Soft Line

Despite Sanctions, Germany Authorizes Russian Energy Deal

Angela Merkel and Vladimir Putin in Deauville, France, in July 2013. Source
Angela Merkel and Vladimir Putin in Deauville, France, on June 6, 2014.
  • Why it matters

    Why it matters

    Germany is letting utility RWE sell energy operations to a Russian investor, even as it enforces sanctions against the country over the Ukraine.

  • Facts

    Facts

    • The United States and European Union ban exports of oil exploration technology and weapons to Russia.
    • But deals can still be permitted if they were signed before sanctions went into effect in July.
    • Germany receives more than a third of its natural gas and oil from Russia.
  • Audio

    Audio

  • Pdf

Germany is grappling to balance its objections to Russia’s role in the Ukraine crisis with its own economic interests.

While pushing for economic sanctions against Russia, the German government on Friday said it will approve a €5.1 billion ($6.9 billion) energy deal that will allow German utility company RWE to sell an oil and gas business to the Russian consortium LetterOne, led by Russia’s second-richest man, Mikhail Fridman.

Germany’s economy ministry will allow the sale of RWE oil and gas unit DEA, including stakes in about 190 oil and gas licenses or concessions in Europe, the Middle East and North Africa.

Only two weeks ago, Germany cancelled construction of a military training facility near Moscow to be built by the German defense firm Rheinmetall amid the Ukraine sanctions.

The European Union and United States have imposed sanctions against Russia for its backing of pro-Russian separatists in Ukraine and annexation of Crimea.

Sanctions include the sale of certain high technology equipment to the Russian army, special technologies for oil extraction, and financial market restrictions for Russian companies. Dozens of high profile Russian policymakers, businesspeople and companies have also been put on a sanctions list, facing, for example, asset freezes.

However, transactions that were signed before the sanctions were put in place are being permitted to go ahead. For instance, the French sale to Russia of two military assault ships, worth €1.2 billion, is going through.

Only two weeks ago, Germany cancelled construction by Rheinmetall of a military training facility near Moscow amid sanctions over the Ukraine conflict.

The RWE deal was announced in March and some experts believe it does not fall under E.U. sanctions.

“With the DEA sale, I see no political issue for the German and Russian side. The deal is within the remit of EU sanctions,” said Joachim Zweynert, professor for political economy at the University of Witten-Herdecke.

“Germany is setting a good example with this deal. We are acting within the sanctions and acting purely from a business perspective,” Mr. Zweynert said.

The controversy often caused by such deals – whether they are pure business deals or tainted by political interests – is one that does not apply to the RWE deal, Mr. Zweinert told Handelsblatt Global Edition: “Fundamentally, the question is whether a business deal is truly a business deal or a political one. In Russia, the borders between business and politics are often blurred. Mikhal Fridman is first and foremost a business man. Of course, like all Russian oligarchs, he will have political ties. But he is not Gazprom.”

For RWE, the sale is important. As many other traditional electricity producers, RWE is suffering from Germany’s shift to wind and solar power and away from nuclear energy. Faced with write-downs and sagging profits, the utility has slashed its dividend to €1 per share in 2013 from €3.50 in 2009.

The sale of the energy operations to the Russian consortium will help RWE improve its finances, which are burdened by a debt pile of €31.5 billion.

 

DEA refuelling car
A DEA refuelling station in Germany. Source: DEA

 

Despite the Ukraine crisis and sanctions, good relationships with Russia are primordial for Germany and its businesses. Russia is the fourth-largest German export destination outside the European Union and more than a third of Germany’s gas and oil supplies come from Russia.

Former German Chancellor Gerhard Schröder is chairman of the gas pipeline operator Nord Stream, which is controlled by Russian state-backed energy firm Gazprom. Two pipelines connect Russia and Germany via the Baltic Sea to deliver gas to north-west Europe. Other Nord Stream shareholders include German oil and gas firm Wintershall, as well as German utility E.On.

German Chancellor Angela Merkel, who speaks Russian, has kept the dialogue alive with Russia’s President Vladimir Putin and Ukraine’s President Petro Poroschenko in an effort to diminish the conflict which has hurt German businesses. She will meet with Mr. Poroschenko on Saturday in Ukraine’s capital Kiev.

The authors are editors at Handelsblatt Global Edition in Berlin. Contact: s.mewes@hvb.de and g.kreijger@hvb.de

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!