Streetwise Professor

March 11, 2014

Germany Vows to Supply Gas to Ukraine: Piecrust Promise?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 1:39 pm

German utilities claim to be developing work-arounds that would provide Ukraine with gas in the event Russia cuts off supplies due to non-payment, or as part of an economic war against Ukraine.

Now Germany’s major energy utility companies are developing strategies to help Ukraine fill the shortfall if Moscow decides to cut gas supplies. Companies including RWE and E.on are working on plans to supply Ukraine with weeks’ worth of gas.

Currently, Ukraine taps around half of it gas needs from Russia. But last Friday, Russian Gas monopolist Gazprom threatened to suspend deliveries to Ukraine if the country doesn’t pay its outstanding February bill of €1.7 billion ($2.35 billion).

In an emergency, the flow through Europe’s pipelines could simply be reversed, with gas getting pumped from German reservoirs through the Czech Republic and Slovakia directly to Ukraine. Following this year’s especially mild winter, Germany’s reservoirs are much fuller than usual. Even long-term deliveries would be conceivable at the moment.

Ukraine already signed a framework agreement in 2012 with RWE to make the gas deliveries possible. Under the contract, the company has committed itself to delivering up to 10 billion cubic meters of gas per year to Ukraine, which the country was going to use this summer to fill its reservoirs for the coming winter. But RWE executives say they could provide deliveries much sooner.

RWE currently draws its gas from Norway or the Netherlands, both major suppliers in Western Europe. It would also be possible to redirect Russian gas from the Nord Stream Baltic Sea pipeline — which connects Russia and Germany — through pipelines in the Czech Republic and Slovakia to Ukraine.

Color me skeptical.

The article notes that there are clauses in the contracts with Gazprom that preclude redirection of supplies, but the German utilities claim these are readily circumvented: given that gas in German storage reservoirs comes from multiple sources, how  could Gazprom prove its gas has been redirected?

But this is based on the naive view that Gazprom’s sole (or even preferred) recourse against German supply of Ukraine would be to file a legal action.  It could decide instead to retaliate for German shipments of gas to Ukraine by shutting off gas flowing on the Nordstream and Yamal pipelines. Given no gas would be flowing to Germany via Ukraine, if Gazprom did so the German companies would soon be drawing down their stocks rather heavily and be vulnerable to Gazprom’s  tender mercies going forward.

Would they really be willing to take that risk on behalf of Ukraine?

And there is also the matter of the huge political pressure Russia would exert on Germany if RWE and E.on were to attempt such a thing. After all, former Chancellor Gerhard Schroeder chairs the Nordstream board and still exercises considerable influence in Germany, and Germany has proven quite vulnerable to Russian pressure in the past.  Numerous German businesses would be importuning Merkel not to antagonize Russia.

I strongly suspect that this “plan” and the article about it have been created and planted to give Merkel and Steinmeier political cover: “See! We are doing something to help Ukraine.”  But if called upon to perform on their promises, I would expect the Germans to fold like a cheap suit in the face of Russian threats to cut off gas.  And Putin is playing for keeps here.  Don’t think for a moment he won’t do it even though he would incur a greater economic cost than the Germans (and other European consumers of German gas).

And remember, gas is not the only lever.  Coal is the major alternative to gas, but Germany (and also the UK, to an even greater degree) get a large fraction of their coal supplies through Russia.   This is a real game of chicken, and I am not putting my money on the Germans.

That’s because based on experience, and my perception that Germany is trying to get short run political benefits by dispelling serious doubts about its commitment to Ukraine, I do not consider the proposed plan to be very credible.  Just as the French (and British) made promises to the Poles in 1939, and then left them hanging when Poland called on them to deliver, I think there is a strong possibility that these German promises will be of the piecrust variety: easily made, easily broken.

In other words, Ukraine should not base its plans on the assumption that Germany has its back on gas, or anything else for that matter.

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  1. Unless the Krauts are willing to be cold, this means squat. The first sign that they are serious would be to stop the shutdown of their nuclear plants due to “foreign instability”. Anything less is just babble to sound good and assuage and deflect the onus of their collaboration with the Chekists.

    Comment by sotos — March 11, 2014 @ 1:55 pm

  2. What are the Western signatories – the US and the UK – to the Budapest Memorandum proposing to do in order to show that we do actually honour our agreements and actually meet obligations freely undertaken?

    In exchange for Ukraine abandoning its nuclear arsenal, the USA, the UK, and Russia undertook
    1) “to respect the independence and sovereignty and the existing borders of Ukraine”;
    2) “to refrain from the threat or use of force against the territorial integrity or political independence of Ukraine, and that none of their weapons will ever be used against Ukraine except in self-defence or otherwise in accordance with the Charter of the United Nations”;
    3) “to refrain from economic coercion designed to subordinate to their own interest the exercise by Ukraine of the rights inherent in its sovereignty and thus to secure advantages of any kind”;
    4) “to seek immediate United Nations Security Council action to provide assistance to Ukraine, as a non-nuclear-weapon State party to the Treaty on the Non-Proliferation of Nuclear Weapons, if Ukraine should become a victim of an act of aggression or an object of a threat of aggression in which nuclear weapons are used”;
    5) “reaffirm, in the case of Ukraine, their commitment not to use nuclear weapons against any non-nuclear-weapon State party to the Treaty on the Non-Proliferation of Nuclear Weapons, except in the case of an attack on themselves, their territories or dependent territories, their armed forces, or their allies, by such a State in association or alliance with a nuclear-weapon State”, and
    6) “Ukraine, the Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America will consult in the event a situation arises that raises a question concerning these commitments.”

    This was signed by the Presidents of the Ukraine, the USA, and Russia (Kuchma, Clinton, Yeltsin) and the British Prime Minister (John Major).

    Okay, the Memorandum unfortunately contained nothing much except for point 6 about what to do in the case of trouble, but do the words and undertakings of Western leaders carry no weight of obligation? (I leave USSR/Russia out of this question since history has shown that one may take it for granted that it is prepared to renege on practically any undertaking.)

    But where oh where is the honourability that is supposed to distinguish us from them?

    In this centenary year of WWI and in the light of Russia’s aggressive actions this century in Georgia and the Ukraine, re-reading Sir Edward Grey’s speech to the Commons of 3 August 1914 is an object lesson in how a country should form a proper moral stance and draw the ineluctable conclusions, maintaining both honour and practicality.

    In the case of the Ukraine today, there is no clear casus belli as yet but the matter of honour – Britain’s and the USA’s honour – under the 1994 Budapest Memorandum is subject to no such doubt.

    One does not go to physical war so readily in the 21st century but a state of moral war should surely be declared against the current Russia under Mr. Putin because that country is coming to represent all that is abhorrent and oh-so-19th-century in its political stance. 

    One response must clearly be sanctions. Sanctions that strike home and that hurt Russia more than they hurt us. And as SW says above, this business of getting Germany to redirect gas is dubious – but it is also not a response by Ukraine’s guarantors.

    I would like to propose this:

    If there is one thing that Russians have come to value since the collapse of Communism, it is the possibility of travel – to the “civilised” countries, as they themselves frequently term the Western democracies, for R&R from their own way of life. 

    Targeted visa sanctions have been proposed or introduced by the USA and other countries but I would suggest that their scope should be seriously widened. Russia’s government was less or more democratically elected and a people and their government may fairly be considered to be essentially one and the same. Why not openly and with great publicity declare that in the first instance, no visas to our country/ies will be available for any employees, in whatsoever capacity, of the Russian state, from doorman to minister? These people all work to support a state that is behaving abominably and they cannot be welcomed among us. 

    By so doing, a proper message will be sent across all Russia’s time zones, straight through the barriers of hindered access to any source on information other than the propaganda channels of Russian TV whereby the thinking of countless Russians are distorted.

    Comment by Dave Essel — March 12, 2014 @ 2:38 am

  3. (I leave USSR/Russia out of this question since history has shown that one may take it for granted that it is prepared to renege on practically any undertaking.)

    Such as?

    Comment by So? — March 12, 2014 @ 5:17 am

  4. @so …such as the Universal Declaration of Human Rights and its own constitutions. Not much point nitpicking after that.

    Let’s take this another way. Why don’t you provide some examples of occasions when the USSR or Russia has acted with integrity and decency on the world stage?

    I can’ t come up with one offhand. Please do help. (A bit like when I tried to think of anything useful if world trade, other than oil, gas, gold, and timber, that one just had to buy from the Soviet Union if one wanted the best.)

    And just for fun, here’s a little bon mot (quoting from memory from Tom Wolfe’s The Right Stuff) that I like to use when I get told gloatingly that the Soviet were first in space: “The fact the Russians are in space just goes to prove it ain’t that difficult – let’s see them make a decent razor blade'”.

    Comment by Dave Essel — March 12, 2014 @ 6:25 am

  5. Along the lines of Dave Essel:

    It seems that sales of Russian cars in Ukraine have dropped sharply by a factor of 3.

    391 cars were sold in February 2014 versus 938 in February 2013

    Also, something interesting out of the book of double standards:

    The Putler Rasha has made it a crime to secede from the Rashan Federation, with a sentence of 5 years in prison. As the blogger points out, it’s like the Hotel California (which was a song “approved” by the sovoks and played ad nauseam for tourists in the sovok union) – you can check in, but you can’t check out

    Just in case there are any readers from within the Russian Federation considering a unilateral referendum to secede the Russian Federation following the Crimean example, yesterday the Russian Criminal Code was amended (Article 280-1) making any such attempt an offence punishable by 5 years in prison for any and all involved.

    Comment by elmer — March 12, 2014 @ 7:01 am

  6. Along the lines of Dave Essel:

    Sales of Russian cars in Ukraine have dropped by a factor of 3, from 938 in February 2013 to 391 in February 2014

    And, as this blogger notes, the Putler Rasha Federation has made it a crime to attempt to secede, making it like the Hotel California – you can check in but you can’t check out.

    Just in case there are any readers from within the Russian Federation considering a unilateral referendum to secede the Russian Federation following the Crimean example, yesterday the Russian Criminal Code was amended (Article 280-1) making any such attempt an offence punishable by 5 years in prison for any and all involved.

    Comment by elmer — March 12, 2014 @ 7:04 am

  7. lets see, the 1993 ceasefire agreement in Abkhazia which the Russians broke by giving massive military assistance to the separatists, allowing them to capture Sokhumi.

    The agreements from 1994 to 2007, also abkhazia where the Russian government recognised the province as part of Georgia and was not to give military or economic aid to the separatists.

    The 2008 ceasefire agreement in South Ossetia and Abkhazia whereby all combat units were to be removed from the conflict zone and forces were to return to the pre conflict positions. instead Russian forces moved further into Georgia and conducted ethnic cleansing of Georgians from Khodori in Abkhazia and from all of South Ossetia, as well as conducting an orgy of looting in Georgia.

    The ceasefire agreement in

    Comment by a — March 12, 2014 @ 7:38 am

  8. Prof, looks like the chinese copper financing trades are unwinding. This might lead to a supply glut at the LME soon and copper prices are already starting to reflect it. Again would be super interested in your take….

    Comment by Surya — March 12, 2014 @ 8:16 am

  9. Germany redirecting Russian gas would generate a certain and predictable set of responses from Russia. How would Germany then respond? Russia cuts off gas to Germany and now Ukraine’s fight with Russia becomes Germany’s fight because Russia would be directly affecting the German economy. Germany goes after Russian money in European banks. Then what? Everyone can see the next moves and none of us believe European governments care to play the game.

    Germany (and the rest of Europe) don’t have the stomach for a messy economic fight with Russia. Having a smaller and more fragile economy, Russia will lose any major fight with Europe over time, but the Europeans know it would be much cheaper to simply funnel the billions necessary to Ukraine to help it pay its bills. Russia then ratchets up the price for its gas and the Europeans end up paying tribute to Russia to maintain economic peace and they wait for the predictable political solution (predictable in that Russian will is imposed because the alternative is a nasty economic conflict and Russia has a FAR greater appetite for “nasty” than do European leaders).

    At the end of the day, with the existing Western political leadership, the question is simply how much does Russia want Western governments to pay it to finalize a political solution that accepts Russian political will in the region?

    Comment by Charles — March 12, 2014 @ 8:32 am

  10. lets see so, just about every agreement on a ceasefire in Georgia since 93.

    Russia broke the 93 ceasefire in Abkhazia and assisted the separatists in taking Sokhumi and conducting ethnic cleansing.

    They breached signed agreements with Georgia by arming and training Abkhaz and Ossetian separatists from 94 to 2008.

    They breached signed agreements by conducting trade with separatists and providing finance.

    They broke their commitment to the 2008 ceasefire agreement by recognising separatist independence in 2008 and by continuing to drive deeper into Georgia and by carrying out a wave of ethnic cleansing.


    Comment by Andrew — March 12, 2014 @ 9:24 am

  11. @Charles. Exactly why I say the German promises are made of piecrust. There is a huge asymmetry of economic power in favor of Germany/Europe, but that doesn’t matter, because it is completely offset by a huge asymmetry in will that favors Putin/Russia.

    The ProfessorComment by The Professor — March 12, 2014 @ 3:37 pm

  12. @Surya-Not just copper. Iron ore is tanking too, and stocks are skyrocketing.

    I’ve always thought China was an accident waiting to happen. I think it is inevitable, but we’ve been here before and I’m not sure that this is the moment the balloon goes up. But it could well be.

    When it does, yes, prices will plummet and inventories will spike.

    Give China’s situation, I’m thinking of going long deep out of the money commodity puts.

    The ProfessorComment by The Professor — March 12, 2014 @ 3:40 pm

  13. @Dave Essel

    Let’s take this another way. Why don’t you provide some examples of occasions when the USSR or Russia has acted with integrity and decency on the world stage?

    In other words you weaselling out. Are you sure you are not related to that snake oil salesman ?

    * The Soviet Union, exhausted by war, declared war on Japan within 3 months of defeating Germany as it had promised to the Allies. (The Allies had promised a second front in 1942, 1943, but only jumped in at the last moment to grab the spoils. I know, I know, Russia was on its back in WW1 and the West was the one that did all the fighting, but still.)

    * The Soviet Union left Austria in 1955 voluntarily. (No it wasn’t because of Reagan and Star Wars. He was still a bad actor in Hollywood).

    * The 1990 Bering Strait maritime boundary agreement favours the US.

    * Russian troops left all of Eastern Europe in 1990s. The West had promised that NATO would not expand… but it’s a gentlemen’s agreement, and those don’t count, right?

    * In 2002-2007, Russia closed down 4 bases in Georgia to satisfy the CFE treaty which had not been ratified by a single Western state, thus paving the way for Saakashvili’s adventure. If that’s not bending backwards, I don’t know what is.

    * Russia closed down the naval base in Vietnam and the SIGINT station in Lourdes, Cuba in the aftermath of 911. Bush showed his gratitude by withdrawing from the ABM treaty.

    * All border disputes with China have been resolved in China’s favour in the last 20 years by Russia ceding territory to China.

    * In 2011-2013, Russia resolved its border dispute with Azerbaijan by ceding a bunch of Dagestani villages to Azerbaijan.

    * In 2010, Russia resolved its maritime border dispute with Norway in Norway’s favour.

    * The ‘Megatons to Megawatts’ program. 500 tons of weapons-grade uranium supplied to the United States over 20 years, generating 10% of its electricity. Sold for peanuts.

    * There is a freaking NATO logistics base in Ulyanovsk for shipping cargo to Afghanistan.

    Comment by So? — March 13, 2014 @ 4:31 am

  14. Actually So? The shutting down of bases in Georgia was nothing to do with the CFE treaty.

    Russia agreed to close the bases in the late 90’s but refused to actually do so until 2007.

    And they only closed 3 of the bases. The airbase in Abkhazia they were supposed to close down remained in opration in violation of the signed agreement with Georgia.

    Comment by Andrew — March 13, 2014 @ 9:43 pm

  15. The reason the border disputes with China have been resolved in China’s favor is that in the 60’s the Russians tried to use force to resolve the border dispute in their favor. it didn’t go well for Russia.

    Also Russia left eastern europe because everybody in those countries 1. hated them 2. wanted them out 3. withdrew basing rights 4. and Russia was bankrupt.

    There was and is no honour in Russia or Russian culture in general. There arw individuals who are honorable and noble, but in general Russians are thugish racists who revere ‘strong leaders’ and support Putin’s agressive empire building.

    Comment by Andrew — March 13, 2014 @ 9:49 pm

  16. As to the border agreement with Norway ‘favouring Norway’ more BS from So?

    The Russian government described it as a good balanced agreement, everyone else describes it a a compromise.

    With regards to the uranium going to the US, the Russians are only too glad to be rid of it given the endemic corruption in their military (remember how the Chechens get their weapons? by purchasing them from Russian soldiers)

    Comment by Andrew — March 13, 2014 @ 10:00 pm

  17. Here is a good ZH article on copper “collaterlized” financing trades.
    These have been a means to get USD into China and lend it out at high interest rates. The lender takes risk in accepting a letter of credit from a Chinese bank. Around 40% of the Chinese copper imports (perhaps more) are a result of this. Tanking copper prices are perhaps a result of an unwind of these trades, where the lender of USD is increasingly wary of Chinese defaults. Of course this copper scheme itself is the result the over leveraged real estate sector trying to come up with another way of paying back interest. A million things can light up the fuse in China…it seems imminent

    Comment by Surya — March 13, 2014 @ 11:31 pm

  18. Curiously the famous China short, Jim Chanos has been absconding from TV (bloomberg where he loves to hang out) lately. Reports are that his short fund lost 15% or more last year…. But his views and thesis has been spot on as regards to China being Dubai times 1000.

    Comment by Surya — March 13, 2014 @ 11:34 pm

  19. It is just a big carry trade. And we know that those are a form of financial Russian roulette. This is doubly, triply, whatever true in the China copper warrant game given that the high yields on the investment of the proceeds of the copper sales in China are achieved by taking on substantial credit risk as well as currency risk. The standard carry trade just has the currency risk.

    It’s even worse in iron ore. There the collateral is less liquid.

    It will not end well.

    The ProfessorComment by The Professor — March 14, 2014 @ 2:46 pm

  20. yes, the carry trade by itself is dangerous, given the amount of copper locked up in it and a small plunge in copper price can affect the balance. In China, all this feeds into the shadow banking system and perhaps carried out by those who invested / spent in real estate and now do not have any investment returns to pay the agreed borrowing rate. Its like a house balanced on an egg which is balanced on a needle…

    Comment by Surya — March 14, 2014 @ 6:17 pm

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