Austria and Russia: Economics in Dispute with Politics

Austria and Russia: Economics in Dispute with Politics

Two planes have become apparent in relations between Russia and the European Union. The first plane, maintained by the positions of the EU Council and the European Commission, amounts to the automatic extension of sanctions against Russia without a specific analysis of their political effectiveness and their impact (negative) on the economies of European countries.

There is also a second plane, however, where everything looks different. During bilateral talks with Russian representatives, the EU member countries voting at their summits to extend sanctions against Russia are increasingly questioning the detrimental effect of the ‘sanctions war’ unleashed by Brussels on the interests of their countries. Just a couple of years ago, there were very few such statements. Today, however, Europe is starting to realise that the lack of trust between Russia and the European Union is not benefiting either side.

Austria – one of the engines of European integration that has, at the same time, maintained its historical and privileged relations with the countries of Central and Eastern Europe, not to mention Germany – is playing an important role in this reassessment of values. Therefore, the mood in Vienna can boldly be projected onto the processes currently under way both within German politics and in the countries of the former Eastern Bloc and the Balkan region.

This mood is being expressed to some extent by Austria’s charismatic and ambitious foreign minister, 30-year-old Sebastian Kurz. In January 2017 he visited Moscow, where, following talks with his Russian counterpart Sergey Lavrov, he stated that the economic sanctions against Russia could be «lifted at any time by a unanimous decision of the 28 EU Member States». Whatever the intention behind these words, they reflect a reaction to the damage that the ‘sanctions war’ is inflicting on relations between Austria and Russia. The potential for cooperation between these two countries in the economic and investment sectors cannot be overemphasised. First and foremost, this includes the gas energy sector, transport infrastructure development, and the high-end engineering sector.

The possibility of transforming the Central European Gas Hub in Baumgarten, Austria, into Europe’s largest gas hub capable of handling pipeline gas supplies to the countries of Central, Eastern and Southern Europe is an absolute priority and is at the heart of relations between Austria’s OMV AG and Russia’s Gazprom. In 1968, OMV became the first Western company to enter into a long-term contract for the supply of gas from the USSR to Europe, and today it is Gazprom’s main partner in Austria and one of the key stakeholders in the Nord Stream 2 pipeline construction project.

Working meetings and talks between Alexey Miller, Chairman of the Gazprom Management Committee, and Rainer Seele, Chief Executive Officer at OMV, have become fairly regular in recent years. The most recent such meeting took place on 20 April. After addressing issues related to the development of bilateral cooperation, the meeting’s participants noted that Austria continues to increase its gas imports from Russia amid Europe’s growing demand for Russian gas in light of the region’s declining indigenous production. Between 1 April and 19 April 2017, Gazprom’s exports to Austria were 69.9 per cent higher than in the same period of 2016. The heads of Gazprom and OMV also reiterated the importance of Nord Stream 2 for ensuring reliable gas supplies to European consumers.

In terms of a more general trend, in 2016 Gazprom exported 6.1 billion cubic metres of gas to Austria – 37.9 per cent more than in 2015. Price dynamics are also bolstering this trend. Mario Mehren, the CEO of Germany’s Wintershall, predicts that «Russian gas prices will shortly fall below the price of LNG from the US or Qatar», and that «pipeline gas will remain the cornerstone of gas supplies to Europe for a long, long time to come».

At present, cooperation between the heads of Gazprom and OMV is also regulated by the Basic Agreement on Asset Swap signed on 14 December 2016. In accordance with this agreement, Gazprom will receive a 38.5 per cent stake in OMV Norge AS, a company focused on geological exploration and production in Norway, and OMV will obtain a 24.98 percent stake in the project for developing Blocks 4 and 5 of the Achimov formation in the Urengoy oil, gas and condensate field.

Another promising area of bilateral cooperation is Russia and Austria’s joint investment and project activities to build a broad-gauge railway line between Kosice and Vienna. The integration of this project into the Europe-Asia transcontinental freight system through Russia could turn Austria into a key logistics centre for Central, Eastern and Southern Europe.

In 2010, a corresponding project put forward by Russian Railways was endorsed by the political leaders of Russia, Austria and Slovakia. The project involves the construction of a 1520 mm gauge railway through Slovakia following the Kosice-Bratislava-Vienna route at a cost of around €5 euro. By 2025, the volume of traffic along the Kosice-Bratislava section of the new broad-gauge line could reach 23.7 million tonnes and allow for 18.5 million tonnes of freight traffic between Bratislava and Vienna. The total length of the railway line will be around 500 km.

The aim of the project is to connect Central Europe’s railway system to the Trans-Siberian railway and encourage freight traffic between Asia, Russia and Central Europe. When completed, the project will prevent overloading at stations connecting Europe’s railway lines to the broad gauge track. According to Russian Railways’ calculations, the project will also halve delivery times from Europe to Asia compared to the sea route (from 30 days to 14 days).

A number of European countries are gravitating towards the planned railway line including Slovakia, Austria, the Czech Republic, Hungary, Germany, Switzerland, Italy, Slovenia, Serbia, and Croatia. An analysis of the locations of natural resources and the markets for finished goods shows that the geography of the 1520 mm broad gauge line will be of huge benefit to transport operations between Europe and Asia. Manufacturers and suppliers will save between $100 and $1000 on the transportation of a single standard container. Both containerised cargo and raw materials (iron ore, ferrous metals etc.) will be transported along this line to Europe, and in the opposite direction will be predominantly containerised cargo.

Yet another promising area of bilateral cooperation between Russia and Austria is the high-tech manufacturing segment of heavy engineering associated with hydropower and the supply of related equipment and materials, in which the cooperation between Russia’s RusHydro and Austria’s Voith Hydro plays a central role. In November 2013, before the start of the ‘sanctions war’, the management of RusHydro approved a loan agreement for €200 million secured by Oesterreichische Kontrollbank Aktiengesellschaft to modernise the Saratovskaya hydropower plant. This is being carried out in cooperation with Voith Hydro and involves the comprehensive modernisation of the hydro turbines in accordance with the agreements signed between RusHydro and Voith Hydro in 2012 and 2013. Over the next 10 years, five hydro-turbine units will be replaced with new turbines. The cost of the entire Saratovskaya HPP modernisation project being carried out by RusHydro in partnership with Voith Hydro is estimated at €1 billion and it should be completed by the end of 2025.

Lukoil’s acquisition of OMV’s loss-making lubricant blending plant is another example of a successful bilateral cooperation between companies in Russia and Austria. By taking advantage of the relative cheapness of Russian oils, the deal has turned the plant from loss-making to profitable, created new jobs, and provided the conditions for the subsequent promotion of Lukoil-OMV oils on global markets. At the same time, Lukoil’s production facility in Austria has been certified as conforming to the German Association of the Automotive Industry’s VDA 6.3 standard and classified as a ‘Grade A Supplier’, the highest certification level, confirming the willingness of German car companies to fill the cars on their assembly lines with Lukoil oil.

It goes without saying that all of this merely reinforces the positions of those political forces in Austria who are fully aware of how much their country could benefit from the development of economic cooperation opportunities with Russia. The significance of these opportunities goes far beyond bilateral relations, and business people, unlike political demagogues, understand this very well. Noting that «Austria maintains good relations with Moscow», there is good reason why the influential Swiss newspaper Neue Zuercher Zeitung called Vienna «a neutral intermediary» in the rebuilding of relations between Russia and the West.

The problem is that politics is entering into a dispute with economics and is slowing it down – insofar as the policy parameters of the EU member states are determining the anti-Russian policy of the EU’s central institutions. There are indications, however, that Austria no longer considers this flawed political paradigm to be the only option. And that is the subject for a separate discussion.

Tags: Gazprom  Austria  Russia