Author: Kent Moors, Ph.D.
Last week, I had the first protracted post-COVID in-person meetings with major international private investors I advise. It took place at a foreign location we have used in the past. There emerged some developments of interest to my Sigma Trader and PRISM Profits subscribers and the portfolios carried by each service, especially in light of the accelerating US market moves towards a correction.
Such meetings provide me with a window on where these folks are redirecting their money. This, in turn, will benefit the next investment moves by both services.
However, given the positions these individuals hold in the intersection between private market moves and public policy, geopolitics has a way of impacting our discussions. One of those ongoing issues resurfacing is the subject of today’s Classified Intelligence Brief.
It involves a major American-Russian policy impasse on which I have written in the past. In the course of that analysis, I have commented on the real reasons why proposed additional US sanctions have been responded to so forcefully by the Kremlin. In addition to other matters, these have the distinct possibility of attacking a vital revenue flow.
Central to this heavy pushback is the additional US restrictions on access to international banking in general and the fate of the Nord Stream 2 natural gas pipeline in particular. The Biden Administration lifted some sanctions against the pipeline in May but the contentious issue still remains, morphing into a central element in European politics.
As with the initial dual-line Nord Stream, operational now for almost a decade, Nord Stream 2 is designed to carry natural gas from Vyborg in northwestern Russia (close by the Finnish border and near Arctic fields), under the Baltic Sea, to Greifswald on the coast of northeastern Germany. Nord Stream 2 will also have a dual-line system and extend some 750 miles.
Over a period of several years, negotiations succeeded for access to offshore Finnish, Swedish, and Danish territory. The Environmental Impact Assessment (EIA) was also completed and construction started. But the politics has remained.
Even before US initiatives called for the European Union (EU) to reject Nord Stream 2, Western Europe had been divided. The primary objection raised by those against the project involves energy diversification. That is a euphemism for the real issue – energy security.
Russia currently provides about 29 percent of the aggregate EU natural gas needs. However, projections point toward a 50 percent rise in demand over the next 20 years. The issue is not whether the imports provided by Nord Stream 2 are necessary (the volume, at least, certainly is) but the source. Some in Brussels are against making Europe more dependent on Russia for energy.
Gazprom, the Russian natural gas behemoth, is sensitive to this argument. It has been substituting affordability and sustainability to diversification in all of its project defenses.
The pipeline’s cost is now put at €9.5 billion ($11.2 billion). While proponents note Nord Stream 2 will mirror the operating Nord Stream venue, thereby cutting planning expenses, the pipeline will almost certainly have overruns. Some of these have already been appearing in overages charged by subcontractors in Finland.
And then there is another stumbling block for the project – the Energy Charter Treaty (ECT). The accord specifies that natural gas exporters into the EU must separate transport from distribution. The ECT also requires that providing countries make domestic pipelines available to third parties.
Despite having signed the ECT, Moscow has rejected both provisions. As a result, Gazprom and other Russian energy majors have been prevented from acquiring assets (such as pipeline networks, terminals, or wholesalers/retailers) inside the EU, despite persistent attempts.
The Kremlin has responded by setting up both Nord Stream pipeline operations with private energy majors in Europe, effectively bypassing their respective governments and, thereby, the ECT provisions.
Both Nord Stream and Nord Stream 2 are administered by boards headquartered at the same address in Zug, Switzerland. Gazprom Marketing & Trading (GM&T) just happens to have an office around the corner.
Gazprom is so important to the Kremlin that it is often used as the vehicle through which Moscow’s foreign policy is expressed. As a corporate structure it is huge and complex. But when it comes to exports, the pecking order is this: Gazprom controls 100 percent of Moscow-based Gazprom Export. Gazprom Export controls Berlin-based Gazprom Germania GmbH, which in turn controls the entity that actually does the pre-financing in foreign markets – GM&T.
Now GM&T has offices in Zug, Paris, Singapore, Houston, Hertogenbosch (the Netherlands), and Manchester (UK). However, its headquarters from which financing is coordinated is in London, a place I know well.
This is in Regent’s Place, close by one of my favorite London Italian eateries (Giovanni Rana), a direct Underground ride from where I used to live in South Kensington, as well as my old professional haunts at the British Museum and the LSE (London School of Economics and Political Science).
In passing, if Washington ever decided to get really serious about economic sanctions against Moscow, the essential pre-shipment global finance issuing from GM&T in London (and contract swaps vis its office in Houston) would be a target having an immediate and painful impact. That is a matter I addressed in an earlier CIB (“How London Telegraphs the Approach of Another Russian Crisis,” Classified Intelligence Brief, #79, April 26, 2021).
But back to Nord Stream. In the case of each pipeline, Gazprom controls 50 percent of the project, with the remainder divided among European energy majors. That way, it is legally a separate entity under EU law and not a foreign project. Nord Stream 2 European partners are Anglo-Dutch Royal Dutch Shell, Austrian OMV, French Engie, and German Uniper and Wintershall. Each provides 10 percent of the working capital.
The second Kremlin strategic move to circumvent Brussels was unveiled back in August of 2017. The Russian government nominated former German Chancellor Gerhard Schröder to be a member of Rosneft’s board.
Rosneft is the largest state oil company in Russia and itself a major player in European energy trade. It is also under US sanctions for previous Russian actions.
Schröder is a close friend of Russian president Vladimir Putin, has developed his own private business network in Russia, and has publicly opposed US sanctions against Moscow.
Oh yes, he is also chairmen of the Nord Stream board of directors. That project received his strong support while he was German Chancellor. The initial pipeline was signed before he left office in 2005 and he was named to head up the pipeline board shortly thereafter.
Rosneft, by the way, also has a Swiss trading operation (Located in Geneva).
In all of these cases, the Swiss connection is important for several reasons. First, operations located there have a direct access to Western Europe without being a member of the EU. Second, deals can be made with EU member state companies easily from any location in Switzerland. Third, there is the ability to utilize Swiss banks (and less transparent Swiss banking regulations) in bypassing foreign (i.e., US) restrictions.
Finally, Swiss law has a different take on what constitutes unacceptable business practices. All manner of “considerations” to effect agreements are allowed. Many of these would be considered bribes or “corrupt foreign practices” under other countries’ rules (including those on the books in Russia). But not there.
I expect we shall see the following in short order. First, intense pressure will be brought on Brussels by the European company members to reject US sanctions and approve the Nord Stream 2. In at least one case (OMV) the company involved is a state-controlled energy major.
Second, there will be a more concerted joint Gazprom-Rosneft move to acquire European energy assets using the Swiss locations of each company and those of both Nord Stream operations. Gazprom for some time has targeted a position in the huge natural gas hub at Baumgarten in Austria (one in which Nord Stream partner OMV already has a position).
A spin off attempt involves the CEGH (Central European Gas Hub) trading platform, a goal Gazprom has energetically sought but stymied via EU enforcement of the ECT. Once again, with OMV on board, Gazprom has essentially obtained Austrian government support.
Meanwhile, Rosneft is eyeing greater access to and control over large crude oil and oil product terminals at Rotterdam. Another Russian oil major – LUKoil (currently having a larger foreign stock ownership position than does Rosneft) – already has terminals and export facilities in Rotterdam. Assuming the joint Gazprom-Rosneft effort succeeds, I expect there will be more contract swaps, including those involving the exchange of future consignments of crude oil/oil products and natural gas.
Third, the confluence of energy moves will allow greater flexibility in financing Russian forward export contracts, effectively turning Rosneft/Gazprom/Nord Stream 1 and 2 transfers under Swiss banking into avenues circumventing sanctions.
Fourth, in all of these the position of Gerhard Schröder (and his Moscow-based personal business interests) will be pivotal.
The Moscow-Washington chess game continues. Only this time, it looks like the board has become the wider European energy market.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
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