New German Cabinet to Reset Russia Ties

Copyright © 2023 Energy Intelligence Group All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.
ss1025764774-Olaf Scholz-Germany-Chancellor

Moscow is closely watching the direction of the new coalition government in Germany led by Chancellor Olaf Scholz, who took office last week.

Germany is Russia's biggest trading partner in Europe, one of the major consumers of Russian oil and gas and a key member of Nato, from which Moscow is seeking commitments about not expanding to Ukraine.

The fate of the 55 billion cubic meter per year Nord Stream 2 gas pipeline running from Russia to Germany under the Baltic Sea is in Berlin's hands as well.

Change is in the air after Angela Merkel stepped aside after 16 years at the helm. Scholz and his Foreign Minister Annalena Baerbock, who comes from the Greens, are both described by analysts as strong "transatlanticists," signaling that relations between Moscow and Berlin could become rockier. "The foreign office will have a strong focus on climate policy and human rights, which will further alienate the relations with Russia," Stefan Meister, head of the program for international order and democracy at the German Council on Foreign Relations, told Energy Intelligence.

Moscow's official line is that relations between the two countries should develop in a beneficial way for both sides, and "constructive collaboration would continue in a number of practical areas, including economy, social exchanges, links between cities and regions, science and education," said Oleg Krasnitsky, a department director of the Russian foreign ministry.

However, diplomatic sources tell Energy Intelligence that Moscow is still analyzing German's new cabinet, and expectations are "vague and worrisome." The unity of the government could be patchy. The Greens are expected "to put pressure and be demanding," while trans-Atlantic solidarity would mean a greater "subordination" to Washington, the sources say. "But there is no other government in Germany and we will be building up the work with them."

Nord Stream 2 Fate

Scholz will face strong pressure from his Social Democratic Party "to engage and cooperate with Russia," Meister said. Unlike Scholz, Baerbock opposes Nord Stream 2, but "since the project is completed and certification is ongoing, the new government is not likely to have a significant impact on the project," says Danila Bochkarev, nonresident Fellow at the Henry L. Stimson Center and associate researcher at the Institute of Political Science Louvain-Europe in Belgium.

Bochkarev pointed to Scholz's statements on the need for Germany to build new gas power stations to guarantee energy security as it is planning to phase out nuclear and coal power plants.

But Baerbock has warned that Nord Stream 2 would not come into service if there were a Russian "escalation" in Ukraine, echoing a line earlier laid down by Washington. "If Vladimir Putin wants to see gas flow through that pipeline he may not want to take the risk of invading Ukraine," US National Security Adviser Jake Sullivan said last week after US President Joe Biden and the Russian president spoke during a video call.

Sanctions against Nord Stream 2 disappeared from the latest draft of the US defense budget after the Putin-Biden conversation, although experts say there is no direct relationship between the two matters. They say that the White House wants to have the leverage to levy sanctions. If Congress implements them and forces them onto the books, the White House no longer has the discretion to apply or relieve.

Primary Colors

Oil and gas are to remain at the center of energy cooperation between Russia and Germany for at least the next 8-10 years, Meister said.

Russia supplies over 50 Bcm/yr of pipeline gas to Germany, accounting for more than 50% of the country's needs.

But as Germany and Europe together become less dependent on Russia's energy supply, cooperation would switch to the green transition, hydrogen and renewables, analysts believe.

Bochkarev said cooperation on hydrogen might become a new “energy bridge” between Berlin and Moscow. "Hydrogen is an important item on both Germany’s and Russia’s energy agendas and they just have to find a compromise between various “colors” of this low-carbon gas," he tells Energy Intelligence. Indeed, Russia's hydrogen plans are now mainly focused on "blue" hydrogen made from natural gas, while many in Germany are pursuing the "green" product.

Bochkarev also noted that more renewables in Germany could mean more gas and not only as a replacement for coal and nuclear power. "The International Energy Agency estimates that the daily variation of demand could increase on the basis of announced pledges to 270 gigawatts in the European Union (from 120 GW today) by midcentury. Therefore, gas as a bridge fuel might resurface in German-Russian energy discussions," he said.

Hydrogen, Gas Pipelines, Gas Demand, Policy and Regulation, Oil Products
Wanda Ad #2 (article footer)
Moscow has published two scenarios for the development of its oil and gas sector in the coming three years.
Wed, Sep 27, 2023
Developers, financers and other stakeholders are stressing the importance of long-awaited guidance from the US Treasury on landmark hydrogen tax incentives.
Tue, Oct 3, 2023