By Jack Ewing Klaus-Ewald Holst, the chief executive of Verbundnetz Gas, the dominant gas supplier in eastern Germany, jumps up from a conference table in his Leipzig office to point to a large map showing the network of gas pipelines running from Russia to Europe. "I have to serve my market," says Holst. "Where do I get the gas? I'm not going to get it from the European Union."
The answer is that he gets the gas from Russia, and further, that he doesn't have much choice. Since 1970, long before the fall of the Soviet Union, Europe's biggest economy has been buying gas from the company now known as OAO Gazprom. Verbundnetz, known as VNG, buys 45% of its gas from the Russian behemoth. Gazprom is by far the most important supplier of gas to Germany, and Russia's share is rising as other supply sources such as Norway gradually deplete their reserves.
"MORALLY REPREHENSIBLE." As a result, probably no other Western country is more entwined with Gazprom than Germany. E.on Ruhrgas, Germany's biggest gas importer, owns a 6.4% stake in Gazprom and its CEO, Burckhard Bergmann, is the only foreigner to sit on Gazprom's board. The $5.7 billion North European Gas Pipeline is a joint venture between Gazprom, Ruhrgas, and German chemical conglomerate BASF. The managing director of the pipeline joint venture is none other than Gerhard Schröder, whose previous gig was Chancellor of Germany.
He came in for harsh criticism after he accepted the pipeline job in December, just weeks after leaving office in December. But his cozy relationship with Russian President Vladimir Putin was hardly new. "Since the Schröder government took office in 1998 there has been an absolutely one-sided, uncritical attitude toward Putin and Gazprom," says Sabine Leutheusser-Schnarrenberger, a member of Parliament for the centrist Free Democrats and former German Minister of Justice. She calls Schröder's decision to accept the pipeline job "morally reprehensible."
But most Germans are surprisingly indifferent about their nation's dependence on a company that is an extension of the Kremlin. The pipeline project has the support of 75% of Germans, according to a survey by Berlin pollster Forsa. A more modest 45% of Germans consider Gazprom a reliable energy supplier, but that is better than the 26% who consider Saudi Arabia to be dependable.
STRATEGIC FRIENDSHIPS. In public forums, German business leaders positively fawn over Gazprom executives. Appearing in April with Gazprom Chairman Dmitry Medvedev and other Gazprom managers at an industrial fair in Hanover, former DaimlerChrysler management board member Klaus Mangold denounced criticism of the Russian company as "unfair." Gazprom's threats to sell gas to China if European countries cultivate other sources of energy are "a totally normal market economic process," said Mangold, who is chairman of a committee of the German Federation of Industry that promotes East-West relations.
While U.S. officials fret about Gazprom's potential as an instrument of Russian foreign policy, German executives see their proximity to Russian gas as a strategic advantage in the global competition for resources. "It's good to have a raw-materials-supplying country so close to home as a friend and neighbor," Michael Glos, German Minister of Economics and Technology, declared at the Hanover event.
Gazprom's main agents in Germany are Essen-based e.on Ruhrgas and Kassel-based Wintershall. Ruhrgas, a subsidiary of Dusseldorf utility giant e.on, has the longest history of cooperation with the Russian gas bureaucracy, dating to 1970. But lately Wintershall, a unit of chemical conglomerate BASF, has emerged as Gazprom's preferred partner. "In 10 years we have developed not only partnerships but also friendships," boasts Rainer Seele, a member of Wintershall's management board.
A NEW COCKINESS. Gazprom has cleverly played the companies against each other to meet its goal of getting closer to European end users. "Each of the German companies tends to grit its teeth at the relationship the other has with Gazprom," says a consultant who deals with BASF and Ruhrgas. "It's like a wife and a mistress sharing the same man."
In their zeal to guarantee access to Russian gas, recently both German companies have traded assets in Europe for the right to take part in Russian gas production. In April, Wintershall allowed Gazprom to boost its stake in the Wingas joint venture, to 50% from 35%. In return, Wintershall got 35% of the equity and 25% of the voting shares in the entity that controls the field that will supply the North European Gas Pipeline. In July Ruhrgas agreed to trade assets in Hungary for a 25% stake in the same field.
Only rarely, and mostly in private, do German energy executives express concern about the reach of Gazprom. Over dinner earlier this year, a top executive at a German energy company balances a knife on his finger to illustrate how soaring gas prices are shifting the balance of power between Gazprom and its partners. So far Russia has needed money as much as Germany needs gas, the executive says. But what happens when Russian doesn't need the money as badly anymore? Already, he warns, Russians are noticeably more confident in negotiations. The new cockiness was on full display at the recent G-8 summit in St. Petersburg, where Putin shrugged off criticism of his increasingly repressive government.
NO EASY CHOICES. Germany's relationship with Russia and Gazprom has changed little under Angela Merkel, Schröder's successor as Chancellor. Merkel, of the center-right Christian Democrats, has adopted a much cooler attitude than Social Democrat Schröder toward Putin, warning him on human rights and repairing relations with the Bush Administration. But there has been no perceptible shift in German energy policy.
Following an energy summit with business leaders in Berlin in April, Merkel made no mention of Russia or Gazprom. In any event, German gas suppliers are locked into long-term contracts with Gazprom that Merkel can do little about. "I don't think she has too many options," says a top banker who has many years experience dealing with both Germany and Russia.
VNG chief executive Holst clearly has no illusions about Gazprom or the Russians, with whom he has had both good and bad experiences. As a child growing up near a Soviet Army base in East Germany, Holst remembers a Russian soldier giving him black bread—a memorable gesture in the lean years after World War II. In the early 1990s, after the fall of the Berlin Wall, Holst and VNG had a much-publicized run-in over gas prices with Gazprom and its German partner Wintershall, which were then the sole suppliers to the former East German gas monopoly. The companies reached an agreement after courts and government officials intervened.
Since then VNG has diversified its sources of supply to include countries such as Norway. But gas reserves belonging to European suppliers are set to decline in coming years. Whatever reservations Holst and other executives may have about Gazprom, there are no easy alternatives. The only other sources of gas within pipeline range are the Middle East. "We're in a competition for resources with the U.S., also China and Russia," he says. "Do we want to buy from Iran or Russia?" Ewing is European Regional editor for BusinessWeek