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February 3, 2020

The Peace Pipe. Borislav Ivanov-Blankenburg’s, CEO&CCO for Deutsche Bank in Russia, Op-ED for VestiFinance.ru

The Peace Pipe

On February 1, 2020, Russia and Germany marked the 50th anniversary of the historic gas-for-pipes agreement that helped establish sustainable economic cooperation between the geopolitical opponents of that era and laid a foundation for the development of a civilized dialogue and the increased welfare of the two nations. This is a story of how two countries overcame differences and distrust for the sake of long-term economic benefits, a story that is still relevant to this very day.

At the heart of the deal was a simple idea – the supply of large diameter pipes from Germany to create a pipeline network in exchange for Soviet gas supplies to Western Europe. The first negotiations started as early as the 1950s, but the first contract for the delivery of gas wasn’t signed until 1 February 1970 and took a great deal of determination and creativity from both sides.

The Backstory

In the early 1950s, heads of leading industrial companies and financial institutes of the German Federal Republic established the German Eastern Business Association. Their aim was to encourage economic cooperation with the Soviet Union and Eastern Europe. At that time, the West German economy was rapidly recovering and was in dire need of energy resources and new markets for its exports, which prompted German entrepreneurs to set their sights on the Soviet Union. However, geopolitical tensions put a strain on negotiations and the general public was of the opinion that joint economic projects with the Soviet Union was something beyond the realm of possibility.By the late 1960s, against a backdrop of domestic changes in West Germany, a new era of policy towards the East began and promised breakthroughs in relations with the USSR. The first successful attempts at dialogue between the two countries on cooperation in the oil and gas sector took place at the Hannover Industrial Fair in late April 1969. These meetings marked the beginning of a series of negotiations that took place over nine months in Vienna, Moscow, Essen and Cologne.

The Signing

After settling political discords and agreeing on the commercial terms of the deal, a new hurdle arose – the two sides had to find a way to structure the financing of the deal, which was hard due to the scale of the project and the absence of experience on both sides given the financial isolation of the Soviet Union. The key role in devising the solution and supporting the deal belonged to a variety of bank syndicates with Deutsche Bank as the lead manager - together they opened a 1.2 billion deutschmarks credit line for the USSR for 12 years at an interest rate of 6%. As per the agreement, Deutsche Bank also undertook to open and run an account for the Bank for External Trade of the USSR Soviet in deutschmarks and process all payments received by the Soviet side for the sold gas.

Finally, on February 1, 1970, Ruhrgaz AG and Soyuznefteexport, the Soviet oil and gas exporter, signed the historical agreement for the supply of natural gas from the USSR to the Federal Republic of Germany. Soviet Minister of Foreign Trade Nikolay Patolichev and West German Economy Minister Karl Schiller participated in the signing of the agreement. The Soviet side agreed to supply at least 52.5 billion cubic metres of natural gas to West Germany over 20 years beginning in 1973. At the same time, West German steel companies Mannesman and Thyssen signed a separate agreement for the supply of 1.2 million tons of large-diameter pipes for the construction of gas pipelines in the USSR.The Economic Benefits The first Soviet gas arrived into Germany in 1973, on the eve of the global oil crisis which caused energy prices to skyrocket. Thanks to its deal with the USSR, West Germany was guaranteed an uninterrupted supply of gas at a predetermined price. Moreover, the deal guaranteed business for the largest West German businesses, the steel producers Mannesman and Thyssen.

In return, the Soviet Union gained access not only to the Western market, but also to Western technologies, which led to the creation of the largest gas pipeline network in Europe. These pipelines, financed by Deutsche Bank, contributed to the development of the largest gas fields in the world and subsequently provided budget revenue and created jobs.The 'deal of the century' was in fact the beginning of an entire system of long-term contracts signed in the 1970s-80s. They allowed for annual deliveries of 11-12 billion cubic metres of gas until the year 2000, including 700 million cubic metres of gas for West Berlin alone. Overall, since 1973, the Soviet Union, and later Russia, has been the single largest gas supplier to Germany, having provided more than 1 trillion cubic metres of gas.Most importantly, the deal marked a reset in relations between the Soviet Union and Western Europe by reviving trade relations and developing new forms of cooperation. In 1973, a Deutsche Bank office opened in Moscow to support the increasing trade activity. Trade turnover between the USSR and Germany reached 2.8 billion rubles in 1975, a tenfold increase from a decade earlier. As a result, German companies became actively involved in the construction of Russian infrastructure projects. For example, Deutsche Bank organised the financing of the construction of Sheremetyevo International Airport.

50 Years On

To this day Germany and Russia remain important trade partners due to determination and belief in the long-term benefits of the economic cooperation of our predecessors. Today, we see the legacy of the 'gas for pipes' programme in new large-scale pipeline projects from China to the Baltics and the Black Sea. And just like 50 years ago, their implementation is facilitated through a mutual understanding of the long-term benefits of these projects and both sides’ ability to accept a compromise.

Speaking at the annual meeting of the German Eastern Business Association, German Minister for the Economy and Energy Peter Altmaier noted: "Over the last 50 years we faced many difficulties in international relations and in relations between the East and the West. We disagreed with many of the decisions taken by the Soviet Union… but despite all the political upheaval, gas supplies never stopped. This shows that it is possible to build strong economic relations despite political differences."

As was the case more than 50 years ago, international business today continues to stand for cooperation and the expansion of economic ties which provide long-term benefits for all stakeholders. As history has shown international economic projects remain our main tool for building stable, civilised relations between countries. From our side, we at Deutsche Bank do our best to support and help further develop economic cooperation between the countries.

https://www.vestifinance.ru/articles/132188



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