An Offer They Can Refuse

 

 

There is a line between acting persistent and acting desperate. Latvian President Valdis Zatlers crossed it last Friday on radio station Echo Moskvy.

 

He told station listeners—in case they hadn’t heard it many times before—that he would much like

to see the Nordstream pipeline cut overland through Latvia.

 

He stated his preference for this over the current plan to run the line through the Baltic Sea. That latter plan is a “join Russian-German project,” i.e., one that is of no benefit to Latvia.

 

If given the chance to host a line on its turf, though, Latvia “could make available its gas storage facilities” and thereby benefit immensely, he said.

 

The problem with his stance is that it is nothing new. He, and likeminded Polish Prime Minister Donald Tusk, have been arguing it as far back as February 2008. At that time, they were pushing for an Amber pipeline that would ferry Russian natural gas overland through Latvia, Estonia, and Poland.

           

Back then, they framed their arguments on security concerns and worry over the environment. Zatlers’ Friday exortation to new business opportunities, not to to protecting the fish and wildlife, is at least some refreshing honesty. For that, I have to give him credit.

 

Valdis Zatlers decides to be blunt.

But will it convince Gazpom to ditch its plans and adopt his?

I doubt it. As Gazprom’s maps can illustrate for you, any overland route through Latvia would have to cross Latvia and Poland both to get to Germany; two nations that will expect transit fees for the gas. Latvia would have to convince Russia that the transit fees would be worth it – right now, Gazprom likes the fact that the planned line’s jut through the water dodges those fees. Says its own Web site: “There are no transit countries on Nord Stream’s route, which reduces Russian gas transmission costs and excludes any possible political risks.” 

 

And frankly, Gazprom has plenty of other, better ways to raise its stock shares via Latvia. Among them:

1)            a possible new nuclear power plant project in Latvia. Gazprom has already taken a 25% stake in this project.

2)            Latvia’s own gas utility, Latvijas Gaze. Gazprom has a 34% stake in this one.

Let’s not forget a third promising prospect in nearby Estonia, a new gas line that will stretch from Estonia to Finland. This, if built, could channel Russian gas to Finnish customers.

 

Russia already has plans to raise capital by these cheaper alternatives. Proof is in Gazprom’s opening of a first-ever Riga office at the beginning of this month. This new office was desired expressly because of “the important energy projects in the region.”

 

And frankly, Russia doesn’t need Estonia or Latvia to sell gas to Finland. Finland’s its next-door neighbor, and as Gazprom’s maps can also show you, conveniently located next to some already-existing pipelines.

 

There is one area of potential collaboration between Latvia and Russia, and that is Latvia’ gas reserves. These are substantial enough and have a customer base spanning the Baltic, as well as parts of Russia. It could expand even more. And given Gazprom’s shares in Latvian gas industries, Gazprom no doubt would like to see it expand even more. But that, too, can easily happen without an overland Nordstream. All it would take is the speculated new pipeline linking Latvia to Gazprom near the Latvian town of Dobele.

 

Zatler’s ardor to cash in on the Nordstream project is understandable, nevertheless, in light of the economic crises. The country’s economy shrank 10% in fourth-quarter 2008, is projected to shrink 12% more this year, and has currently the lowest Standard & Poor credit rating of all the Baltic states. This after boasting the highest growth figures in the European Union in 2004 and being designated one of the Baltic Tigers, along with Estonia and Lithuania. It’s bad enough to threaten Zatler’s government. He had a prime minister resign last February. And a 10,000-strong riot in Riga last January that left 40 people injured and several stores looted.

 

But if he wants Gazprom to toss him an overland lifeline, the burden of proof is on him to show that his way will be cheaper. Riga could heavily subsidize the construction so that the costs are less. And build up enough infrastructure so that its citizens will become loyal Gazprom customers. Both take money, though. And I don’t see Latvia having the money anytime soon.

 

Certainly, Gazprom’s owners would be all for Latvians pumping more gas and selling it to more customers. But they will see that this be accomplished on terms that maximize Gazprom profits and minimize Gazprom costs. You can’t blame them. Business is business, after all.