Why has Germany seized the world’s largest superyacht, but keeps paying Putin?

Sascha: [00:00:20] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. We're almost ten weeks into Russia's invasion of Ukraine. When it began, condemnation from world leaders was swift. 

Audio clip: [00:00:32] As I made crystal clear, the United States will defend every inch of NATO's territory. 

Audio clip: [00:00:36] With the full force of American power. The people of the United Kingdom stand with our Ukrainian abduction of civilians. Must be priority number one. 

Sascha: [00:00:46] And the world imposed unprecedented sanctions on Russia. 

Audio clip: [00:00:50] We will limit Russia's ability to do business in dollars, euros, pounds and yen. 

Sascha: [00:00:55] Germany, the biggest single economy in the European Union, was part of this outcry.

Audio clip: [00:01:00] Politicians are doubting. 

Sascha: [00:01:02] The chancellor, Olaf Schulz, called Putin's actions a blatant breach of international law. And former Chancellor Angela merkel. All as I said, Russia's invasion of Ukraine marked a deep rupture in Europe's history following the end of the Cold War. Yet despite all this, Germany continues to buy Russian natural gas. It's Monday, the 2nd of May. And today I want to know why. When Germany has seised superyachts and joined the Western world in supporting sanctions on Russian owned businesses, do they continue to pay Putin and import Russian natural gas? To talk about this today, I'm joined by my colleague and the co-founder of Equity Mates Bryce Leske. Bryce, welcome. 

Bryce: [00:01:47] Thank you, Sascha. 

Sascha: [00:01:47] Okay. This is a big story and one that I've been trying to get my head around. It's been playing out for a couple of months. There's been lots of headlines. Why are we talking about it today in

Audio clip: [00:01:57] Russia With a drastic economic escalation? 

Bryce: [00:02:00] Well, Sascha, there's been a development from Russia that has got Germany very nervous. We are getting closer to a severing in energy relations between Russia and Europe. And it has us looking into the relationship between Russia's gas supply and Europe. Russia has cut gas supply to Poland and Bulgaria. 

Audio clip: [00:02:18] Cutting off supplies of natural gas to two members. 

Sascha: [00:02:20] Of NATO's. And why has Russia cut supply to Poland and Bulgaria? 

Bryce: [00:02:25] Well, in late March, Russia said unfriendly countries would have to start paying for its oil and gas in rubles to prop up its currency after Western allies froze billions of dollars it held in foreign currencies overseas. 

Sascha: [00:02:37] The European Union is framing the.

Audio clip: [00:02:39] Gas cut as. 

Sascha: [00:02:40] Retaliation. So can I just check unfriendly countries is code for anyone who's against them, basically? That's correct. Okay. 

Bryce: [00:02:47] So Poland and Bulgaria both refused to pay for gas in rubles leading to Russian state gas firm Gazprom, shutting off supplies. Poland currently gets about 45% of its natural gas from Russia. Russian gas accounts for about 73% of Bulgaria's gas demands. However, both countries had already planned not to renew their contracts with Gazprom when they expire later in 2022 and were already making alternative plans. 

Sascha: [00:03:14] So they'd both seen the writing was on the wall. And Russia, rather than letting them jump, decided to cut them off early. Yeah. 

Bryce: [00:03:20] So, for example, Poland, they've built up their natural gas storage reserves. They've built a liquid natural gas terminal which allows them to receive gas from ships overseas. And they have built another pipeline, the Baltic pipe, to import Norwegian natural gas. And then Bulgaria, they are completing a pipeline that brings in natural gas from Azerbaijan. So they'll be able to substitute Russia's gas for Azerbaijan's gas. 

Audio clip: [00:03:45] And given the fact that the heating season is almost over and giving the fact that Poland indeed built alternative routes. 

Bryce: [00:03:52] So it's not as big an issue as you might expect for these two countries. 

Sascha: [00:03:56] It's not as big an issue in terms of supply, but it is big in terms of the political statement that it's making. 

Bryce: [00:04:01] That's right. It is a signal that Putin is not afraid to use resources as a weapon against Europe. This move by Putin has sent gas prices soaring and has heightened concern he might do the same to other countries such as Germany. And currently it is something Germany cannot afford to let happen. 

Sascha: [00:04:20] So this is the problem with sanctions, isn't it? Is that designed to hurt one country? But the global nature of our economy means that we're all so connected that as soon as you move one domino, they all start to affect each other. It's the ripple effect or the butterfly effect, right?

Bryce: [00:04:36] Yeah, that's right. So a lot of these sanctions are designed to try and cripple the Russian economy, isolate some of the richest people from the global economy, and to starve Russia of the financial resources that they need to continue paying for their war efforts. 

Sascha: [00:04:50] And just to double back on something that you've already said, that's the significance of being asked to be paid in rubles, isn't it? Previously they were being paid in euros, and because of sanctions, Russia now wants to be getting paid in their own currency. 

Bryce: [00:05:03] Yeah, that's right. A lot of their foreign reserves have been frozen, so they need rubles to prop up essentially their economy. But there is always the risk of sanctions blowback. This is where a sanction hurts the sanctioning country more than the sanctions. 

Sascha: [00:05:16] How many times can you. Say sanction in a sentence, right? 

Audio clip: [00:05:19] A lot. 

Sascha: [00:05:21] Okay. So this is a bit like when someone has an individual boycott, but your personal purchasing power doesn't make a huge impact to the big company. Like if I decided I was no longer buying rebates, I'm sure that's going to affect me much more than it's going to affect everybody. Absolutely, Sascha. I mean, you don't actually know how much rebates I ordered, so I like the way that you said that with such confidence. But it could be quite a large bill I'm racking up. 

Bryce: [00:05:49] Well, that, in perhaps oversimplified terms, is the situation with Germany. They're happy to say the right things. They're happy to see superyachts, but they can't stop the thing that would hurt Putin most because it would hurt them even more. 

Sascha: [00:06:02] And this thing that we're talking about, the uber eats in this situation is natural gas. So explain it to me. Why does it hurt Germany so much more? 

Bryce: [00:06:12] Germany's energy import dependency, which is how reliant they are for other countries, energy is very high at over 60%. They only produce roughly 35% of their energy themselves and rely on others to fill the gap. And this is where Russia comes in. They're Germany's top supplier of energy. Last year, Russia supplied more than half of Germany's natural gas, about half of Germany's coal and about a third of Germany's oil. So it's pretty reliant on Russia for energy. Now, Germany is preparing to forgo Russian gas, but a quick cut off would really hurt. 

Audio clip: [00:06:48] Amid Germany's dependence on Russian gas. The initial order was clear use as little as possible.

Bryce: [00:06:55] The Bundesbank, Germany's central bank, warns that an embargo on Russian gas could cause the country's economic output to drop by as much as 5% this year. Tens of thousands of jobs in German industries that are powered by gas, including chemicals and steel, could be threatened and nearly half of all homes in Germany are heated with natural gas. 

Sascha: [00:07:15] Those are pretty significant stats because Germany, as I said in the intro, is the European Union's biggest economy. So 5% is pretty significant. And then also we're sitting in Australia where we're quite a warm country. But when you're thinking about half of all homes in Germany heated with natural gas and the kinds of winters that they endure, that's also something that's not as easy as us. Oh, well, I'll just go without heating this year. So I can understand the reliance and the significance and the personal costs that you're talking about when they're looking at how do they stop this reliance?

Bryce: [00:07:50] Yeah, it's true. You know, we can sit here and I guess get angry that Germany is still buying from Russia. But as you said, at the same time, it's it's pretty hard to imagine that the German chancellor is thinking about rationing energy and losing tens of thousands of jobs and the implications that it's going to have on the economy. 

Sascha: [00:08:06] So the question that comes out of this really is how did Germany let themselves become so reliant on Russia? Let's take a quick break and then come back and unpack that. Welcome back to the Dive. Today we're talking about Germany and Russia and the conversation about gas price. It's not a surprise to many Western countries that Putin is such a ruthless leader and isn't afraid to use Russia's resources as a weapon. So how did German reliance on Russian gas get to this point? 

Bryce: [00:09:20] So, Sascha, I want to pick up the story of Russian and German energy cooperation in the early days of the Cold War. Germany helped the Soviets build their first natural gas pipelines until JFK and the Americans got spooked in the 1960s. I start there because US concern over German and Russian energy cooperation has been a continued source of tension.

Sascha: [00:09:40] So this is going to be a thread that comes the whole way through the story. 

Bryce: [00:09:43] You're right. So JFK tried to stop Germany selling pipes to the Soviets, and Reagan repeatedly tried to convince Germany to reduce Russian gas imports. Throughout it all, though, Germany increased the energy reliance on Russia. 

Sascha: [00:09:58] So they were doing the exact opposite of what the Americans wanted them to do. Correct. So tell me about what's been happening in recent generations.

Bryce: [00:10:05] So the early 20 tens have seen an exponential increase. In 2012, the Nord Stream one pipeline opened transporting gas directly from the Russian territory to the German territory, bypassing all countries in between. 

Audio clip: [00:10:19] In early May, the laying of the first of Nord Stream twin pipelines was completed. The last pipe was laid on the seabed of the Swedish island of Cortlandt. 

Bryce: [00:10:27] And you may recall that one of the sanctions that Germany recently imposed on Russia was to cancel the Nord Stream two pipeline.

Sascha: [00:10:35] So they were going to build a second version of this. Correct. 

Bryce: [00:10:38] So in 2011, Germany also announced that they were shutting down their nuclear power plants after the Fukushima nuclear disaster in Japan.

Sascha: [00:10:46] So they're also decreasing their reliance on other alternate forms of energy. 

Bryce: [00:10:51] Yeah, that's right. So before 2011, Germany generated one quarter of its energy from nuclear power. While the intention was to replace it with renewables. Natural gas has been the transition fuel, in particular Russian natural gas. 

Sascha: [00:11:04] So what is Germany doing now to fix the situation? Because you've painted a pretty clear picture of this reliance. 

Bryce: [00:11:12] In the short term, they are reducing their reliance on Russian natural gas. Christian Linder, Germany's finance minister, stated it was a mistake that Germany became so heavily dependent on energy imports from Russia at the outset of the Ukraine war. Germany relied on Russia to make 55% of its natural gas needs, and since Moscow's invasion of Ukraine on the 24th of February, the country has reduced that to about 35%. 

Sascha: [00:11:37] A reduction of 20% in ten weeks is extraordinary. That's pretty amazing.

Bryce: [00:11:42] Yeah, it's pretty significant. So a big part of this is building two liquefied natural gas import terminals so that Germany can receive its gas via ship from Qatar. In late March, Germany and Qatar entered into a long term agreement for the supply of LNG. However, it isn't a simple process to import LNG and it will still take some time to build out these specialised LNG infrastructure. And Sascha, who knows one day they might be importing from Australia as well.

Sascha: [00:12:08] Oh, that sounds interesting. And maybe a future episode. What are the other long term options that they have on the table? 

Bryce: [00:12:14] Yeah. So the long term option for Germany is renewables. That's the answer. Germany has the target to fulfil all of its electricity needs with renewable energy by 2035 and has earmarked €200 billion to achieve this. A great goal. But when seen in the context of Putin's aggression today, 2035 feels like a long time away. Another option that they're floating is, does Germany just return to nuclear energy after their 2011 announcement of ending nuclear power? The final three of their 17 nuclear power plants were due to be decommissioned this year, 2022. These three nuclear power plants supplied 13% of Germany's electricity in 2021. So some have floated the idea of extending the life of these three nuclear power plants to help cut that reliance on Russian gas. But German leaders have poured cold water all over this idea. Instead, Germany's economy minister said that they would be relying on the country's first liquefied natural gas terminal due to come online in 2024, which is a confusing statement given we're talking about a crisis right now here in 2022. 

Sascha: [00:13:21] Yeah, exactly. Two years without a suitable gas supply chain is a little shortsighted. Okay, Brass, final question. What happens from here? 

Bryce: [00:13:29] Well, Germany will keep buying gas. They'll keep buying Russian gas and Russia will keep selling it. There are two sides to this conversation, though. 

Sascha: [00:13:37] Okay. Well, let's start with the German side of the conversation. 

Bryce: [00:13:40] So one of Germany's biggest energy firms has said it is preparing to buy Russian gas using a payment system that critics say will undermine EU sanctions. And this is what Putin wants. They've said for our company and for Germany as a whole, it is not possible to do without Russian. Gas. In the short term, this would have a dramatic consequence for our economy. The European Commission, which is a Cabinet government of the European Union, has said countries should not pay in rubles and that complying with Russia's request could breach EU sanctions. But what they have done is suggested contracts between European countries and Gazprom should be tweaked to ensure payments in euros will not be breaching current financial sanctions on Russia. So good news for Germany, but I doubt that Russia are paying attention to the EU Commission's recommendations. 

Sascha: [00:14:25] So from what you just said there, it sounds like they're going to do some legal tweaking to make sure that Germany is not breaking any of their own rules. But the real world implications mean that this is good news for Russia.

Bryce: [00:14:38] Yeah, Russia will still get their money. Germany won't be cut off from gas. No one will be breaking sanctions. But hurting still gets money to fund these war chest. So. 

Sascha: [00:14:47] Yes. Okay. So dig more into this Russian story for me. What does this mean for them?

Bryce: [00:14:52] So for Russia, Germany accounts for 20% of all Russian gas exports. It is comfortably Russia's biggest customer and it's not easy to switch. Gas that is travelling to Germany via pipeline cannot be easily transported elsewhere. It's not like you can just redirect pipelines. 

Sascha: [00:15:08] Yeah, I know. And once they've been fed in, I mean, where else does it go? 

Bryce: [00:15:12] Oh, that's it. Nowhere. So building more pipelines takes time and cooperation, both of which Russia doesn't really have a lot of at the moment. And to transport via ships, say to sell it to China, Russia would need to liquefy it. But we know that to do that, it means Russia will need to expand their LNG facilities again, taking time because. 

Sascha: [00:15:32] That's a whole other chemical process than just pumping it in a pipe. I mean, I know I'm making it sound very simplistic. 

Bryce: [00:15:38] That's correct. That is correct. So Russia can't easily redirect this gas from their biggest customer to another, more friendly country.

Sascha: [00:15:46] All right, Bryce. Well, I sat you down today to understand what was going on, and I think you've given me a very clear picture. Unfortunately, I don't feel reassured that there's a lot of answers here, it seems. Germany's going to keep buying gas from Russia, and that's really important for the health of their citizens. That's going to be real world implications if they just stop this tomorrow. 

Bryce: [00:16:08] Yeah, that's it. Until Germany can move a significant portion of its energy reliance to other sources than Russia. This is a story that's going to continue to play out with Germany and the rest of the EU on edge, questioning whether Russia and Putin will flex their resource muscles and cut gas to other countries. So unfortunately, it does mean that for the short term, Germany will still be paying Russia for its gas. 

Sascha: [00:16:33] Thanks so much for joining us for today's edition of The Dive. If there's a story that you'd like us to talk about, then why not tell us? Contact us at the dive at Equity Mates dot com or shoot us a message. All our contact details are right there in the show notes below. I've got a favour to ask if you could please give us a five star review. It makes all the difference. It helps us stay in the charts. It helps us be sent to other people who might enjoy the story. Or if you just want to do it the old fashioned way, send an email, send a text message, share this episode with a friend. We'll be back in your feed later in the week. Thank you. In the meantime for joining me today, Bryce. 

Bryce: [00:17:10] Thank you, Sascha. 

Sascha: [00:17:10] Until next time