The future of Europe and Russia are linked together - Putin

There are some that do not want to see Russia and Europe working together and have tried to bring up past phobias, says Russian Prime Minister Vladimir Putin.

He spoke with the German ARD channel and also discussed Ukraine's role in the current gas crisis.

Interviewer – Hubert Seipel, ARD political analyst

Q: Those who have energy, have the power. Russia has a lot of energy, how much power does it have?

A: Power belongs to those who have brains, first and foremost. You can have whatever, but not have the means to manage it. But you are right, in today's world energy means a lot. And it is in our interest to see Russian energy as an integral part of world energy, so that it would abide by common rules, receive appropriate income, make profit and make sure its partners' interests are observed.

Q: It turned out that you and Russia got hit heavily because of the decision to turn off the Ukrainian gas tap.

A: I want to state right away – we are not interested in stopping deliveries to our consumers. Just think about it – why would we do it? We have long-term contracts with our European consumers. These European consumers make timely payments. Why do we commit suicide and stop the deliveries from getting there? Ukraine basically staged a gas blockade for Europe. Why? In order to get lower than market prices on our gas. After the fall of the Soviet Union, new transit countries were formed. They try to use their transitory monopoly to get preferences, to get low gas prices, first of all. Lower than the market prices.

As for Gazprom, it only acquires losses from the cut in deliveries to its partners. During the days when Gazprom stopped deliveries through Ukraine, it lost about 800 million dollars. Gazprom had to stop the operation of over 100 wells while avoiding the danger of negative technological effects.

The company's image has been damaged also, as you have rightly noticed. But we are doing all this not just for the benefit of the Russian side, but mostly in the interests of European consumers. I want the European consumers, the citizens of the European Union, to be aware of this and to understand it well, because the European consumers are first and foremost interested in the reliability of the supplier. And reliability can only be ensured if all the participants in this process – gas producers, transit countries, and consumers – act within the framework of civilised market policies, rules and mechanisms.

Besides, gas is one of the key foundation tools for forming prices on other products on the European and world markets. And if a western neighbor, Ukrainian partners, for example, get gas at lower prices, whereas EU countries pay high prices, then their products on world markets – chemical, metallurgical and some other products – become unmarketable. And Ukrainian partners in this case get a huge advantage of a non-market nature.

Q: But the Ukrainian economy will not change in the visible future. So when is gas going to flow to Germany?

A: First of all, gas is flowing to Germany. There is more than one channel delivering gas to Germany, thank goodness. Secondly, there are gas storage facilities in Europe, including Germany, where Gazprom's gas is being kept. And this is not just about the Ukrainian economy – we are also talking about Russia, Belarus, Kazakhstan, and all others.

If there are no clear market signals for prices on primary energy sources, then these economies will never strive for energy saving. And it will be impossible to encourage saving using just administrative measures. As for Ukraine, unfortunately today's situation has not only collided with the desire to benefit from their transit status, but also with the internal political crisis.

Many people, during the so-called Orange Revolution, thought they were going to have better lives. They were hoping to fight corruption, to switch to clear market relations, strengthen democracy. Many are disappointed today. Former leaders of the Orange Revolution did not fulfill their hopes, and abused their trust.

And political competition has now turned into fights between clans. The goals of these clans is not strengthening democracy or building the market, but perusing personal ambitions, struggling to get access to financial flows, one of them being the trading of Russian gas inside Ukraine as well as on the European market. In order to move away from this, regardless of what happens inside Ukraine, we need to diversify the flows, transporting gas from the producer to the supplier in Europe. These transit counties should have no illusions, the girls should have no illusions – the groom has other choices, they have to understand it.

Q: But unfortunately, this doesn't change the fact that so far gas has to flow through Ukraine in order to get to Ukraine. So what's the solution?

A: There is a solution. Ukraine signed the energy charter. It wants to look like a civilized European state. So it should not close its transit to European countries, regardless of its burning desire to get gas at lower prices. Europe needs to give a clear signal, not to Russia – saying that we should give our gas for almost nothing, but to Ukraine, saying that it has to act in a civilized way.

There is also another option. For example, what we do with Belarus. In order to stabilize everything, we need to switch to market relations, market prices and market transit. If there are not enough resources for today, for example, the economy is not ready, the economy is very energy-consuming, or other systems are not ready, give them credit. So we gave credit to Belarus – $US 2 billion.

And we wrote in the contract with Belarus that we will switch to a European price formation in three years. And we raise the price each year, even though our Belarusian partners are not happy about it. Here we also have many arguments, but Belarus still pays.

There is also a third choice – we offered this several years ago. Actually, Russia and Germany proposed it. And at that time it was practically accepted by the Ukrainian leadership. Ukraine, Russia and Germany signed a memorandum. The memorandum stated that we were organizing an international syndicate, involving other European partners – Italy, France, maybe other European countries. And this syndicate was to rent the gas transportation system of Ukraine.

We can also participate in privatization, if Ukraine wants it. But they tend to make a fetish out of this gas transportation system, consider it some sort of national heritage of an almost heavenly origin. And it is not up for privatization.

But if Ukraine finally decides to do it, we can participate in the privatization. But we suggested a long-term lease with Ukraine, still being the system owner. I think everyone would benefit from that. But we could privatize too, why not? Russia has been rebuked many times, and in some sense those were correct rebukes, it has been suggested that we should keep striving for liberalization of our energy market. But we can say the same about our Ukrainian friends

Q: Of course, when we talk about Russian gas, we have to mention Gazprom. Gazprom is a state industry, and in essence, Gazprom is a success story. In the 1990s, it was a very turbulent time in Russia, when many appropriated state property. But Gazprom remained state property. Can we say that you learned the lessons of the 90s, realizing that it is not bad when the state has its own resources?

A: The information you have is not quite correct. Gazprom is not a state industry. It is a joint stock company. And until recently the state only had 38% of Gazprom's shares. Now, using only market methods, we have increased the state's share to a little bit over 50%. But Gazprom functions as a joint stock company within the framework of a market economy and following all the market rules.

And more than 49% belongs to private owners, many of whom are foreigners. But of course in such an important area as energy, the state's influence is very significant in the Russian economy. And there are several reasons for that. First of all, the one that I mentioned speaking about the Ukrainian, Belarusian, Kazakh or Russian economy.

We are talking about the type of economy that is really energy consuming, inherited from the Soviet times, the time of managed economy. But it does not mean we are going to leave things the way they are now. Even inside Russia we are going to switch our consumers to the European gas price formation. And this of course is not some sort of economic masochism. We are doing this on purpose, understanding that only by using market methods can we encourage the economy to switch to new technologies, including energy saving. Only this way can we make it marketable. But that is not all either. Even though this process takes time and we are supposed to reach European prices by 2011, we already have as one of our objectives giving access to Gazprom's pipelines to our so-called independent gas producers.

Q: Since we've started to talk about infrastructure projects, we should mention such an important project as Nord Stream. The cost of the project is over $US seven billion. It will bring gas from Russia to Germany. So let me ask you this question: what are the reasons for favouring Germany in particular?

A: It is not about love, it is about mutual interests. A European gas system was first established between Russia and Germany, as there were plans to provide Soviet gas for the German economy. So from the very beginning Russia and Germany have been the “founding fathers” of this system. And now it is clear to both European consumers and us that when transit countries emerged, we began to experience additional threats. And the current crisis confirms this. And note this: today Germany helps some countries whose conditions are extremely critical in this crisis. Today the situation is different. Germany is one of the EU leaders. And the potential that Nord Stream brings strengthens Germany's leading role in the European Union. The Nord Stream project is not bi-lateral any more. It involves Russian, German and also Dutch companies. It's two German companies, one Russian and one Dutch company. The idea is that in the future gas from the Shtokman field will flow into this system as well. And we have Gazprom, French Total and Norwegian Statoil working at the Shtokman field. And not just Germany, but many other European countries will get the gas. So we have a full right to say that this is project is not between just two sides, but several European partners. But again it was started by Russia and Germany for obvious reasons. Germany is our major consumer. And the same reason for Germany. We sell about 149 billion cubic meters of gas to Europe annually, and over 40 billion goes to Germany.

Q: Is the reason why you invited two German representatives, Mr. Schroeder and Mr. Varnik, to be part of the executive team for this project?

A: No, not for this reason. They were invited to be part of this project not because of their German origin, but because of their personal qualities and experience in business. More than anyone else, they understand the importance of this project for Europe, for Germany, for Russia. They have all the professional experience to do the job that has been entrusted to them.

Q: Now, of course, the project is being developed, pipes are being made for it. 70% of the pipes are produced in Germany, 25% in Russia, but the project is not quite approved. Many European countries are against it. Some demand more gas deliveries, others apparently still have a bone to pick with the Soviet Union. What will happen if this project is not realized?

A: I think all the talk about past problems, about cut deliveries are meaningless. First of all, our partners pursue their pragmatic interests. Look at what transitory countries do if they realize they have the monopoly on transit. They demand their price be lower than the market price for the gas that they get from us. For some European countries additional transit opportunities may mean strengthening their status in the European Union. But I would like to emphasize again – we don't hurt anyone by this project, we don't take anything away from anyone. There are routes already set on the territories of transitory countries. We are not closing them. More than that, all the countries that sign long-term contracts with us on a market basis, receive gas in full volume. No refusals on the part of Russia. None – I want to stress that. We will work with the countries that have not given their permission yet. I hope that those European countries that are potential consumers of our gas in the future will also put their effort into it. Now, to answer your question what will happen if the project is not realized. Of course, there will be gas in Europe, there will be less of it, and it will be more expensive. Why? Because the same transitory countries will create problems by raising transit prices, trying to get cheaper gas for themselves, so it will be more expensive for the other consumers. And also we will have to transport our resources to markets in other regions of the world – the United States, the East. It means that we will focus more on other delivery methods – such as liquefied gas – and that is a very expensive process. First we need to build mooring facilities, build liquefying plants, then build a special oil-carrier fleet, then build mooring facilities in receiving countries. Then we need to build plants that will de-liquefy this liquid, turn it into gas again. All this will be included in the final product price, and hit the wallets of the rank-and-file consumers.

Q: There are, of course, many political factors in the energy dialogue. This includes a political image of an enemy. Russia, for instance, is accused of buying gas and pipeline systems in Central Asia. Russia is also building the Nord Stream pipeline, it's going to supply gas to Germany and Europe and will be able to impose its prices on European consumers. This is the 'nightmare' which Russia's opponents use to scare Europeans. Can you explain how Russia got this bad reputation?

A: It is out of fear of Russia. Which, in turn, is the result of past phobias. I think there are still people who don't want to see Russia and Europe getting closer, so they're creating this image of an enemy. None of the points you've mentioned are true, in fact, all of them are false. The main one is the price formation. I watch TV, too – not that often, but it happens – including German television. I can often hear people saying that gas is too expensive, and this is the way we have to buy it from Russia. But it's not expensive because it comes from Russia. Few people know that gas which is bought from Russia at 300-400 dollars per one thousand cubic meters is then sold in European countries at a much higher price. It depends on the governments' financial and fiscal policies. The most important thing is, we're not imposing any prices. Few people in Europe, including Germany, know that gas prices are directly related to the market prices for oil and oil products. So we're not responsible for the high gas prices and the high oil prices. When the price for oil and oil products drops, so does the price for gas. It happens with a delay of five-to-six months, though, because it takes this long to calculate the average price for a certain time period. But gas prices will invariably go down later this year, because oil prices dropped at the end of 2008. If you want to be angry at someone, it has to be the oil traders, who sell paper instead of the real product. But, in any case, this has been done elsewhere in the world and not at Moscow's stock exchanges.

Q: You've once told journalists – in a very ironic way – that no matter what happens, for them you'll always be a KGB agent. At the same time, it's widely known that George Bush Sr. was head of the CIA, but it never was important for public discussion. In your case, do you think it's due to what you've mentioned earlier, namely, a fear of Russia?

A: I think it actually is true. And, once again, this is because someone does not want Russia and Europe getting closer. I think this position is very wrong. It takes no account of the tendencies of global development. This is a tradition which originates in the darkest sides of the past. We've had dark ages in the past, but we've also had some good times. And the most important thing is that the future of Russia and Europe are definitely linked to each other. We should never forget about this natural interdependence. We have to build our relations with a long-term perspective in mind, base them on clear principles and respect each other's interests. If we manage to do this, the whole of Europe will prosper and be competitive in today's complex world. I can imagine that someone doesn't want it to become more competitive, so they're trying to mess about and stir up the past phobias. That's by far the only reason I can use to explain it.

Q: One more question about Gazprom. There's a crisis in the world now and the price for energy carriers is dropping. How important are Gazprom's revenues for the Russian budget?

A: Gazprom is one of the biggest Russian companies. Only because of that, we are going to support it in every way. It's a major employer, too, with a staff of 300,000. As for its input into the tax pool, it is significant, but not as big as it might seem. The oil industry, on the whole, provides for 40% of the budget, and Gazprom accounts for 5-6%. But there's also a huge social load on the company. First, gas is still selling inside the country at a lower-than-market price. Even after 2011, when we plan to switch over to market prices for industrial consumers, we plan to keep the prices low for the population. Even now, industrial consumers are signing contracts at European price levels. But I'll say it again – Gazprom's input into the tax pool is 5-6%. The company also has another area of activity which is tightly linked to solving social problems. It's the widening of the gas supply network for household purposes. Unfortunately, not all towns and villages in Russia have access to the company's gas. In 2005, we adopted a gas infrastructure programme, and at the time, this programme was more than half completed. Now, in three and a half years, it's 62%. That's almost a social load on Gazprom, as well. That's why the company's contribution to the budget is not as large as that of the oil industry – the latter works under market conditions, and sells oil at market prices inside the country, but its tax load is much heavier.

Q: There's only one last question, because I don't want to take up much of your time. We all remember the events of 1970, when Willy Brandt and Leonid Brezhnev signed an agreement called 'Pipes for gas'. This leads to the next question. We know that you and ex-Chancellor Schroeder are good friends now. When, do you think, Mr. Schroeder saw Russia's potential for supplying gas to Europe and started to promote the development of this potential?

A: This is the question you have to address to Mr. Schroeder himself. I really can't tell you what he felt and when he felt it. But I think that Germany's political and intellectual circles have long had the idea that Germany's development, and Europe's development, cannot be efficient without Russia. You've just made a reference to my past in the intelligence services. It's true that when I was an intelligence officer, I was influenced by ideological clichés. Later, I started working in St. Petersburg's city administration, and I still remember one of my first visits to Germany. It was when Mr. Helmut Kohl, who was the Federal Chancellor at the time, invited the Mayor of St. Petersburg to visit Germany. I was part of the delegation. We've talked for a long time in the Federal Chancellor's Office in Bonn, although I was mostly listening. I was greatly impressed by what Mr. Kohl was saying about the future of Russian-German and Russian-European relations. He spoke with astounding conviction and professionalism. It made me look at the problem from a completely different perspective. It's no secret that Mr. Kohl and Mr. Schroeder have had a difficult political relationship. But the fact that Schroeder adopted the same pragmatic position in Germany's relations with Russia says a lot – most importantly, about the fundamental common interests that our countries share and which call for a further development of relations. It also means that the relations between Germany and Russia do not depend on the tastes of politicians and their political views and party affiliation. There are national interests, which tell us that the development of relations between Russia and Germany is positive. They have to be developed – not only in the field of energy, but in other spheres, as well, such as high technology, education, health and humanitarian efforts. It's also true about politics, namely, the coordination of our efforts on the international arena. I think I'll be able to discuss it all with the Federal Chancellor of Germany Angela Merkel, who has invited me to Berlin in the middle of January. I'm sure we'll have a resourceful and progressive dialogue.

Q: As far as I understand, you'll be in Berlin on January 16.


A: Yes.

Q: One small question. You've told us about your time in St. Petersburg. Was it there that you've met Mr. Warnick?

A: Yes, it was in 1993 or 1994, when I was heading the external relations committee. One of my duties was registering foreign companies in St. Petersburg. Mr. Warnick came to me to talk about registration issues,as a representative of Dresdener Bank. We were registering representative offices. It later developed into Dresdener Bank's subsidiary in Russia.


Thank you very much.

Thank you.