Merkel meets with Putin -- No more pipeline politics

January 24, 2007

German Chancellor Angela Merkel followed up her visit to the U.S. with one to Russia’s President Vladimir Putin at his personal country retreat, Bocharov Ruchei in Sochi. Merkel’s timing was just one week after Russia cut off gas supplies to Belarus, which carries the main pipeline to Europe.

As head of the EU (until July) and of the G-8 this year, Merkel pressed for, and got, assurances that Putin’s pipeline politics would not affect the EU’s energy supply. Putin also agreed to:

• A new EU-Russia Partnership and Cooperation Agreement.
• Acceleration of a gas pipeline construction to Germany under the Baltic Sea.
• Construction of an oil pipeline leading to Russia's Pacific Coast, to avoid going through “transit countries” Ukraine, Belarus and Poland.
• Establishment of a gas reservoir in Germany, adding a new distribution center for Russian gas

In addition to energy, Putin pledged Russia’s support for:

• Revival of the Quartet to advance peace in the Middle East according to the guidelines of the Roadmap for Peace, which has already been agreed to but never implemented. The meeting is to be held February 2 in Washington.
• The UN Security Council resolution on Iran. Merkel’s push is to help lessen other conflicts in the region that could threaten energy supplies, as well.

What Merkel’s visit to Putin means:
Merkel and Putin enjoy a fairly cordial relationship, due to Putin’s fluency in German and Merkel’s schooling in then-Communist Eastern Germany, which gives her a good command of Russian.  Furthermore, upcoming bilateral goodwill events are in process:

• An energy forum between German and Russian energy companies will be held in April to negotiate further investment.
• Russian-German intergovernmental consultations, which will take place in Wiesbaden in autumn, 2007.
• Russia will take part as the main partner country in the CeBIT-2007 international telecommunications systems and computer technology exhibition in Hanover in March.
• The Year of Siberia will be held in Germany .

Putin does not want to jeopardize German foreign direct investment in Russia, which is at $10 billion, or bilateral trade, which is $40 billion, up 30% in the last year.

On the other hand, Putin is trying to get market prices for the oil and gas it sells Belarus and Ukraine, which want to keep receiving the low rates received as part of their Soviet Union-era agreements. Putin has shut off the spigot to get his prices, but Merkel insists that Europe’s supply should not be endangered as a result. By presenting her position to Putin face-to-face, she may in fact convince him to change his tactics to avoid displeasing his largest customer.

The EU is also working to reduce its reliance on Russia’s gas and oil. Its Charter states that it will:

• Increase energy efficiency by 20% by 2020,
• Triple renewable eneryg use by 2020,
• Increase energy research by 50% a years,
• Advance clean hydrocarbon technology.
  

The EU Parliament will vote on these proposals in March.

Action steps:
This type of negotiation will keep oil and gas prices steady. However, don’t be fooled by recent low oil prices, a result of warmish winter weather in the northern U.S. Oil prices, for the long term, will increase, so make sure you have them in your retirement planning.

Source: President of Russia web site; Presentation of the Working Programme of the German Presidency, European Parliament, Strasbourg, 1/17/07; RadioFreeEurope/ RadioLiberty, “Russia: Putin, Merkel Accentuate the Positive”,1/22/07.