09-10-06

Armed with oil and natural gas revenues worth billions of dollars, Russian President Vladimir Putin plans to buy his way into Germany's and Europe's key industries. But he is likely to encounter a sceptical Chancellor Angela Merkel when he visits Berlin.
In the world of diplomacy, the balance of power is frequently expressed in linguistic nuances. The weak and the undecided have a propensity to retreat into the meaningless hackneyed phrases of international conference jargon. The strong and the confident have no aversion to straight talk, even in front of TV cameras.

Rarely has this phenomenon been as obvious following the German- French-Russian summit meeting in Compiegne outside Paris. At a joint press conference to conclude the meeting, German Chancellor Angela Merkel and French President Jacques Chirac practically outdid each other with their well-oiled diplomatic lingo.
Merkel characterized the summit as "extraordinarily important," while the French president gushed over what he called the meeting's "constructive atmosphere" -- clearly the kind of language people use when they don't want to, or are unable to say anything meaningful.

The contrast between these leaders and Russian President Vladimir Putin couldn't have been more pronounced. The language Putin used to characterize the meeting was about as unadorned as if he had been commenting on the outcome of a shareholders' meeting.
He said that the three leaders had discussed projects "in the area of industry and energy," including investments and joint ventures in the space and aviation industries, infrastructure and machine building, all at price tags running into the billions of dollars. The discussions, said Putin, were "very businesslike" and "very specific." In defining his administration's objectives, he coolly said that Russia was primarily "interested in implementation."

The Kremlin is clearly adopting a new tone in its dealings with its European neighbours, a tone that reflects a new self-confidence and to which Western states are unaccustomed. In the wake of the collapse of the Soviet Union 15 years ago, the Germans have treated Russia at best as a promising market, a challenging but worthwhile investment opportunity and an obedient supplier of raw materials.
At worst, the West has seen the giant nation as an anarchic playing field for brutal mafia bosses, greedy former intelligence officials and corrupt bureaucrats. When Russian presidents travelled to Germany in the past, they found themselves begging for debt forgiveness and pacifying critics of their draconian treatment of multibillionaire Mikhail Khodorkovsky.

When Putin arrives in Germany for a state visit, he'll no longer be asking for favours. Instead, he will be discussing Russia's potential role as an investor in the German economy. The wind has clearly shifted when it comes to German-Russian trade relations, and so have the issues. Instead of large German companies like E.ON or BASF investing in Russia's natural gas fields, German state governments could soon be paying their gas and oil bills to Russian companies now eager to invest in German businesses.
The Russia lobby within the German economy has quickly recognized the unexpected impact the shift is having on economic relations.

"Russian companies will be looking increasingly at foreign investment opportunities," says Klaus Mangold, the chairman of the Eastern Europe Committee of the German Economy. "Without heavy investment abroad," he adds, the Russians would be unable to close the "competitive gap" between them and their Western competitors in key areas of the economy.
Putin apparently has a similar understanding of these issues. Under his leadership, Russia's state-controlled corporations plan to buy their way into European industry on a grand scale. And for the Russians, money is no longer an obstacle.

Cash-filled coffers from energy
Years of soaring prices in the oil and energy markets havefilled the coffers of a country blessed with abundant reserves of key natural resources. A newly cash-rich Kremlin has joined forces with deep-pocketed entrepreneurs from Moscow and St Petersburg in scouting out lucrative investment opportunities in the Western European energy, chemical, aviation and heavy manufacturing sectors.
The Russian government announced its intention to make the "jump into the global economy" at a cabinet meeting in July. Russian newspapers have taken to describing the government's buying spree in military terms. Gazprom, already the world's fourth-largest company based on market value, plans to acquire British energy utility Centrica. The state-controlled Vneshtorgbank recently shelled out almost EUR 800 mm for 5 % of the European Aeronautic Defence and Space Company (EADS), the parent company of Airbus. Severstal, a steel company headed by Alexei Mordashov, recently bought out Italian competitor Lucchini.

But German companies are at the top of the Russians' shopping lists. When Putin arrives in Dresden and Munich for his upcoming state visit, he will once again present his favourite idea to Chancellor Merkel. Putin envisions German automobile, chemical and machine-building companies investing more heavily in the Russian market in exchange for Russian investment in German power plants, automotive supply companies and aircraft manufacturers.
Putin's plan would ultimately result in the Russian and European Union economies forming a giant market encompassing at least 600 mm people, a loosely knit entity capable of keeping pace in the global market with rising economic powers China and India.

But what the Kremlin sees as a strategy for dealing with global markets in the 21st century has been met with mixed emotions in Berlin. Like his former mentor, ex-Chancellor Gerhard Schroeder, Foreign Minister Frank-Walter Steinmeier wants to see Germany welcoming the Russians with open arms. The members of his planning staff are already ecstatic over the fact that both countries are lowering barriers to entry in strategically important sectors and promoting an approach they call "rapprochement through integration."
Steinmeier himself has said that he wants to see Europe "irreversibly tied to Russia," a strategy that would include the establishment of a European-Russian free trade zone.

But the chancellor sees the process in a significantly more sceptical light, despite the fact that she too has become visibly more open to Russian advances since she took office almost a year ago.
For Merkel, integration with Russia would only be an option if Germany's alliance with the Americans were at risk, and when she hears the phrase "free trade zone" she is more likely to think of the United States than Moscow.

Fear of dependency on Moscow
Both Steinmeier and Merkel are well aware of the many questions the prospect of closer economic ties with Russia raises. Will Germany become even more dependent on Russian energy sources if Moscow gains a voice in the boardrooms of German power companies? How closely aligned can one become with an economy consistently ranked as one of the world's most corrupt? And, most important, wouldn't an alliance with Moscow inevitably alienate the United States?
One of the greatest concerns for diplomats in Berlin is that Russian corporations are falling increasingly under the control of the state. As Russian companies invest in Germany, the Kremlin's influence in German boardrooms will also grow -- as will the risk that Russia will use its economic clout as a tool to further its political goals.

German politicians still have horrific memories of last winter, when Russian's Gazprom Group quickly turned off its gas supply to Ukraine when that country fell out of political favour in Moscow.
"In the past, German companies asked themselves whether it would be wise to invest in Russia," says Germany's former ambassador to Moscow, Hans-Friedrich von Ploetz, "but today the Germans are wondering whether it would be such a good idea to allow the Russians to invest in their businesses."

It's an issue that can no longer be left on the back burner. For Russian business executives toughened in the bloodbaths of rapid-fire privatization under former President Boris Yeltsin and in many cases trained at leading US and British business schools, their own country has simply become too small a playing field. In the first half of 2006, Russian direct investments worldwide climbed to a new record level of just under $ 13 bn.
Russians dominate the tourism industry in Namibia and are reviving old ties to Cuba. The tiny Balkan state Montenegro, where oligarch Oleg Deripaska controls 80 % of the country's exports through his aluminium business, is already being called "a suburb of Moscow."

Russian oil giant LUKoil has even bought up a network of gas stations in the United States, Russia's greatest adversary during the Cold War. Under CEO Vagit Alekperov, the company is now on the verge of buying a Rotterdam refinery from the Kuwaitis, thereby edging out competing bids from Western Europe and Latin America.
Of all Russian companies, Gazprom enjoys the closest ties to the Kremlin. Hardly a week goes by without the Moscow papers celebrating new mergers or new, ambitious plans. The headlines are reminiscent of reports of military victory, but from a front that seems to be expanding relentlessly in all directions -- yesterday Hungary, Poland and Slovakia, today India, France and Switzerland, tomorrow perhaps Canada or Australia.

In Germany, the Russians are supplying natural gas -- and collecting hefty profits -- directly to consumers through Wingas, a Gazprom and BASF joint venture. BASF benefits from the arrangement by receiving a stake in the huge Siberian natural gas field at Yuzhno-Russkoye.
The crown jewel in the German-Russian energy axis is expected to be the 1,200-km (745-mile) Baltic Sea pipeline, which will pump Russian gas to the north-eastern German town of Greifswald. Gazprom owns 51 % of the consortium and German companies E.ON, under CEO Wulf Bernotat, and BASF, under CEO Juergen Hambrecht, each own 20 %. Merkel's predecessor, former chancellor Gerhard Schroeder, is the chairman of the consortium's supervisory board.

Not much happens along Russia's long march into global economy without the Kremlin pulling the strings. Politics and business in Russia operate hand in hand. The rise of aluminium oligarch Oleg Deripaska is a case in point. Raised on a farm in southern Russia, Deripaska was trained as a nuclear physicist and eventually furthered his career by marrying into the Yeltsin clan.
Deripaska also enjoys an excellent relationship with Putin. The aluminium baron took care to secure the Kremlin's approval before embarking on a mega-merger, in which his company, Russian Aluminium, will take over Russian competitor SUAL and the aluminium division of the Swiss company Glencore. In Germany the 38-year-old oligarch, whose net worth American business magazine Forbes estimates at $ 7.8 bn, attempted to take over Hamburg-based aluminium company Hamburger Aluminiumwerke and failed -- just barely.

To further their global expansion aims, the Kremlin's strategists are even turning to those they would normally condemn as offshore aristocrats -- magnates like London-based Roman Abramovich, for example.
According to estimates by the Russian finance ministry, Russians have moved more than $ 430 bn in assets out of the country since 1986. Recognizing the emigrants' value, Moscow now plans to involve them as intermediaries or buyers in some of its business deals.

Hard to turn away the Russians
The Düsseldorf-based E.ON Group is a perfect example of how difficult leading German companies are finding it to turn away the increasingly aggressive investors from the East. Indeed, the German energy giant has spent the last two years attempting to thwart Gazprom's efforts to acquire a stake in E.ON. Two years ago, Gazprom proposed that German companies could invest directly in the huge and to some extent unexplored Siberian gas fields to guarantee the country's long-term energy supply.
But the negotiations turned out to be more difficult than expected. Whereas Gazprom had been interested primarily in capital and know-how in the past, CEO Alexei Miller was now demanding nothing less than unrestricted access to the German energy market. He even wanted a "significant share" of 25 % in E.ON’s natural gas subsidiary, Ruhrgas. But a substantial stake in the Ruhrgas network would have immediately given the Russians access to some of Germany's biggest utility customers, including major cities and manufacturing companies.

The E.ON executives, seeing the venture as too risky, turned down the Russians -- a move that initially proved deadly to the Düsseldorf utility. Within months, the Russians cancelled preliminary contracts and exclusive agreements with E.ON. Miller then signed an agreement with BASF subsidiary Wintershall, giving the German company a 25-% stake in the Siberian gas field. BASF's executives had proven to be significantly more open to allowing the Russians to increase their investment in the company's natural gas subsidiary.
Only after tough negotiations and with the vociferous support of German politicians did E.ON manage to score a 25-% stake in the gas field. In return, Gazprom will receive significant shares in E.ON’s major Hungarian electric and gas utilities.

Interested in EADS
The current negotiations over Moscow's investment in European aviation group EADS have been no less challenging. To secure a stake in EADS' Airbus subsidiary, the state-owned Vneshtorgbank acquired shares in the German-French consortium in recent weeks. But Putin's proposal to upgrade the share purchase to a strategic corporate investment was met with alarm in Germany, especially within the German government.
Aside from her displeasure over the fact that Putin had arranged the deal behind her back, Chancellor Merkel was concerned that the Russian investment would anger important business partners in the United States. If Putin were to acquire a significant say in business decisions at EADS, important contracts with American carriers and the US Defence Department could be jeopardized.

Meanwhile, Western European politicians continue to search for ways to manage the Russian offensive.
"We want to welcome Russian investors," say Moscow-friendly executives like Eastern Europe lobbyist Mangold. The former DaimlerChrysler executive emphasizes what he sees as tremendous business opportunities, especially for Germany's small and mid-sized companies.
"If we are now allowing Indian investors like steel producer Mittal to enter the German market," says Mangold, "why not the Russians?"

Foreign Minister Steinmeier, a member of the Social Democratic Party (SPD), sees the issue in much the same way, and is placing his bets on an updated version of an old SPD strategy that envisioned "change through rapprochement."
In an internal foreign ministry strategy document, Steinmeier likens the economic transformation he believes greatereconomic cooperation will bring to Russia to how former chancellor Willy Brandt's policies toward Eastern Europe, known as Ostpolitik, paved the way for democratic revolutions in the Soviet-block countries.

Not so sanguine
But many energy experts are less sanguine, noting with concern the way Russia's state-owned corporations are securing their access to shrinking raw material reserves worldwide and, by the same token, reinforcing their monopolistic positions in key markets.
Gazprom, for example, is currently forging strategic alliances with producer countries like Algeria and Libya, a move that would prevent the European Union from developing alternatives to Russian gas in the first place. Officials in Berlin also haven't failed to notice that Russian natural resource providers are currently buying up reserves of titanium, one of the most important raw materials in aircraft construction. Moscow's strategy is apparently based on the speculation that whoever controls the world's titanium reserves will stand a better chance of muscling his way into the Western aviation industry.

Western corporate executives are even more incensed over the fact that Moscow's increasingly forceful bids to invest in Western businesses are accompanied by a tough protectionist strategy benefiting its own industrial corporations. Moscow complains about Western Europe's opposition to Russian investment, and yet the Kremlin leadership declared large sections of its own industrial infrastructure off-limits to foreign investment long ago. The Kremlin's approach has been to classify certain sectors as strategic industries, thereby insulating them against European or American control.
At the same time, Moscow is making it more difficult for foreign companies to do business in Russia. Several months ago, for example, the Kremlin began imposing tougher environmental and production constraints on international energy companies like Exxon and Shell, which have been drilling for oil on Russia's Sakhalin Island for years. The new rules came on the heels of the multinationals' refusal to allow Gazprom to acquire a share of production at the Sakhalin oil fields.

Chancellor Merkel has taken a two-sided approach to dealing with the Russian challenge. On the one hand, she hopes to accommodate the cash-rich Russians with the prospect of stronger German-Russian trade relations. On the other hand, her administration is doing its best to prevent the Kremlin from gaining access to many strategic industrial corporations.
Of course, says one of Merkel's foreign policy advisors, this is no "linear process," but rather an attempt "to ride the bear."