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 who spoke with the German ARD channel and also discussed Ukraine's roll in the current gas crisis

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, 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 - 2 billion dollars.

And we wrote in the contract with Belarus that we will switch to a
European price formation in 3 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 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, 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 frame work
of marker 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 7 billion dollars. It will bring gas from Russia
to Germany. So let me ask you this question: what are the reasons for
favoring 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 that
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 give 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 liquified
gas - and that is a very expensive process. First we need to build
mooring facilities, build liquifying plants, then build a special oil-carrier fleet, then build mooring facilities in receiving countries. Then we need to build plants that will unliquify this gas, 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 5-6 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 crisis in the world
now and the price for energy carriers are 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've 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 clichйs. 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.

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