Russia steps up role in German industry

By Vladimir Socor

German Chancellor Angela Merkel visited Russian President Dmitry Medvedev in Sochi on August 14 - their third bilateral meeting thus far this year - in an atmosphere of conviviality staged primarily for German television channels.

Merkel was in the Crimean resort as a "favor-seeker" - the chancellor's Christian Democratic Union and other parties face a general election next month and three major enterprise bankruptcies with their attendant threat to jobs spurred her decision to rush to Sochi.

These short-term considerations, however, are only adding impetus to an existing long-term strategy of linking the German economy to Russia.

Topping the bilateral agenda at the moment are Russian takeovers in Germany of the insolvent Opel automobile plants, the Wadan shipyards and the semiconductor producer Infineon-Qimonda, as well as ambitious projects involving the nuclear power industry and natural gas supplies.

The Wadan shipyards, in Wismar and Rostock-Warnemuende on the German Baltic coast, are being offered to a Russian investors' group close to the Kremlin. The German government takes the position that an investor connected with the Russian political leadership can guarantee Russian state orders for the yards.

As recently as 2008, the German government allowed an individual Russian investor (identified in the German and Russian media as Andrei Burlakov) to acquire the Wadan shipyards in unclear circumstances. Burlakov had promised to secure Russian state orders, but he did not deliver by the time the crisis hit. The shipyards became insolvent despite their capacities for building liquefied natural gas (LNG) tanker ships, Arctic transport ships, and ice-breakers.

Gazprom, Russia's biggest natural-gas producer, and the Russian merchant fleet lack such vessels and are unable to build them. Russia needs them in order to break into the LNG trade (lest this become Western Europe's answer to Russian pipeline dominance) and to compete for Arctic resources.

At the Sochi meeting, Medvedev and Merkel tentatively agreed on handing over the Wadan shipyards to a Russian group, represented by Igor Yusupov and his son Vitaly. The senior Yusupov, a member of Gazprom's board, was a cabinet minister in 2001-2004 and later a special Russian representative for external economic relations and energy issues. He has been closely associated with both Medvedev and Vladimir Putin during their respective presidential, governmental, and Gazprom tenures.
Yusupov junior is now the head of the Moscow office of Nord Stream, the Gazprom-led Russo-German project for a gas pipeline on the Baltic seabed. Thus, both are colleagues with Germany's former Social Democrat chancellor Gerhard Schroeder, being in Gazprom's employ in one way or another. Schroeder joined the Gazprom payroll soon after leaving office in 2005. The incumbent Christian-Democrat chancellor's chosen solution for Wadan reflects the bipartisan nature of Berlin's new Ostpolitik.

According to Russian and German press reports, the Yusupovs have pledged 40.5 million euros (US$57.6 million) upfront, ostensibly as private investors, for the Wadan shipyards. According to these reports, the Yusupovs are believed to represent a consortium that includes the Russian Vyborg shipyards - working largely on orders from Gazprom - and the construction and banking magnate Sergei Pugachov, who has been described as belonging to Prime Minister Putin's inner circle and as the "Kremlin's cashier".

At the Sochi meeting, Medvedev told the media that the proposed takeover of Wadan would be a purely "private" business. Nevertheless, Merkel held out the prospect of German government credits or guarantees to support this solution for the shipyards.

Under such arrangements, Russian capital would acquire the Wadan shipyards at a fraction of their real value. The shipyards possess a highly trained workforce, modern machinery, and advanced patents, such as Russia could not hope to develop on its own any time soon. From the German government's standpoint, guaranteeing Russian state orders through the investors' links to the Kremlin is a decisive consideration in favor of this solution.

In Sochi, Merkel urged Medvedev to go ahead with the Nord Stream project as a priority, "even if South Stream is also being pursued". The proposed South Stream gas pipeline would transit the Black Sea from Russia to Bulgaria before feeding gas to Europe. Such remarks have been heard repeatedly from the German side, reflecting anxiety that South Stream might divert Russian resources of gas and investment capital away from Nord Stream. Such anxiety is gratuitous, however, inasmuch as South Stream remains an implausible project.

Also on the inter-governmental agenda is a proposed Russia-Germany joint energy agency. If created, such an agency could nip the European Union's common energy policy in its fragile bud.

Vladimir Socor is a senior fellow and long-time senior analyst with the Jamestown Foundation. He was formerly a senior research analyst with Radio Free Europe/Radio Liberty in Munich, and is a specialist in the non-Russian former republics of the USSR, Commonwealth of Independent States affairs and ethnic conflicts.

(This article first appeared in The Jamestown Foundation. Used with permission.)

(Copyright 2009 The Jamestown Foundation.)