ploch (Poland), Bratislava (Czechoslovakia), Sizhalombati (Hungary), Schwedt (the German Democratic Republic), Burgas and Pleven (Bulgaria), Gheorghiu-Dej (Romania).

[6] Within NATO countries.

[7] West German industrialists and entrepreneurs have been proposing German authorities to work more actively on the eastern markets since the early 1950s. There was the Eastern Committee of the German Economy established in 1952. The Committee included the leaders of the Federal Union of German Industry, Deutsche bank, the Krupp concern and many others. Moreover, in 1955 the head of metallurgical company “Otto Wolff” strongly persuaded the authorities of the Federal Republic of Germany in the need to establish diplomatic relations with the USSR.

[8] In 1978 Soviet oil exports to Eastern Europe amounted to more than 1.5 million barrels per day or 13% of total volume of production.

[9] The story of one discovery. Access mode - https://www.istpravda.com.ua/articles/2014/09/25/144855/

[10] More than 5.5 billion cubic meters of natural gas were exported from 1945 to 1965.

a[11] Through the main gas pipeline “Dashava-Kyiv- Bryansk-Moscow” as well as “Dashava-Minsk”

[12] After the oil contract with the USSR.

[13] There was “Megal” pipeline system built to transport Soviet gas to France. This network of gas pipelines made it possible to supply gas form the USSR to the system of European pipelines “WAG”, “TENP”, “SETG”.

[14] The first package was announced by the President  Reagan on December 29, 1981. The formal ground for this was the accusation that the USSR had participated in the “imposition of a state in emergency in Poland” on December, 13 and repression of “Polish people”.

[15] Deutsche Bank, Creusot-Loire, Mannesmann, John Brown Engineering

[16] Due to the resource from deposits of Western Siberia

[17] The first attempt was in 1960. The second attempt was in 1970.

[18] To ensure the rapid movement of military units, railway echelons with weapons and resources.

[19] It was decided that oil will be supplied by rail through Baikal –Amur main pipe instead of “Angarsk -Nakhodka” pipeline.

[20]The first round of negotiations began in 1970 and concerned the annual supply of 2 billion cubic meters. The second round lasted for more than 6 years (1972-1978) and ended only with exploration work.

[21] cl.2432 “Freedom of emigration in trade relations “East -West”

[22] At that time there was a Decree of the Presidium of the Supreme Soviet of the USSR of August, 3, 1972, according to which citizens who went to permanent residence abroad and had higher education, had to reimburse the state for their education in higher educational establishments.

[23] The Yom Kippur War began in October, 6, 1973 and lasted for 18 days. The USSR began delivering weapons to Egypt and Syria by sea as early as October, 7, 1973 and air deliveries started on October, 10, 1973. To ensure the safety of Soviet vehicles there was a detachment of warships formed to escort vehicles. Submarines were also sent to the Mediterranean Sea. In addition, a group of Soviet pilots was sent to Egypt to conduct aerial reconnaissance on MiG-25 fighter-interceptors. The Soviet Union supplied the Arab countries with a large number of anti-craft missile weapons: air defense missile system (ADMS) “Kvadrat”, MANPADS “Strila-2”, anti-craft artillery and so on. Communistic Cuba also sent a contingent of 3000 soldiers, including tank crews to Syria.

[24] At that time the German Democratic Republic, Czechoslovakia, Poland, Hungary, and Bulgaria

[25] The worst methods of the Soviet Union were applied to the Crimean Tatar people, as well as to its own population, which has a different opinion from authorities.

[26] The goal of the Nord Stream-2 project is to further disruption of balance of power in NATO. That is to continue the USSR policy.

[27] Probably, the conflict between Armenia and Azerbaijan was initiated in Kremlin to reduce Baku’s role in supplying hydrocarbons to global markets.

[28] According to the classical approaches of the USSR, long-term contracts and unreasonably low energy prices.

[29] According to the results of 2019, the share of gas from the Russian Federation in the European market was 37% and covered 67% of imports.

[30] However, there might be military-political reasons that have been described in detail in the article “Underwater military pipelines”. Access mode https://razumkov.energy/meny/news/military-pipelines.html

[31] Financial plan of PJSC “Gazprom” for 2020 was calculated based on the indicators of freight transport work in 2019, as well as the corresponding prices of natural gas for sales - $204 per thousand cubic meters.

[32] “The study of the European natural gas market in the absence of transit through Ukraine” was performed by Razumkov Center in the third quarter of 2019.  In accordance to which, a scenario modeling of gas flow without Nord Stream-2 was carried out. Access mode -https://razumkov.energy/meny/research/%D1%94vropejskij-rinok-gazu.html

[33] For example, by legislatively limiting the share of long-term contracts in the EU natural gas market.

[34] The election of individual politicians to the supervisory boards of JSC “Rosneft” and “Nord Stream 2 AG”, as well as huge contracts of PJSC “Gazprom” given to German, Italian and French companies together with reduced gas price became a kind of motivation for the old European elites in exchange for tolerant attitude to Ukraine and other countries of Eastern and Central Europe.

 

Maksym Bielawski

Leading Expert, Energy Programmes


Born in 1986 in Zhytomyr oblast

Education:

Zhytomyr State Technological University (2008)

Ph.D in Technical Science (2010)

Ivano-Frankivsk National Technical University of Oil and Gas (2012)

Author of 17 patents and 100 scientific works

Work Experience:

2008 – 2011 — Operator of Gas Infrastructure Units, Controller of Gas Transmission System in Rivne Division of PJSC "Ukrtransgas"

2011 – 2017 — Leading Engineer, Deputy Head of Press-Service, Head of Public Relation Department of PJSC "Ukrtransgas"

2017 – 2018 — HR Director of PJSC "Maine Gas Pipelines of Ukraine", Advisor to the Minister of Energy and Coal Industry of Ukraine

(044) 201-11-98

bielawski@razumkov.org.ua

bielawski.maksym