GERMANY’S ECONOMIC DEPENDENCY Russian Soft Power Expansion in the Energy Sector

JESSICA GARLOCK

Abstract

Germany’s increased dependency on Russian natural gas exports has jeopardized its international stability by opening it to political interference from Moscow. Russia has demonstrated its belief that strategic manipulation of its energy supply to the European Union can extend its soft power through Europe, furthering its nationalistic foreign policy goals. To that end, Germany, as the current strongest member of the EU, has threatened the Union at large by its dependency. In deepening its ties with Russia through the recent construction of new pipelines, Germany continues to concede its regional authority to the East. This gives Russia direct, exploitable control over the German energy supply and creates a disturbing divide between Germany and its anti-Russian ideological counterparts in NATO and the EU, which Russia will use to increase its soft power.

Introduction

Russia has long been the monster in the closet of Western society. From the Communist Revolution to the Cold War, Europe and the US have denounced the Soviet Union’s perceived backwardness, utilitarianism, and brutality. Yet Russia’s ruthless character did not vanish after the Berlin Wall fell—it merely went underground. As Putin walks the line between president and autocrat, Russia mounts a campaign to exploit the European Union ’s fundamental weaknesses. The energy sector is a significant front for this conflict since Russia seeks to construct and manipulate strategic connections with Europe through natural gas exportation. Germany is the most problematic casualty of Russia’s campaign of influence. Already vulnerable to geopolitical exploitation through its links to Russia, Germany continues to expand its energy trade and thereby further Russia’s political goals. Germany’s substantial dependency on Russian natural gas has opened it to manipulation by Russia—an opportunity that the Kremlin will likely leverage. As the strongest economic partner in the EU, a weakness in Germany jeopardizes the stability of the union at large, worsening ongoing crises caused by the COVID-19 pandemic and other systemic issues.

Literature Review

Much of the literature used consists of objective news reports. However, political theorist Joseph Nye’s theory of soft power, when applied to Russia’s economic interactions, serves as a guiding principle for the political aspect of this subject. Nye defines soft power as “a state’s ability to wield influence based on its culture, political values, and foreign policies, which must be perceived as legitimate and having moral authority” (Nye, 1990). In contrast, hard power is coercion through direct force. Except in response to natural security violations, the West rarely considers hard power acceptable; rather, soft power, or persuading through attraction, is the ideal in modern political relations. Effective soft power projection necessitates that a nation appears credible to its citizens and neighbors; it creates national cohesion and achieves foreign policy objectives (Banciu, 2016, p. 85). The “unevenly balanced mutual dependencies” in the globalist world disallow the easy exertion of hard power, meaning two nations must either work to their mutual advantage or to exploit the other’s vulnerabilities (Nye, 1990). Problems arise when the balance of power shifts toward anti-democratic actors. Western idealism claims that international difference can be settled through soft power; geopolitical tensions are exacerbated when this conflicts with Eastern realism. The foreign policy establishment agrees that soft power extension is the primary mode of operation for modern countries seeking to extend their influence; hard power is no longer permitted in the increasingly globalist and idealistic world climate. Yet this does not assume that all countries will behave in an acceptable manner. Russia has demonstrated extensive and current patterns of aggressively leveraging its influence, contrary to the principles of Nye or western thought. The second key piece of literature for this paper is an extensive 2018 study by the Policy Department, Directorate-General for External Policies of the European Parliament. It evaluates the use of energy as a tool of authori-

tarian governments, primarily Russia. The analysis draws from extensive examples of offensive energy usage, supplementing with the EU’s natural gas dependency statistics. It looks at how nations strategically leverage exports themselves, rather than the effects of economic benefits gained after the trade is completed.

Data and Methods

The data for this paper is open-sourced, drawn from primary and secondary sources. Most of the historical analysis is pulled from official exploratory and recommendary publications by the European Commission; news articles have been chosen from reputable sources and cross-checked with other records. In the “Literature Review” section, this paper will discuss several scholarly sources utilized, including Joseph Nye’s theory of soft power in international relations, which will provide a framework for this discussion. In the “Research” section, this paper will first evaluate the status quo of the Russian energy sector and its relations with Eastern Europe; next, it will assess Russia’s actions through the theory of soft and hard power in international relations; and lastly, it will consider to what degree Germany’s current position exposes it to Russian exploitation.

Research

Russia’s Energy Sector Russia possesses vast natural gas reserves. Its 35 trillion cubic meters of natural gas account for 18.1% of the world’s total proven reserves (Temizer, 2018); petroleum materials comprise 58% of Russia’s total exports (Focus Economics, 2014), with 250 bcm of gas exported in 2019 (Bofit, 2020). Its market adaptability is hindered by this lack of diversity coupled with its centrally planned economy, as the oil giant Gazprom, which produces two-thirds of Russia’s natural gas, is majority-owned by the government (EIA, 2017). Though Russia is a self-identified energy superpower, its deteriorating infrastructure and stagnated innovation necessitates foreign investment for industrial revitalization (Leidel, 2004). Though oil prices have recently plummeted, Russia remains Europe’s primary energy supplier. Despite warnings to diversify, the EU imported 70% of Russia’s gas in 201, with the Commonwealth of Independent States (CIS) importing an additional 15% (Bofit, 2020). Eight major pipelines connect Europe and Russia, the most significant being Turk Stream, connecting to southeast Europe via the Black Sea, and Nord Stream 1 and 2, connecting to Germany via the Baltic (EIA, 2017). Russia thus relies on the European market to sustain its industry, while the EU depends on Russian gas. These exploitable geopolitical links between East and West are the subject of this analysis.

Germany’s Energy Sector Germany is one of Russia’s most significant buyers. In transitioning to low-emissions fuels, it has shifted from coal to natural gas with the intent of becoming fully electric (Wettengel, 2021). However, concurrently decommissioning its nuclear reactors, which supply a third of its electricity, has exacerbated its interim dependence on gas (Karnitschnig, 2020a). As of 2020, Germany imports 40% of its natural gas from Russia, rendering its transition to renewables a Pyrrhic victory. The short-term costs of diversifying among suppliers weigh heavily against the long-

term benefit of energy security, and given Germany’s underdeveloped transition plan, it is unclear when Berlin plans to sever itself from Moscow (Wettengel, 2021). The construction of the twin Nord Stream pipelines suggests that neither party intends to end the relationship soon. Nord Stream 1, completed in 2011, transports 59.2 bcm of natural gas directly to Germany beneath the Baltic Sea, lowering Germany’s energy cost by bypassing all transit states (Nord Stream AG, 2021). Russia used the bypass to divert gas from pre-existing transcontinental pipelines and thus divest Ukraine of the transit fees that accounted for 3% of its economy (Markind, 2021). The second string, Nord Stream 2, is nearly complete and has the same capacity as Nord Stream 1, allowing Germany to import 110 bcm of gas annually (Gazprom, 2021). An international outcry has paused construction, but Germany has voiced its intentions to complete the project (Stelzenmüller, 2021).

Russia’s Projection of Power in the Energy Sector: Russia’s Soft Power Goals Post-Soviet Russia has demonstrated its desire to return as a world power. To that end, it has concentrated soft power in the former Soviet satellite bloc (sometimes through hard power, as in the 2014 annexation of Crimea), while enhancing its bilateral relations. The Kremlin has also launched a successful internal soft power campaign, promoting a nationalistic culture through its political, educational, and religious institutions (Karabeshkin & Sergunin, 2015, p. 356). Internal cohesion increases Russia’s attractiveness, facilitating cultural exportation and improving diplomatic relations to extend its influence (Hill, 2016, p. 341). Russia’s socio-political influence in the Eastern states also combats democracy. Democratic border regions threaten Putin’s authoritarian regime—one reason Russia despises the presence of a sovereign Ukraine. Russia also sees destabilized border states as contributing to its own security (Goldgeier, 2021). To restore Russia’ s “greatness,” Putin has pursued means that blur the lines between soft and hard power (Hill, 2016, p. 344). Post-Soviet Russia shifted the revenue from energy exports out of the military-industrial complex and to the economic sector, triggering a period of rapid growth amid climbing oil prices. Initially, “new oil wealth… turned more to butter than guns,” yet recently, Moscow has used soft power to prepare for hard power incursions (Hill, 2016, p. 341). A militaristic tendency joined with hostility towards democracy has aggravated tensions between West and East, drawing attention to Russia’s politically motivated actions in the energy sector.

Russia’s Hard Power in Energy Authoritarian regimes utilize energy exports defensively to consolidate power and improve international relations or offensively control opponents. The government uses the state-controlled corporations as a geopolitical tool in supplier and transit countries, making economic gains, exerting political influence, and coercing customers through the market (Korteweg, 2018, p. 13). The first two typically manifest as soft power, while the third is hard power (Korteweg, 2018, p. 4). Low prices make Russia’s gas the most globally competitive, enticing new buyers and discouraging present customers from switching suppliers. Russia thus establishes mutually beneficial relationships with consumer and transit states, leveraging this positive influence to draw more into the Russian fold (Korteweg, 2018, p. 8). Though it must not drastically undercut soft power by damaging its image, the Kremlin can exploit these relationships for hard

power projection. This occurs primarily through the following ways: • Price increase and decrease • Supply cuts • Asset control • Restrictive contracts (Korteweg, 2018, p. 14)

Regarding prices: Through price decreases and increases, Russia rewards or punishes behavior in dependent consumers. This is best seen in Eastern Europe, which Russia considers under its sphere of influence and therefore vulnerable to economic leverage. Gazprom frequently makes politically motivated price changes while citing business reasons (Korteweg, 2018, p. 16). Regarding supply cuts: Supply cuts are primarily a weapon of last resort, as they undermine Russia’s soft power by damaging its image as a dependable, ethical partner. However, they are effective when used. For example: when Ukraine refused compliance with a three-fold price increase in mid-winter 2006, Gazprom halted all gas exports to Ukraine; when Prague constructed a US anti-missile radar system, Russia cut supply to the Czech Republic (Korteweg, 2018, p. 20). Regarding asset control: Gazprom and Rosneft, through which the Kremlin exerts its political power, own majority shares in most major European pipelines. Gazprom frequently conducts “debt-for-assets” agreements, where Russia forgives foreign debts in exchange for control of pipeline infrastructure. This, combined with the purchase of foreign production assets (e.g. in Venezuela), extends Russia’s monopoly on European oil (Korteweg, 2018, p. 22).

Regarding contracts: Russian suppliers use long-term contracts with specified delivery points to fragment the European market, increasing dependency on Russia. These contracts tie buyers to Russian suppliers while also prohibiting buyers from changing pipelines or re-selling imports. This allows Gazprom to exert strategic leverage by setting different prices for different buyers (Korteweg, 2018, p. 23).

Nord Stream 2’s Consequences for EU Stability: Deterioration of the EU The EU has recently suffered a downturn. Brexit marked the departure of the EU’s most politically influential and economically beneficial member; large states like Italy and France struggle with weak executive branches and internal tension; the southern region has a failing immigration system and a stagnated economy. The COVID-19 pandemic triggered the most drastic decline in the eurozone’s history, with GDP dropping 6.8% (Karnitschnig, 2020b). The adoption of the euro in 1999 created systemic economic issues that left many countries unable to cope with the debt and lockdowns caused by the pandemic. Calls for an EU-wide coronavirus recovery fund have been ignored, with prosperous countries reluctant to fund the dubious recovery of states that were already unsound before COVID (Karnitschnig, 2020b).

Germany’s Role in the EU Britain’s exit left Germany the default political and economic leader of the eurozone. A thriving domestic and international market allowed it to contribute € 25.267 billion, or 0.73% of its economy, to the EU in 2018

(Europa, 2020). It holds 96 of the 705 European Parliament seats, more than any member; it also holds the presidency of the European Commission and held the rotating presidency of the Council of the EU in 2020 (Europa, 2020). German politicians also have a plethora of roles in various committees and enjoy unofficial but influential leadership in the Council (Economist, 2020). Germany, therefore, is the natural choice for an EU hegemon—hegemon being “a country that uses its power to preserve a larger system, even at a cost to its more narrowly defined national interests” (Kluth, 2020). A hegemon is necessary to maintain unity among the frequently incoherent EU states, but Germany refuses to accept the role. Germany’s dark history makes it reluctant to blatantly leverage its natural authority, even as a beneficiary; it also will not risk the moral hazard of assuming economic liability for the south without precautionary conditions on that aid (Kluth, 2020). The soft power vacuum created by the lack of hegemony opens the region to the incursion of influence by less benevolent actors.

Effects of Germany’s Energy Policy on the EU Germany’s internationally censured embrace of the Nord Stream 2 pipeline strengthens its relationship with Russia at the expense of Europe’s security. In bypassing the eastern and central transit countries, Russia increases its leverage over those states, as it can force problem countries to capitulate to political or economic demands by diverting exports to Nord Stream without losing revenue through a supply cut (Korteweg, 2018, p. 27). Russia has already demonstrated a decades-long pattern of offensive energy use, especially towards Ukraine; Nord Stream 2 allows hard power to maximize German revenue. The EU is also imperiled. Together, the two strings of Nord Stream carry 110 bcm of natural gas, over 70% of Russia’s exports to Europe, which creates a chokepoint for Europe’s gas supply (Korteweg, 2018, p. 27). Russia could exploit this dependency with strategic supply and price manipulation just as it has exploited the east. In addition, Nord Stream strategically undermines EU soft power through internal division: consumer countries are incentivized to purchase cheap Russian fuel, while non-buyers condemn them for their increased dependence on Russia. This worsens the EU’s burgeoning fragmentation, preventing the formation of a common EU energy policy and allowing Russia to capitalize on the destabilization (Korteweg, 2018, p. 5). NATO is also jeopardized. While it ordinarily acts as an unofficial check on Russia’s power, it cannot do so effectively if Germany, one of its strongest partners, is dependent upon Russia. Recent events show this danger: Russia began an immense military buildup on the Ukrainian border, and Germany remained uncharacteristically silent in its support of NATO. Antagonizing its business partner would jeopardize its economy—Russia’s soft power extension worked with brutal effectiveness (Kramer, 2020). While Russia cannot exert much hard power without damaging its commercial reliability, its image would cease to matter in a military conflict. Suppose Russia pursues its aggressive tendencies to take military action against Eastern Europe or the EU. In that case, Germany is boxed in by Nord Stream: either a vulnerable Germany stands with NATO and faces its due punishment from Moscow, or Berlin distances itself from the EU and NATO to appease the Kremlin (Markind, 2021). This security threat to the already structurally unsound EU opens the region to risks of catastrophic proportions.

Conclusion

Moscow has won on both fronts. It has created commercial ties with Berlin while improving its image as a benevolent neighbor; Germany, however, has distanced itself from the US and the EU. If estranged from western powers, Germany will likely turn towards Russia and China, jeopardizing the security of the West by extending Russian soft power and imperiling the stability of NATO. This is predicated, however, on the assumption that West-East relations are always a zero-sum game. Every expansion of Russian influence is not automatically a loss for Europe, yet Russia does have a long and disturbing history of viewing democracy as antithetical to its national interests. The West—and Germany in particular—might be willing to extend the olive branch in the economic sector, but Russia may not view the situation with a similar benevolence. Germany and the European Union must acknowledge the instability of their position and devise a means of lessening their resource dependency before it is employed against them.

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