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Germany’s Energiewende and the Baltic Sea region: Public opinion and systemic interactions

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Dr. Thomas Sattich is an Associate Researcher at the Institute for European Studies at the Vrije Universiteit Brussel, where he is working on energy- and industry-related topics. With various publications on EU energy policy and Germany’s energy transition (Energiewende), his focus lies on the power sector, the integration of renewables and the adaptation of the electricity transmission infrastructure to the needs of Europe’s sustainability agenda.

Executive summary

Germany’s energy transition changes the demand for energy on regional and international energy markets. A major share of the country’s energy imports comes from, or passes through the Baltic Sea region, making Germany the area’s main energy importer. Public discourse does, however, not reflect this situation accurately. Imports of natural gas block the view on the importance of other energy carriers. The latter, especially oil and coal, are, however, equally important both as elements of the regional energy system and with regard to Germany’s energy future. This article therefore aims at going beyond the narrow focus on natural gas, and provides a more encompassing assessment of the impact Germany’s Energiewende is likely to have on energy flows in the Baltic Sea region.

Introduction

In 2011 Germany started enthusiastically into its Energiewende adventure. Since then it became clear that the goal of a nuclear free and carbon-neutral energy system is not to be achieved easily or cheaply. The international implications of the project have not received much attention in the beginning; yet in the energy sector things are per definition interrelated and not confined to the national level. Soon after the phase-out of the first eight nuclear power stations, the country hence saw itself confronted with the international dimension of the latest of its energy policy u-turns. But to the major surprise of the general German public, the idea of a quick nuclear phase-out and large-scale increase of renewables did not turn out to be an Exportschlager (export success).

On the contrary, the focus of countries, such as Poland, Sweden and Great Britain, remained on coal, gas and nuclear power. Others such as Spain even reduced their subsidies for renewables. But even though Germany’s energy transition causes only little enthusiasm in neighbouring countries, the Energiewende still has repercussions in the international energy system: being Europe’s largest importer of energy, the transformation of Germany’s energy system changes demand on international and regional energy markets. Moreover, electricity flows go through the interconnectors between national power systems, and thus have an impact on the emerging EU electricity market. It is thus very likely that the Baltic Sea region will not remain unaffected by the Energiewende.

The aim of this article is a twofold assessment of 1) the role of the Baltic Sea region for Germany’s Energiewende project and 2) the likely impact of this project on energy flows in the region. A short-term and a long-term scenario could serve as the basis for this analysis: according to Germany’s national energy strategy the nuclear phase-out is to be completed by 2022. At this point renewables should contribute with at least 18 per cent to meet national net energy demand, and with at least 35 per cent to electricity demand. The renewables are supposed to increase to 60 per cent of national net energy demand and 80 per cent of electricity demand by 2050 (BMWi 2014a). As the

Energiewende’s history suggests, sudden turns in Germany’s energy policy are possible. As a consequence, the article elaborates on the basis of a 2020/2022 short-term scenario.

What role does the Baltic Sea region play in Germany’s plans to transform its national energy sector?The following section provides an analysis of public discourse in Germany. Aiming at an assessment of those issues that will affect the region’s energy system in the following years, this analysis looks at the Baltic Sea region through the eyes of the country’s energy-interested public. Based on this assessment, the energy system of the region and the likely impact of Germany’s energy system itself is analysed. The focus of this step lies on import/export flows of different energy carriers.

Germany’s energy transition and energy flows in the Baltic Sea region: public opinion in Germany

The significance of a particular region for a country’s energy policy should be reflected in the national media coverage: the more important a particular region appears to journalists and experts to be as a source, supply route, and/or location for energy production of a given country, the more prominent its place in the energy-related media coverage should be. Similar patterns should be noticeable in the German case. On the basis of this assumption, the following analysis aims at assessing the relative importance of the Baltic Sea region for Germany’s Energiewende. It is based on a sample of 717 articles from five of Germany’s leading daily and weekly newspapers, covering the spectrum from centre-right to centre left and a time period from April 2005¹ to October 2014: Die Zeit (76 articles), Der Spiegel (63), Süddeutsche Zeitung (206), Die Tageszeitung (90), and Die Welt (282).²

How much attention does the Baltic Sea region receive in German debates around the Energiewende? From the sample of articles, 134 mention the term ‘Ostsee’ (the Baltic Sea), that is almost 19 per cent. However, this number shrinks drastically if the search term is amended with ‘erneuerbare Energie’ (renewable energy) or ‘Energiewende; only 33 (4.6 per cent), respectively 26 articles (3.6 per cent) discuss the role of the Baltic Sea for the country’s energy transition towards more renewables. In order to put these numbers – and hence the relative importance German press attributes to the Baltic Sea – into perspective, it has to be related to the prominence of other areas. Since Germany is not only a littoral state of the Baltic Sea, it seems logical to ask also about the prominence of the North Sea and other neighbouring regions in German energy-related press (Figure 1).

Based on the findings of this analysis, aforementioned search results appear in a different light. Even though other countries and regions rank higher on the echelons of energy-interested public awareness in Germany, a nevertheless considerable percentage of energy-related press articles seems to discuss the threats or benefits of the Baltic Sea for the country’s energy policy. It can hence be assumed that the Baltic Sea is considered an area of significant importance for Germany’s Energiewende project by German press (and thus the country’s energy-interested public). Moreover, this general interest in the Baltic Sea seems to increase (Figure 2). Yet the results of this analysis are indifferent with regard to the specific role the Baltic Sea plays in energy-related public debates in Germany; the relatively low number of articles in the year 2013, for example, cannot be explained on this basis. In order to provide a better view, a closer look on the specific targets of the Energiewende is necessary.

According to BMWi (2014a, 11), the Energiewende aims at distinctively changing central elements of Germany’s energy system: on the one hand, the share of renewables in Germany’s gross energy consumption is to be increased to 18 per cent until 2020 (60 per cent by 2050); on the other hand, the use of primary (fossil and nuclear) energy is to be decreased by 20 per cent (50 per cent by 2050). In sum, these and other measures are supposed to decrease green house gas emissions by 40 per cent in the same time period (80 to 95 per cent by 2050). The electricity sector has to play a fundamental role in this programme, with targets even more far reaching: power consumption is to be decreased by 10 per cent until 2020 (25 per cent by 2050), and full nuclear phase-out is to be achieved until 2022. By then (2020) renewables are to increase to a share of 35 per cent in gross final power consumption (80 per cent by 2050).

How does German press reflect these targets with regard to the Baltic Sea? While the percentage of newspaper articles from the sample generally reflect the significance of individual Energiewende targets, the Baltic Sea appears to be a blind spot in this regard: only a small fraction of those articles, which are dealing with Energiewende targets also mentions the Baltic Sea. A look at the different forms of energy explains why: German press mostly reflects on the Baltic Sea region with regard to conventional energies; most important in this context is gas and oil, but nuclear energy and coal also play a significant role. Renewable energy, such as solar, biomass and hydropower, on the other hand hardly appear at all (Figure 3). The exception that proves the rule in this context is wind power, as more than a third of those articles that mention the Baltic Sea deal with this form of power generation.

In a first approximation this analysis has examined the prominence of the Baltic Sea in German energy-related press; yet the search term ‘Ostsee’ (the Baltic Sea) is too narrow to include the entire region, that is those countries around the Baltic Sea. A deeper assessment therefore has to include the individual littoral states in German Energiewende-related press. There are slight differences between the numbers of articles that mention the search terms ‘Energiewende’, ‘erneuerbare Energie’ and individual countries around the Baltic Sea; yet all in all Poland, Russia, and Sweden appear to be at the centre of attention, whereas Denmark, Finland and Norway attain less attention and rank second in German press.³ Estonia, Latvia and Lithuania attract the smallest share of attention.Thus, a few preliminary conclusions can be drawn: if the prominence of the Baltic Sea in German press is taken as an indicator, it appears that the energy-interested public in Germany attributes only limited attention to this region in terms of the Energiewende targets. The interest is, however, growing. Moreover, by broadening the scope to include the littoral states of the Baltic Sea, the picture changes significantly, with individual countries, such as Poland, Russia, and Sweden attaining considerable attention by German press. Seen through the eyes of the German press, the Baltic Sea region is, however, of limited importance with regard to the primary targets of Germany’s energy transition, that is the reduction of (fossil) energy consumption and the increase of renewables. On the contrary, the German press perceives the Baltic Sea region mostly as a supplier for fossil energy, especially gas and oil, or as the location of conventional/nuclear energy based electricity generation capacity.

A closer analysis reinforces this impression: screening the sample of articles mentioning the Baltic

Sea for different search terms to appear in the same section as ‘Ostsee’ (the Baltic Sea), almost two thirds of the results account for the term ‘gas’, while only 18 per cent account for ‘wind’. Hence, not only do most articles in the sample largely cover fossil fuels; the particular sections within the articles that contain the search term ‘Ostsee’ also mostly cover the issue of natural gas which is mentioned. The conclusion of this analysis must hence be that gas largely predominates where public discussions in Germany mention the Baltic Sea region and the Energiewende. Given the Energiewende targets to decrease the use of carbon based energy carriers⁴, the following sections can hence be based on the hypothesis that – with the exception of wind power – the Baltic Sea region will lose some of its importance for Germany’s energy system.

Germany’s energy transition and energy flows in the Baltic Sea region: statistical facts and trends

Where the Baltic Sea region is mentioned, it is largely portrayed as a supplier or supply route for fossil fuels – namely gas – by the German press. In comparison, other forms of energy, such as nuclear energy or biomass, hold an inferior position. The construction of the Nord Stream pipeline might, however, have resulted in a place of gas imports in German public discourse disproportionate to its actual role. Beyond, renewables pose a serious challenge for gas-fired power plants in Germany. The role of natural gas might therefore decrease in the years ahead. The Energiewende targets to generally decrease the use of fossil fuels until 2020 and beyond. In order to provide a clearer idea of the interactions between Germany’s Energiewende and energy flows in the Baltic Sea, this section will therefore analyse the energy system of the Baltic Sea region in more detail. Basis of this analysis is Eurostat data on energy consumption and imports from 2010-2012 (see Annex at the end of this article).

If the territory of the littoral states is included in the analysis, the Baltic Sea region⁵ is an area rich in energy resources, with a three years (2010-2012) average surplus of primary energy production of 500.2 mtoe (million tonnes of oil equivalent). Unsurprisingly, the distribution of available energy resources is, however, highly unequal, with only three countries, namely Denmark (2010-2012 average surplus of 1.7 mtoe), Norway (2010-2012 average surplus of 169.6 mtoe) and Russia (2010-2012 average surplus of 602.5 mtoe), showing a positive balance between energy consumption and production. If one compares this (positive or negative) balance with gross energy consumption of individual countries, the seriousness of this situation becomes clearer: with the exception of the three net exporters, the countries of this region do not produce indigenous energy in numbers sufficient to supply the national economies (Figure 4). The energy supply gap of those countries⁶ with insufficient access to indigenous energy sources amounts to a (2010-2012) average of -273.7 mtoe.

With an index of -0.613 Germany is to be found amongst those countries that in the region with the smallest basis of indigenous energy. As a result of its internal energy situation and the size of the German economy, the country thus is confronted with a massive (2010-2012 average) energy gap of (-)198.1 mtoe, that is 72.38 per cent of the region’s combined energy supply gaps. 95.3 mtoe, or 48 per cent, of the necessary imports to Germany come from the littoral states of the Baltic Sea region.⁷ The Baltic Sea region can thus be described as the backbone of Germany’s energy supply, and should be of strategic interest for the country. Given that Germany also accounts for some 24 per cent of gross energy consumption in the Baltic Sea region (including entire Russia), any changes in the German system of energy production, imports and consumption can be expected to affect energy flows in the entire region (Figure 5).

Energy imports from the Russian Federation and Norway play a particular role in this regard, as they account for nearly the totality of imports from the Baltic Sea region to Germany, and hence fill almost half of the country’s energy gap. Including Norway and Russia in the analysis is, however, based on a very broad understanding of the Baltic Sea in terms of geography, as both countries stretch far beyond the geographical limits of that area. This analysis therefore requires a closer definition of the ‘Baltic Sea region’. In this regard, it is important to understand that Germany’s national energy system is located at the crossing point of several major Euro-Eurasian energy regions (Högselis, Aberg & Kaijser 2013, 56). German gas and oil imports from Norway, for example, come from fields in the North Sea, and cross that sea through different pipelines (via Europipe I, Europipe II, and Norpipe); from its entry points to the national German system – located at the shores of the North Sea – Norwegian gas then predominantly supplies areas in North-Western Germany (such as the Ruhr), which, in a more narrow sense, cannot be described as being part of the Baltic Sea region.

In the strict geographical sense, Norwegian gas (2010-2012 average of 25,003 mtoe) and oil (8.5 mtoe) supply to Germany can hence mainly be attributed to the North Sea Europe region (Högselis, Aberg & Kaijser 2013, 56); they are thus to be excluded from the following analysis. With energy from Russia, things are more complicated, as parts of the transit system are part of the Baltic energy system (Nord Stream, Yamal/Europol), whereas others (e.g. Brotherhood) pass through different regions. However, yearly transport capacities of individual pipelines⁹, and actual gas flows in these pipelines¹⁰ allow to infer an estimated 50 per cent of Russia’s gas and oil supply towards Germany passing through countries in the Baltic Sea region. The following analysis thus includes only those 50 per cent of German oil and gas imports from Russia that can be assumed to pass through the Baltic Sea region.

As a result of this, the overall picture of energy flows in the Baltic Sea region changes considerably, and leaves a clearer perspective on the interplay of Germany’s Energiewende with the flux of various forms of energy in the area (Figure 6). Accounting for approximately 79 per cent of energy exports, the predominance of Russia amongst the energy exporting countries remains largely unchallenged in this closer definition of the Baltic Sea region, whereas Norway’s role as energy exporter becomes far less important. Germany’s energy imports from the region reduces largely, to approximately 57.6 mtoe, that is a comparably small 36 per cent share. In other words, the importance of the Baltic Sea region for Germany’s energy sector diminishes if the analysis is based on a strictly geographical understanding of the geographic area.

Moreover, the perspective on different energy carriers as a commodity in the Baltic Sea region changes with an exclusion of Norwegian and Russian sources: while gas is most prominent in the German (Energiewende-related) press on the Baltic Sea region, its actual share amongst those energy carriers which are traded and shipped in the region, is small compared to other energy carriers, such as oil and the different forms of coal (see Figure 6). Compared to the flows of oil, gas is only the second most important energy in the energy system of the region, and depending on the share of coal among solid fuels¹³ it is likely that gas even ranks third. An analysis of the impact ofGermany’s Energiewende on energy flows in the region has to take this limited role of gas into account. Moreover, the place of electricity imports and exports in the region amongst other forms of energy flows has to be noted, as its relatively small share indicates that electricity generation still has a very strong national basis.

The impact of Germany’s energy transition on energy flows in the Baltic Sea region

Its scarcity of indigenous energy resources makes Germany irrelevant as an energy exporter.¹⁵

Regardless of major modifications of Germany’s energy system, such as the Energiewende, this is unlikely to change. As an importer Germany plays, however, an important role in different energy markets. With a yearly average of 57.6 mtoe (2010-2012) of energy imports, 25 per cent of Germany’s total imports of 176.4 mtoe (2010-2012 average) come from or pass through the Baltic Sea region.¹⁶ To put it differently, 36 per cent of the Baltic Sea region’s total energy flows enter Germany’s energy system. The Energiewende will affect this pattern (until 2020 and beyond), yet the question is, how and to what extent. Since Germany’s exports is unlikely to change significantly¹⁷, the reminder of this section focuses on energy imports.

Based on an energy scenario from 2010 (Prognos, EWI, GWS 2010)¹⁸ , it can be assumed that Germany’s energy imports from the Baltic Sea region will decrease by 27 per cent to 41.8 mtoe until the year 2020 (Figure 7). In today’s numbers, this implies that Germany remains the largest destination for energy flows within the region, but the country’s share of imports would reduce from 36 to 26 per cent. As a consequence, the region’s combined energy deficit of (-)273.7 mtoe (see Annex, Table 2) would be reduced by about 15 per cent. In other words, energy demand would decrease. Yet in order to infer from Germany’s national energy policy on future energy flows in the entire region, several factors need to be taken into account, namely economic growth, national policies of neighbouring countries, and energy prices.

Sound and continuing economic growth of Germany’s eastern neighbours, makes it, for example, possible that by 2020 Poland will be the region’s main importer of energy from the Baltic Sea region.¹⁹ In view of relatively large share of oil, development of road traffic and transport could be a decisive factor in this regard, both in Germany and other countries. National policies are very different in terms of their approach to road traffic: while Germany implemented programmes to promote the use of electric cars and increase their number from only 12,156 at the beginning of 2014 (Car Sales Statistics, 2014) to one million by 2020 (Bundesregierung), other countries did not. Depending on the success of Germany’s policy to convince consumers of the benefits of electric cars, oil demand will develop accordingly.

Other national policies, such as supply diversification programmes in Poland and the Baltic States – that is increased use of LNG from overseas and of indigenous shale gas, as well as the continued use of nuclear power (in Sweden and Finland) and/or the successful construction of new nuclear plants and the necessary grid infrastructure (in Poland and the Baltic States) – might generally reduce demand for gas in the region (largely gas from Russia). Whether Germany will actually retain its roleas the region’s main importer thus depends on the development of German demand for natural gas, bituminous coal, and solid fuels. Their place in Germany’s energy system is, however, very much unclear. The reason behind this uncertainty is to be found at the very core of Germany’s

Energiewende project – namely the phase-out of plants suitable for meeting base load requirements and increasing number of intermittent renewables.

Both technically and economically this combination of decreasing numbers of base-load generators and increasing numbers of peaking units such as solar and wind power is a complex issue, and – despite many scenarios and plans – there is no blueprint for a system where decentralised and intermittent renewables largely replace centralised base load plants. Flexible gas and biomass power plants are seen as the ideal technological link between the two elements; yet as the case of Europe’s most recent gas power plant in Irsching (FAZ, 2015)²⁰, illustrates, investments in state-of-the-art equipment and turbines becomes unprofitable under the economic conditions of the Energiewende: as renewables have priority access to the grid, they are growing in numbers and come with low prices at peak hours, therefore, market for gas and other fossil fuels is shrinking. Moreover, gas faces a double challenge, as coal still outcompetes gas due to lower prices.

The development of Germany’s gas imports hence largely depends on the question whether policy makers agree on a capacity market that provides an economic framework suitable to keep gas plants in the system. Such a step is currently under discussion (BMWi, 2014b). Outcomes of this discussion and their implementation will certainly affect Germany’s demand for coal and gas imports. Notwithstanding the results of this political process, the demand for biomass is likely to increase in Germany over the following years, because this form of energy – either used in decentralised plants or in form of co-combustion in existing fossil fuel plants.²¹ The share of biomass amongst energy imports is thus to until 2020. Depending on the availability of biomass and the outcomes of Germany debates on capacity markets, this energy source is hence – to a larger or smaller extent – to replace either coal or gas in Germany’s energy imports from the Baltic Sea region.

Conclusions

Against the backdrop of energy imports and exports patterns in Northeast Europe, this article analyses the place of the Baltic Sea region in Germany’s public discussions about the country’s energy future; natural gas imports from Norway and Russia largely dominate this public discourse. The construction of the Nord Stream pipeline is likely to be one of the reason for this highly topical nature of gas in German public discourse; it can hence be assumed that the perception of the Baltic Sea region by the German public is largely distorted. This article therefore attempts to broaden the discussion by expanding the focus of the analysis to include other forms of energy such as coal and electricity. On the other hand, this article attempts to focus on the energy system of the Baltic Sea region in the narrower sense. As Norwegian oil and gas exports to Germany come from and through the North Sea, they are hence excluded from this analysis. And as about half of Russia’s oil and gas exports to Germany pass through Central Europe, they are equally excluded.

The result of this analysis is, that the importance of the Baltic Sea region for the future of Germany’s energy supply is not fully grasped by German public. Individual countries, such as Poland and Russia

obtain varying degrees of attention, and so do the various forms of energy. But all in all the narrow focus on gas largely hides the role of other forms of energy coming to Germany from or through the Baltic Sea region, and thus the true role of the area for Germany’s future energy system. Taking the bigger picture of energy flows in the Baltic Sea region into account, the role of gas imports from Russia appears overestimated in German discussions concerning the role of the Baltic Sea region for Germany’s energy supply: even though Russia is the region’s main supplier of energy, natural gas is not the most important energy carrier. The focus of German media on this topic hence seems to obstruct the view on other important energy carriers, such as coal and – most importantly – oil, which are at least equally important.

As a response to the growing role of renewables, Germany currently discusses a new market design for fossil fuel power stations. Capacity markets for coal and gas-fired plants will be the likely result of these debates, as backup for the notoriously volatile renewables is needed. As Germany is the region’s largest importer of gas and coal, the design of these markets will largely determine the impact of Germany’s Energiewende on regional flows. The way Germany’s Energiewende will affect patterns of energy exports and imports in the region depends, however, on more factors. The future of the German transport sector will at least be equally important, as oil represents the largest share in energy flows in the region. Widespread use of electric cars could serve as a storage battery for intermittent wind and solar power; in 2014 the German government therefore renewed its support with a broad range of incentives for the use of electric cars.

It remains, however, to be seen whether the customers of the German car industry see electric cars as an attractive option. If they do, Germany’s role as an importer of energy from the Baltic Sea region could diminish largely. In this case, Germany’s place in the energy system of the Baltic Sea region will be determined by the results of current discussions about a capacity market for flexible fossil power stations. Depending on the exact outcomes of these debates, German energy imports could decrease according to official scenarios. In such a case, Germany might lose its role as the region’s main importer of energy. For those countries in the region which have only limited access to indigenous energy resources and hence can only play a minor role in supplying Germany’s energy system, such a development is not necessarily a bad one, as their bargaining position on the regional energy market would improve, especially if they successfully implement programmes to further diversify their energy supply.

References

Auer J. and Anatolitis V. (2014) The changing energy mix in Germany. The drivers are the Energiewende and international trends. Deutsche Bank Research. Current Issues, June 26, 2014.

BMWi (2014a) Zweiter Monitoring-Bericht „Energie der Zukunft“. Berlin: Bundesministerium für Wirtschaft und Energie BMWi.

BMWi (2014b) An Electricity Market for Germany’s Energy Transition. Discussion Paper oft he Federal Ministry for Economic Affairs and Energy (Green Paper). Berlin: Bundesministerium für Wirtschaft und Energie BMWi. Bundesregierung (n.d.) Leitmarkt und Leitanbieter für Elektromobilität. Retrieved from http://www.bundesregierung.de/Webs/Breg/DE/Themen/Energiewende/Mobilitaet/podcast/_node.html, date accessed: April 9, 2014.

Car Sales Statistics (2014) 2014 Germany: Total Number of Electric Cars, March 29, 2014. Retrieved from http://www.best-selling-cars.com/germany/2014-germany-total-number-electric-cars/, date accessed: April 9, 2014.

CIEP (n.d.) Russian Gas Imports to Europe and Security of Supply. Fact Sheet. The Hague: Clingendael International Energy Programme.

FAZ (2015) Energiewende. Irrsinn in Herrsching. Frankfurter Allgemeine Zeitung, March 17, 2015.

Gazprom Export (2015) Transportation. Retrieved from http://www.gazpromexport.ru/en/projects/transportation/, date accessed: February 11, 2015.

Högselis P., Aberg A. and Kaijser A. (2013) Natural Gas in Cold War Europe: The Making of a Critical Infrastructure. In

The Making of Europe’s Critical Infrastructure. Common Connections and Shared Vulnerabilities, edited by Per Högselius, Anique Hommels, Arne Kaijser, Erik van der Vleuten, 2761-101. Basingstoke: Palgrave Macmillan.

OECD and IEA (2004) Energy Statistics Manual. Paris: Organisation for Economic Co-operation and development, International Energy Agency.

Prognos, EWI and GWS (2010) Energieszenarien für ein Energiekonzept der Bundesregierung. Studie für das Bundesministerium für Wirtschaft und Technologie. Basel, Köln, Osnabrück: Prognos AG, Energiewirtschaftliches Institut an der Universität zu Köln, Gesellschaft für Wirtschaftliche Strukturforschung mbH.

Sattich T. (2014) Germany’s Energy Transition and the European Electricity Market. Journal of Energy and Power Engineering, 8(2): 264-273.

Annex

Table 1. Yearly energy production and consumption in the Baltic Sea region (2010-2012 average, in ktoe)

Country	Average consumption	Average production	Balance
DE	322773.17	124684.17	-198089
DK	18875.73	20578.53	1702.8
EE	6149.33	5019.9	-1129.43
FI	35892.37	17173.87	-18718.5
LI	6963.77	1306.27	-5657.5
LV	4514.33	2129.7	-2384.63
NO	30346.63	199960.77	169614.13
PL	99841.07	68491.9	-31349.17
RU	772254	1374802.8	602548.8
SE	50100.53	33757.9	-16342.63

Table 2. Yearly energy deficit/surplus in the Baltic Sea region (2010-2012 average, in ktoe)

Country	In per cent of national consumption	In per cent of regional deficit	In per cent of regional surplus
		(-273670.87 ktoe)	(773865.73 ktoe)
DE	-61.37	-72.38
DK	+9.02		0.2
EE	-18.37	-0.41
FI	-52.15	-6.84
LI	-81.24	-2.07
LV	-52.82	-0.87
NO	+558.92		21.9
PL	-31.4	-11.45
RU	+78.02		77.9
SE	-32.62	-5.97

The global gas market: An international perspective

Admin — Sat, 19 Sep 2015 14:27:17 +0000

Mr. Pål Rasmussen is the Secretary General of the International Gas Union (IGU) and has 25 years of experience form the gas industry. Rasmussen holds a master degree in economics and management. Executive summary Natural gas has become fundamental part of the global energy mix. The increasing reserve base and well developed technical and commercial infrastructure place natural gas in an excellent position to be part of the long-term solution in meeting the global energy challenges. Benefits of using natural gas range from improved air quality in towns and cities, improved working conditions, a cleaner and more efficient local economy, more competitive energy supplies with better security and the prospect of prosperity for all. From an international perspective, we see the global gas ‘revolution’ as an ongoing dynamic and evolutionary process in which natural gas technology, investment and trade continue to develop and spread throughout the world. In this article, we will review some of the step changes in economics and politics that have created challenges or stimulated the global gas market since the start of this millennium, and discuss the implications for key regional energy markets, such as the Baltic Sea region. We should also remind ourselves of the ‘gas chain’ that has been the fundamental basis for long-term natural gas investment and expansion. We are now entering a new era, in which shorter-term and smaller scale investment is equally important, and this has fundamental implications for new markets and new uses of gas in all its forms. IGU has no doubt that minimising pollution and mitigating climate change must be central features of sustainable energy policy, both locally and globally. But policy makers must not forget the important role that natural gas already plays in helping us achieve a low-carbon future. Not only is natural gas the perfect partner for intermittent renewable energy sources, switching to natural gas now, instead of using more polluting fuels, is often the most efficient and timely solution. Finally, we will look briefly at how companies are adapting to the continuously changing international energy business. There are exciting developments taking place in the Baltic Sea region. Although the gas market here is small-scale by global standards, the Baltic Sea region is at the cutting edge of technology and is developing a gas industry with potentially wide impact.

Events that have influenced recent gas market development Fifteen years ago, at the be- ginning of the millennium, the world had experienced a decade of economic growth built in part on increased international trade and supported by greater free- dom in global capital markets.

The current drive for a low-car- bon energy solution had its roots in this period too, with the 1992 UN Framework Convention on Climate Change, which commit- ted National signatories to reduce their emissions of Greenhouse Gases. This led to the adoption of the Kyoto Protocol in December 1997, which entered into force in February 2005. This was also the decade of new developments in information technology and web- based communication that were to survive the ‘.com bubble’1 and become the mainstay of many ac- tivities in the world today. During the 1990’s, the gas in- dustry continued to invest for the longer-term, and as we entered the 2000’s gas market growth, which had averaged 2.1% rate over the previous ten years, was set to increase to an average of 2.8%. People active in the gas industry could see the benefits of natural gas and there were optimistic fore- casts about even stronger growth of global and regional gas markets.

An important political event in the Baltic region took place in June 2004, when Estonia, Latvia, Lithua- nia, and Poland joined the European Union along with the Czech Repub- lic, Cyprus, Hungary, Malta, Slo- vakia and Slovenia. This profound enlargement of the European Union has brought further challenges and opportunities for the integration of the ‘Internal Energy Market’, not least for investment in natural gas infrastructure and diversity of im- ported gas supplies for Europe. But, let’s fast-forward a few years to 2007, when a financial crisis was starting to cause some of the world’s largest banks to fall into administration. At the same time commodity prices, including energy, were rising: the follow- ing year, oil peaked at over $140/ barrel (bbl) during the summer. Despite this, as seen in Figure 1, 2008 was the year that global gas demand reached 3000 bcm for the first time. But then, the effects of the global economic downturn started to bite and demand in sev- eral markets collapsed with severe

effects on manufacturing industry and on energy demand, notably in some developed economies. Furthermore, 2009 began in Europe with a disruption of Rus- sian gas supplies through Ukraine. Although this was resolved more quickly than the similar contrac- tual dispute in 2006, the disrup- tion led to concerns about supply security and a renewed interest in geopolitics and the need for energy diversity. Globally, the economic squeeze reduced energy demand even with oil prices tumbling to be- low $40/bbl and natural gas prices falling too. For the first time in re- cent history, annual global gas de- mand decreased significantly (by 2.3% in 2009 compared with 2008). The long-term outlook for the gas industry seemed very chal- lenging, particularly in Europe. Overall, however, the IGU 2030 Gas Industry Study, presented at the World Gas Conference in Bue- nos Aires, looked forward to natu- ral gas increasing its market share from 22% to 25% of global energy consumption, and an even higher percentage if Governments would properly recognise the environ- mental benefits of natural gas. The new decade started opti- mistically, but April 2010 was to be a month of disruption and disasters; Volcanic ash from the eruption of Eyjafjallajökull in Iceland led to the closure of airspace over most of Eu- rope and a few days later the Deep-water Horizon drilling rig explosion killed 11 people, caused the rig to sink and oil discharge in the Gulf of Mexico. The year overall saw a re- surgence of natural gas across the world, while in the US natural gas prices stayed low and production increased to over 600 bcm, support- ed by the increasingly successful exploitation of shale gas onshore.

On 11 March 2011, a 9.0 magnitude earthquake caused a tsunami wave, which severely damaged the Fukushima Daiichi nuclear power plant. There were almost immediate political reac- tions across the world, including a decision by Germany to perma- nently close all its nuclear capac- ity by 2022. Separately, on a socio- political front, popular uprisings and demonstrations spread across much of North Africa and the Mid- dle East in a phenomenon that be- came known as ‘the Arab Spring’. 2011 was the year that the Inter- national Energy Agency (IEA) asked the question “Are we enter- ing the golden age of gas?”. Cer- tainly this seemed to be the case for the global LNG market, which expanded by 10%. The shale gas ‘revolution’ was progressing rap- idly in the USA. With self- suf- ficiency of natural gas in North America established, instead of importing LNG the industry was now signing the first export deals for future US LNG exports broadly priced at ‘Henry Hub plus’.

By May 2012, Japan itself had shut down all its nuclear reactors, but thanks to LNG imports it was able to use natural gas to make up much of the 30% loss of power generation capability. Globally however, international gas trade changed little year-on-year and surprisingly LNG trade actually decreased. Whilst the global gas market had become better connected than ever before the high spot price for LNG and fierce com- petition with coal for power gen- eration was having a dramatic ef- fect. 2013 saw a return to modest gas demand growth of 1.4% in the global energy market. During 2014, probably the most significant event was the de- cline in oil prices from well over $100/bbl to a range of $50-60/bbl by the end of the year. This has profound implications for the nat- ural gas industry and we will look at natural gas price movements late in this article. At the time of writing, authoritative global de- mand data for 2014 is not yet published, but indications are that the gas market has continued to expand, despite a further squeeze in Europe caused by slow economic growth, highly-subsidised renew- able energy and warmer than av- erage temperatures that reduced demand for space heating. Natural gas consumption in the European Union actually decreased by 11% to 409 bcm in 2014, and the industry is seriously considering strategic adjustments for the future.

Throughout all this, the natu- ral gas industry has developed and adapted to change. As the gas busi- ness has grown globally the interac- tions across the world have become increasingly significant, in particu- lar with many more countries in- volved in LNG trade. International relationships and trade in natural gas will be even more important in the future. This is particularly the case in Europe, where the decline in indigenous gas production seems inevitable. Reshaping the gas mar- ket in Europe to be ready for future challenges may well need to take a new course. There will still be ‘mega projects’ in other parts of the world, and there may well still be signifi- cant natural gas resources to be found and developed in some locations in Europe, but we are already seeing a new approach to the gas value chain developing. So that we can explore this phenomenon, I would like to de- scribe briefly the traditional gas business, including some basic technical information, so that we can understand better the invest- ments throughout the gas business and how they have been linked into a value chain. This structure is now starting to behave like a global network, with new delivery routes, new market sectors and new market participants doing business in new ways.

The natural gas value chain Natural gas is a mixture of hydrocarbons, of which by far the largest component is the simplest hydrocarbon, methane (CH4). Methane is an odourless, colour- less, non-toxic gas which is lighter than air. Synthetic natural gas and bio-gas are examples of increas- ingly important components that are being integrated into natural gas systems, but conventional and unconventional natural gas pro- duction, still provides more than 99% of global gas supplies. The gas business throughout the world has involved long-term invest- ment ‘from drill bit to burner tip’ to bring natural gas to final cus- tomers. The IGU diagram (Figure 2) illustrates, in a simplified form, the main components of the tradi- tional gas value chain. Exploration, production and processing Most of the natural gas that has been discovered so far was al- most certainly formed by similar biogenic processes to those that created oil reserves. Over millions of years the residues of decom- posed organic material under in- tense pressures and temperatures, have become hydrocarbon miner- als, including natural gas. These hydrocarbon minerals can be found both in the original source rock where they were formed (including shale formations) and also in more porous reservoir rocks that are the conventional oil and gas fields.

Natural gas also includes some heavier hydrocarbons, such as ethane (C2H6), propane (C3H8), butane (C4H10), and there can be a wide range of different non-hy- drocarbon gases that also occur in the mixture in the reservoir rocks. Indeed, gas production has often been a by-product of oil produc- tion and is then termed ‘associated gas’. Three different types of natu- ral gas production can broadly be categorise by the type of reservoir.

‘Dry gas fields’ requiring very little processing of the reservoir fluids needed to achieve
pipeline quality gas;
‘Condensate gas fields’ in which the heavier natural gas hydrocarbons can be separated as
natural gas liquids (NGLs); and
Oil fields with ‘associated gas’, sometimes with a natural gas

cap that can be produced sepa- rately or temporarily re-injected to enhance oil production. Development plans and in- vestment decisions depend on the expected relative revenue streams from the gas and liquid hydrocar- bons, but even for dry gas fields the reservoirs themselves can vary in fundamental characteristics like the permeability of the reservoir rock. Extremely tight formations (for example shale gas reservoirs) require stimulation to enable the natural gas to be produced. Natural gas is abundant, but the reservoirs that are simple in struc- ture and closest to markets tend to be developed first. This means that investors may face a choice between developing remote conventional gas reserves or more difficult unconven- tional gas that is closer to the market and requires use of new technology. In practice both types of investment has occurred; as new technology is developed and proven the tech- niques can be applied more widely and the global economic reserve base increases.

Natural gas occurs in other forms, most notably as methane hydrate crystals. This is potentially a vast future source of natural gas, but for which at present production technology has not yet found an economically viable solution. Once produced the natural gas is likely to need some processing. If it is dry gas with very few impurities then it might be sufficient to check the gas quality and make sure that it is adjusted to the correct pressure and temperature for the next stage of its journey. More likely, however, is that it will also be necessary to treat the ‘wet’ gas that has come from the upstream reservoir to deal with one or more components that need to be removed to satisfy the gas quality requirements for on- ward transportation. International and national high pressure pipelines The locations of natural gas reserves are more diverse than for oil, but even so a large proportion of natural gas needs to be transported from the producing countries and regions with more gas than is need- ed internally like Norway, Russia, Qatar, the Caspian area and North Africa to the consuming countries and regions with demand that can- not be satisfied by indigenous gas

supplies, such as Japan, China and the European Union. International high pressure pipelines provide direct links from producers to consumers. Good relationships with any transit country (through which the pipe- line passes) are essential to main- tain high reliability of gas supply. Technically, these high pressure pipelines are immense feats of en- gineering that continue to be the main way by which vast interna- tional flows of gas are transported. Because the pipeline usually locks the gas producer into a particu- lar route to a certain market, the commercial and political condi- tions both in the transit countries and in the downstream market are crucial. This leads investors to fa- vour projects that are backed by long-term contracts in which one party has a strong market position midstream or downstream. Globally, however, there is, in total, far greater investment in gas transmission pipelines tak- ing place within individual coun- tries, for example in the USA and in China. The shale gas revolution in North America changed indig- enous supply patterns and led to many new onshore pipeline pro- jects to enable higher levels of gas production to be brought to mar- ket. In the USA, however, several of the main shale gas formations are relatively well positioned, ei- ther with good proximity to the final market or in economic reach of existing infrastructure. In con- trast, the geographical challenge to deliver indigenous natural gas to the main consuming areas has been far more demanding in Chi- na. The final length of the second West-East Pipeline linking gas production in the west to con- suming areas in the east was over 8,700 kilometres, including both east and west sections and eight branches, making it probably the world’s longest natural gas pipe- line. Construction of a third West- East Pipeline, to bring additional supplies from Turkmenistan as demand for natural gas in China continues to grow, is scheduled for completion before the end of 2015.

Liquefaction, LNG shipping and regasification Gas liquefaction, so that nat- ural gas can be more easily trans- ported by ship (or occasionally by road tanker) to the market where it is then regasified, has become almost as important as pipelines as a means of international deliv- ery of natural gas. Liquefaction involves pre-treatment to remove oil condensates, purify the natural gas from pollutants like sulphur or carbon dioxide, remove any traces of heavy metals and control the moisture level. Then the processed natural gas is refrigerated to reach a temperature down to approxi- mately minus 161 degrees Celsius.

This refrigeration process involves compression, condensation and expansion of refrigerants that ex- change heat with the natural gas until it becomes a liquefied natural gas (LNG) occupying 1/600th of the volume. A large enough LNG fleet of ships (or road tankers) is essential to prevent bottlenecks developing in the supply chain. Since January 1959 when the Methane Pioneer set off for Europe with its modest cargo of liquefied natural gas from the Louisiana Gulf coast of the USA, international LNG trade has developed a global fleet that now amounts to over 380 active ships, the largest carrying up to 266,000 m3 of LNG. Annual worldwide de- liveries are equivalent to well over 300 bcm of natural gas, about 10% of global consumption. Some countries have long been reliant on LNG, and like Japan and Korea have based successful downstream markets on a range of LNG supplies, but with the growth of international gas trade many more countries now have LNG re- ception terminals and there is a flourishing market in LNG deliver- ies and diversions to the markets with highest value. This flexibil- ity is of course only possible when there are sufficient ships available (a diversion may well result in a longer route) and sufficient capac- ity in the regasification terminals to where a ship might be diverted.

The capacity in the regasification terminal comprises not only the delivery slot to enable the ship to be unloaded, but also short-term storage of the unloaded LNG and regasification (in which LNG is warmed up) before compressing the natural gas into a national or local transmission pipeline. LNG is set to be an exciting growth area, with bold and inno- vative solutions being applied both upstream and downstream. An example of upstream innovation is the Shell operated Prelude gas field development off the NW coast of Australia. Rather than pipe the produced gas to the shore, the pro- ject involves a very large liquefac- tion ship that will float above the gas field and load LNG into con- ventional LNG carriers for onward delivery to market. Downstream, there are many more innovations in the LNG market, as illustrated in Figure 3, which is taken from the IGU 2015 LNG Review. The ‘re-export’ market from receiving terminals is evolving to distribute LNG as a fuel to further downstream mar- kets. Thus supplying off-grid net- works with gas and fueling the heavy trucking business (e.g. in China, the USA and Europe) and bunker business for barges notably in Europe. In the not too distant future we might also see the deep sea shipping fleet becoming an im- portant market for LNG.

Storage The ability to liquefy natural gas means that it can be stored and made available at very high delivery rates, but the process of liquefaction and storing LNG is often expensive. In many parts of the world gas demand is very sea- sonal and the storage of very large volumes of gas that are needed (for example for residential space heat- ing in northern hemisphere win- ters) is best achieved underground in natural geological formations, particularly if such structures can be found near the local pipeline grid that serves the centres of gas demand. Most of these structures used to be oil or gas reservoirs, which benefit from unproduced ‘cushion’ gas as well as confidence that the natural integrity has been proven for containing reservoir fluids at high pressures. Occa- sionally the geological conditions are right for gas storage in highly permeable rock that benefits from a hermetically sealed cap, like the sandstone formation in Latvia that allowed the development of the 4.4 bcm (2.3 bcm working volume) Inčukalns Underground Gas Stor- age (UGS) Facility, one of the largest in Europe. In all forms of UGS an im- portant component of the storage facility is the ‘cushion’ gas that remains in the store so that a rea- sonable withdrawal rate can be achieved. The ‘working gas’ in the store is injected (compressed) into the UGS on top of the cushion gas and it is this working volume that is taken out for the heating season or for other commercial reasons during the storage cycle.

Another form of UGS, which offers potentially higher delivery rates albeit sustainable perhaps over a number of weeks rather than throughout the winter months, is salt cavities. Here, the storage cavities of the optimum shape and size are leached out from the un- derground salt formation. The ability of storage facilities to add flexibility to the gas net- work and to help balance the in- puts and off-takes of gas suppliers is extremely important. Increased

use of intermittent renewable en- ergy sources creates more stress on energy grids. The ability of fast- response gas storage to respond to within-day fluctuations is allowing new dynamic ways to use storage, particularly for portfolio optimisa- tion and improvements in overall efficiency in liberalised markets. In comparison with the dif- ficulties of storing electricity or stockpiling coal, natural gas pro- vides very efficient and highly ef- fective ways of storing potentially vast amounts of energy with mini- mal impact on the environment and with the ability for rapid re- sponse through already connected networks. In aggregate this may also provide sufficient flexibility for national or regional ‘strategic’ purposes.

Local transmission and distribution The energy carried though a typical gas transmission pipe is far more than can be transmitted through the biggest high voltage electricity cables. Gas in the trans- mission system is at high pressure (typically 50-80 bar) and, depend- ing on the final use, may pass through a series of pressure reduc- tions, metering and quality checks leading to low pressure distribu- tion pipeline systems with their own pressure and flow controls and final metering at the supply point of the end consumer. Technology is enabling gas operations and gas markets to develop in ways that should lead to further efficiency improvements in grid operation and utilisation. Smart grid tech- nology as well as Smart metering still have a long way to go but have already demonstrated significant fuel savings through grid optimi- sation at Transmission level. The regulatory focus in com- petitive supply markets tends to be on the pipeline systems, with regional groupings of energy regu- lators aiming to enable third party access (TPA). In Europe, of course, we have ACER, the Agency for the Cooperation of Energy Regulators, which is instrumental in encour- aging a consistent approach to all

the gas transmission grids in the EU. Other regional regulatory ini- tiatives aim to foster competition and introduce incentives particu- larly for the interconnection or expansion of gas infrastructure in less developed markets. Whilst transmission and dis- tribution pipelines can become relatively safe cash-generating as- sets in a mature market, the ini- tial investment typically requires large capital input for a low-mar- gin business that is not provid- ing an economic return until the market has grown, and may take decades to reach payback. Initial downstream investment is often at least partially in public ownership, with the distribution (pipeline) ac- tivity in the same company as the local monopoly gas retail business. Clarity about government policies for public and private ownership is essential to avoid problems for po- tential investors. The regulatory regime must also be clear, so that the access conditions are under- stood and the tariff structure does not distort the market. LNG provides an alternative approach to the local distribu- tion of natural gas, by LNG road tanker (sometimes referred to as a virtual pipeline). As the markets expand for natural gas as a land vehicle fuel, either as LNG or CNG (Compressed Natural Gas), as well as fuel for ships, the use of these ‘virtual pipeline’ routes could add greater flexibility and security to the energy system as well as ena- bling locations to be serviced that might otherwise be sub-economic.

Utilisation The economic availability of natural gas combined with its quali- ties of efficiency, quality, reliability, convenience and responsiveness to the consumers’ needs make it an ideal choice for a wide range of uses in many part of the world. High efficiency gas boilers are the mainstream residential gas appliance in many countries. Commercial customers also pre- fer natural gas for space heating, either directly or as the fuel for a Combined Heat and Power system. Gas is also an ideal fuel for district heating systems and makes an excellent partner with intermit- tent renewable energy sources like wind and solar power. Industrial gas demand requires a more competitive offering in rela- tion to other fuels, but the proven high efficiency appliances that al- ready exist for natural gas could be a springboard for further growth in the manufacturing sector. Natural gas is also a useful feedstock for the petrochemical industry, and there are indica- tions that this use is developing in some producing nations as an alternative to exporting LNG or constructing a new international pipeline.

Whilst at a relatively low level, the use of natural gas as a trans- port fuel is possibly the most rapid- ly growing sector across the world. There are encouraging signs both onshore, with compressed natural gas fuelling millions more cars, trucks, busses and lorries, and off- shore with LNG-fuelled ships be- ing favoured over more polluting rivals in environmentally sensitive areas like here in the Baltic Sea re- gion. The Gas Target Model for Eu- rope, published by the Agency for Cooperation of Energy Regulators in January 2015, includes projec- tions of new uses of gas in the EU across four main areas, which are closely linked either with renew- able energy or LNG: • Natural Gas Vehicles (NGVs) using CNG or LNG; • Water transportation; • Power to Gas (P2G) technologies, using surplus renewable energy; and • Virtual Pipelines (Truck loading of LNG). With the right political support and economic stimulus, Fig- ure 5 shows that the contribution from these sectors could be very significant on a European scale within just five years. Globally, however, the use of natural gas for high efficiency, low-emission power generation re- mains the largest and most impor- tant growth sector, but the pros- pects vary across different regions of the world. How much and how rapidly the global gas market will grow is dependent on fundamen- tal economics, which in turn are influenced by political attitudes to energy and to climate change.

Wholesale gas prices and how they are formed? Natural gas prices, and how they are formed, influence the economic viability of investment and market development. One as- pect of the IGU Committee work over the last ten years has been to monitor wholesale gas price trends. There are several aspects to this work, which are described in detail in the 2015 Report by the IGU Strategy Committee. Whilst the global energy markets are better connected than ever before, the average wholesale natural gas prices at the beginning of this year at Henry Hub in the USA were under $3/million British thermal units (mmBtu), Europe was around $7-8/mmBtu and Japa- nese LNG over $15/mmBtu.

Figure 6 shows how natural gas prices rose in these three mar- kets during 2007 and 2008, and then collapsed following the oil price fall in summer 2008. Whole- sale gas prices are formed in dif- ferent ways throughout the world. Where price formation is based on traded gas markets, as in the USA and the United Kingdom, an adjustment to the perception of available supply and demand for natural gas is quickly reflected in the wholesale price. Price forma- tion that contractually links the natural gas price to an index of a competing fuel (e.g. crude oil as in many Japanese LNG purchase con- tracts, or oil products as in many Russian international sales con- tracts) both delay and dampen the changes. By the summer of 2009 natural gas wholesale prices across the world had ‘bottomed- out’, but with the oil-indexed prices re- maining significantly higher than the traded gas market prices.

Then, in 2010 divergence into three clear pricing areas occurred, with the US shale gas surplus keeping Henry Hub prices low and, with no physical ability to export the surplus gas (instead the USA exported some displaced indig- enous coal) while the gas prices in Europe and Asia were pulled up

by the higher oil price and the in- creased gas demand. IGU has carried out several sur- veys to determine how the methods of gas price formation have changed over the last decade. During this time there has been a slow move- ment away from ‘oil’- indexation and an increase in gas market based pricing where this is technically pos- sible. Regulatory and government determinations of wholesale gas prices still remain important, par- ticularly in less developed markets, but the types of regulatory controls are themselves changing to more cost- reflective methods. The trend towards wholesale natural gas prices being based on the prices in traded gas markets has been driven by the expansion of gas-on-gas competitive markets in which consumers have been able to seek suppliers with the lowest price offerings. At the same time, the contractual linkage of the nat- ural gas price to relatively high- priced oil products has placed the agreements with traditional large gas supplying countries like Russia under considerable pressure. With the fall in oil prices the differen- tial between oil-indexed and gas hub traded prices is now changing. But already in Europe2 overall, as shown in Figure 8 there has been sufficient confidence in the traded gas markets to link more than 60% of the physical wholesale gas sales to the prices at gas hubs in com- petitive markets.

A partnership with renewable energy There is a growing realisa- tion that natural gas can be a per- fect partner for renewable energy. There are, however, difficult chal- lenges in making investment deci-

sions in capital intensive projects when the plant is not expected to operate most of the time. Some bespoke projects already successfully combine gas and re- newable energy because of the lo- cal circumstances, but in general an energy market design is needed to ensure that there can be widespread and large-scale implementation. The way natural gas is priced can also influence whether the best environmental choice are made, and this can work both ways. Where the wholesale natural gas price is too high then efficient low emission gas-fired CCGTs can- not compete with cheap coal-fired plant, whereas if the gas price were unusually low (as occurs in parts of the Middle East, for example) then worthwhile renewable energy pro- jects face undue economic barriers. Governments or their agen- cies have an important role to help the market achieve the best eco- nomic solutions for sustainable and secure development of the energy system. Among the things that IGU has recommended are:

to encourage investment in re-search and technology to deliv-er their political objectives;
to avoid picking winners and losers, but rather to incentivise those industries that deliver re- sults (e.g. better to have a ‘cost for carbon’ than ongoing sub- sidy of a particular source ofenerg y);
to ensure that there are no un-due subsidies or taxes that dis-tort the market; and
to see first if the removal ofexisting incentives or obliga- tions would be a more efficient solution than adding a new in- centive or obligation on energy companies.There are already signs that, with such good practice, the world might be turning a corner and get- ting CO2 emissions on a downward trend. In March 2015, the IEA an-

nounced that global anthropogenic CO2 emissions had stabilised in 2014 while world GDP increased (by 3%). This was the first time in 40 years that the global economy grew without increasing emissions, and was attributed to changes in ener- gy consumption patterns in China and OECD countries. Increased use of solar and wind energy no doubt contributed to this success, but the continuing shale gas revolution in North America combined with the expansion of the Chinese natural gas market were probably decisive factors that have enabled CO2 re- ductions from the world’s two dom- inant energy consumers. Adapting gas business models to the changing energy world Investor groups associate companies with a particular part of the natural gas value chain be- cause the risks, required skill sets, and critical success factors vary considerably. Often there are dif- ferent laws and fiscal systems gov- erning the upstream, midstream and downstream components. To manage the commercial risks, however, companies have often sought to integrate along the value chain, particularly if there are is no developed trading hub availa- ble to enable them to manage price and volume risks.

Throughout the gas chain the investor assesses and manages the risks in the hope of achiev- ing a return on their investment. Commercial risk relates primarily to the investment and operating costs and the volumes and prices of gas. Political and regulatory un- certainties can be the determin- ing factor as to whether or not the commercial risk is acceptable.

Whatever the prevailing ide- ology and legislative systems, suc- cessful natural gas development and continued industry growth needs to be based on co-operation and mutual commercial prosperity all along the value chain. Business models, however, continue to change. Physically, the gas industry still relies on large infrastructure to create the back- bone of the business, but increas- ingly there are many smaller pro- jects that, joined together, create an even stronger market. We can image this as a large single chain being slowly replaced by a woven mesh that is both more flexible and more resilient for the benefit of the final customers. Within this mesh there should be room for local en- ergy sources, whether synthetic natural gas, bio-methane or shale gas, as well as a diversity of tradi- tional and conventional deliveries of LNG and pipeline gas.

In conclusion: the Baltic Sea re- gional gas market in focus The gas market in the Baltic Sea region is quite diverse internally, but until re- cently it was characterised by a lack of connectivity with the rest of Europe and a lack of supply diversity in most countries. There have already been some investments made to address these issues, notably with the LNG reception terminal at Świnoujście in Poland and the Klaipėda floating LNG storage and regasification facil- ity in Lithuania. Since 2010 Finland has had an LNG production facility in operation at Porvoo in the South of the country. Plans for LNG terminals at the port of Turku and at Tornio in BSR Policy Briefing 1 / 2015 the North aim to bring LNG directly to Finland, making the gas and fuel markets more versatile and supplying LNG for vessels operating on the Baltic Sea. There are several other LNG im- port, storage or redistribution pro- jects under consideration, including a large-scale terminal at Inkoo near the landing point of a proposed Bal- tic Interconnector offshore pipeline linking the Estonian and Finnish gas markets. A further dimension would be a St Petersburg LNG facility. This idea was re-launched last year as a project in which the plant’s output would be supplied to the Kaliningrad area and also used for bunkering and

small LNG cargoes in the Baltic Sea region. Encouraged by the new SECA (Sulphur Emission Control Areas) rules, ferries are changing fuel to LNG. In Sweden (Gotenburg), fer- ries have already switched to LNG as bunker fuel, being much more environmentally friendly than the Marine Fuel Oil that was previously used In addition to the well-known Nord Stream offshore pipeline de- velopment, there have also been enhancements to the onshore pipe- line systems to allow reverse flow from Germany to Poland, and to in- crease the capacity to Denmark and Sweden. Plans for further intercon- nection seem limited because of un- certainty about future gas demand growth in the region. Transporting gas as LNG may well allow better economic options in such cases. In Poland, where natural gas is recognised as an environmentally advantageous replacement for coal- fired power generation and where indigenous shale gas production remains a real possibility, the na- tional demand for natural gas is ex- pected to rise significantly. In some countries in the Baltic Sea region however, the national energy plans suggest that natural gas consump- tion is expected to be displaced by renewable energy. Each country may well have a different optimum balance, but we can learn two les- sons from what is happening in the rest of Europe and indeed through-out the world. Firstly, gas markets that are better connected can sup- port each other at times of stress or disruption of the energy markets, and secondly the increase in the use of intermittent renewable energy sources requires a reliable low-car- bon partner such as natural gas. For a sustainable future it is important to retain, and better to grow, the share of gas in the energy mix.

Technology continues to de- velop and to provide solutions for the variety of energy challenges faced in the region. Here you are at the cutting edge, breaking new ground with the Klaipėda floating LNG terminal in Lithuania, exploit- ing bio-gas potential for vehicle transport in Sweden and creating Synthetic Natural Gas from wood in Finland. Developments in the fuel and bunker market already make this the primary local growth area Notes:

for LNG. Further developments in utilisation of gas in all its forms will help to expand the global market and establish natural gas new sec- tors with overall benefits for energy efficiency and the environment. We live in a complex world of change, with wide ranging risks that are faced by countries and com- panies. Here in the Baltic Sea re- gion, as in the rest of the world, we need to strive for closer cooperation and to improve our shared commer- cial and technical understanding of what is needed to facilitate invest- ment in the gas market. This will help to deliver a secure low-carbon energy future for us all. Let the dynamic evolution continue! Published in BSR Policy Briefing 1 / 2015, Centrum Balticum, www.centrumbalticum.org

The Coastal Factor In The Socio-Economic Development Of A Territory (Based on the example of Kingisepp District of Leningrad Oblast)

Admin — Wed, 16 Sep 2015 18:14:56 +0000

Druzhinin Alexandr Georgievich — Doctor of Geography, Professor, Director of the Northern-Caucasian Research Institute of Economic and Social Problems of the South Federal University.

Lachininskii Stanislav Sergeevich — PhD in Geography, Research Fellow at the Laboratory of Comprehensive Studies of the Spatial Development of the regions, Institute of Problems of Regional Economics of the RAS; Assistant Professor of the Department of Economic and Social Geography, Saint-Petersburg State University.

This article was prepared based on the materials of the expedition studies in the framework of research grants of the Russian Scientific Foundation (#15- 18-10000) and the Russian Humanitarian Scientific Foundation (#15-02- 00002).

The aim of the study was to identify the role of the coastal factor and the location factor in the transformation of the socio-economic system of Kingisepp District.
The scientific and practical significance of the proposed research concerns synthesis of analytical, statistical, expert estimates and projections, as well as consideration of the position of the local authorities, views of major economic players and port operators.

The study aims to contribute to the regional economy and social geography, united by a common geospatial paradigm. Russian scientific literature provides little research performed on the level of municipal districts, which greatly decreases our understanding of the socio-economic processes in the field. Kingisepp district of Leningrad Oblast is a unique area that combines several important spatial characteristics — «cross-border-ness», «seaside-ness», and «periphery-ness». The seaside part of the region (which has 114 km of the sea coastline) has gained a powerful impetus to its formation due to implementation of the project of the Ust-Luga sea port. This sea port continues to increase its influence not only on the surrounding areas, but also on the whole historical main area of economic and residential development of the municipality (along the axis of «Ivangorod — Kingisepp»). This became possible due to improvement of road and transport infrastructure, outlooks for development of industrial zones, housing development, and due to an increase in labour “push-pull” migration. The article describes the most important aspects of the transformation of the socio-economic system in the context of marine economic activities that correspond to the port development.

Introduction

“The shift to the sea” of the economy, population and infrastructure is a fundamental, universally manifested trend of the territorial organization of the modern society. Marine economic activities are based on the powerful economic potential of the world’s oceans (according to the most conservative estimates, the value of their resources totals 24 trillion USD [1]), and correspond to globalization (it is symptomatic that 90% of international trade is carried out through seaports [2]). In this regard, in the scientific literature there have been cultivated for decades notions of the economic and social specificity of coastal regions, of the “coastal zones” as specific socio-geographical phenomena; attempts have been made to identify and delimitate them. At the same time, formal geospatial criteria for a “coastal zone” (a direct “access” of a territorial socio-economic taxon, merged by this coastal zone, to the coast, as well as a small, usually in the range of 50 to 200 km distance from the coastline [3-9]), as we believe, should always be complemented by the actual impact of the “coastal factor” on the territorial socio-economic dynamics, and by recognition of the determination of the coastal zone (including its spatial scope and contours) specifically by its marine economic activities (including development of modern port, logistics and industrial complexes [10, p.55]).

A striking example of the renovation of the coastal zone, its “compressing” and “expansion” (as well as the overall “coastal factor” in the social and economic development), is Kingisepp District of Leningrad Oblast. Here, a major project of the Ust-Luga sea port has been successfully implemented for already more than two decades. With the growth of the port and industrial activity and developing of the necessary infrastructure, it provides an increasing impact on theeconomic and residential architectonics of the territory.

The port of Ust-Luga as the “pole” of the socio-economic activity in water and on land

Construction of the sea port of Ust-Luga is carried out in accordance with the decree of the Government of the Russian Federation dated April 28, 1993 #728-r with the aim to create powerful, high-performance complexes for handling bulk to large vessels with the carrying capacity of over 30 thousand tonnes. The port was kind of an “answer” of Russia to the growing geopolitical and geo-economic risks from transit countries (first of all, from the Baltic States). At the same time its construction was a logical step in the development of the north-west (Baltic) transport communication corridor of Russia and in the reconstruction (expansion on a new site) of the Saint-Petersburg sea transport hub.

Unlike the old sea ports – Saint-Petersburg, Novorossiysk, Rotterdam, Antwerp, Hamburg, Le Havre and others, Ust-Luga was originally designed as «greenfield». This means that it was designed as a new project from scratch in a new place, which determines not only its high-tech capabilities, but also opportunities for further expansion of transport and logistics activities and, which is even more important (also due to the potential impact on the surrounding areas), opportunities for the development of the port industry. This project is a good example of the successful practical implementation of the Russian geo-economic strategy by the State and its business in the very complicated geo-economic, economic, financial and institutional conditions. German researcher Hans Kundnani, when discussing such behavior of states (in his studies – Germany), interprets it as a “geoeconomically active state using its geoeconomic power” [11].

Figure 1

Turnover growth dynamics, 2003-2014 (tonnes)

Compiled based on [12]

Currently, the port of Ust-Luga (with a turnover of 75.7 million tonnes in 2014 – Fig. 1) is the largest port not only in the region (to put this in perspective, the port of Saint Petersburg has a turnover of about 58 million tonnes, oil loading port Primorsk – up to 75 million tonnes), but also in the entire Baltic Sea, being second in the whole country only to the sea port of Novorossiysk. Developing on a single site, the port of Ust-Luga is in fact an established transportation and logistics cluster, uniting 15 independent terminals:

“Rosterminalugol” JSC (employing 308 people; overload of Kuzbass coal for export with the design capacity of 4 million tonnes of coal per year; by August 2015 it has handled almost 10 million tonnes);
“Universal Handling Facility” LLC (design capacity – 3 million tonnes; the terminal specializes in receiving, storage and shipment for export (import) of general and bulk cargo, including – cast iron ingots, coal, nonferrous metals, bulk goods);
“European sulfur terminal” JSC (design capacity – 9 million tonnes per year; sulfur comes by rail from Orenburg and Astrakhan);
“Baltic fertilizer terminal” LLC(Transshipment of general cargo and fertilizers with the capacity of over 5 million tonnes);
“Ust-Luga Oil” JSC (employing 600 people; the design capacity – 30 million tonnes of oil products per year, of which 20 million tonnes – dark oil products and 10 million tonnes – light petroleum products; the tank farm provides storage for 960000 m³ of petroleum products; the terminal performs transshipment of oil products from companies of the following cities and towns: Kirishi, Yaroslavl, Surgut, Ryazan, Nizhnevartovsk, Orenburg, Saratov, Samara, Syzran, Achinsk, Kazan and Pavlodar);
“Spetsmornefteport” LLC (LLC “Transneft – Port of Ust-Luga” is focused on receiving of oil from the main oil pipeline, storage and shipping of oil into tankers in the interest of oil companies of the Russian Federation and is aimed at ensuring a continuous process of transfer of oil for export; the tank farm of Ust-Luga is an endpoint of the “Baltic Pipeline System – 2″ (BPS-2));
“Neva Pipeline Company” LLC (provides handling of up to 30 million tonnes of Russian oil for export);

8. “Commercial sea port Ust-Luga” JSC (Multipurpose Transshipment Complex MTC Yug-2 is designed to handle a wide range of goods: new imported cars, large rolling machinery, containers, project and general cargos, including military equipment for export; shipment of cars from the terminal is carried out by car and rail);

9. North-Western Basin Branch of the Federal State Unitary Enterprise “Rosmorport” (servicing terminal for the port activity);

“Ust-Luga Container Terminal” JSC (the first deep-water container terminal in north-west Russia; with its full development it will become the largest and most technologically advanced Russian terminal with a depth of up to 16 m at berth and a carrying capacity of 2.6 million TEU per year; currently the volume of transshipment totals 440 thousand TEU[1]);
“Sibur-Portenergo” LLC (subsidiary of “SIBUR Holding” JSC, managing a complex for transshipment of up to 1.5 million tonnes of liquefied petroleum gas (LPG) per year and up to 2.5 million tonnes of light oil products per year in the commercial sea port of Ust-Luga);
“NOVATEK Ust-Luga” LLC (complex for fractionation and transshipment of stable gas condensate; enables processing of stable gas condensate in the light and heavy naphtha, kerosene, diesel fractions and fuel oil, and shipping of finished products for export by sea; capacity of the complex is 6 million tonnes of raw materials per year);

13. Forest Terminal “Factor” JSC (has a timber transshipment capacity of about 290 thousand m³/tonnes with the prospect of handling pallets up to 400 thousand tonnes per year);

“Terminal New Haven” LLC (the terminal is designed to receive Ro-Ro and general cargos; the terminal capacity allows storage of up to 10,000 cars at the same time with the ability of loading up to 240 car haulers per day);

15. “SmartBalk Terminal” LLC (a joint venture of “FosAgro” JSC and “Ultramar” LLC, stevedoring and terminal service company for transshipment of mineral fertilizers in the port of Ust-Luga. The freight turnover is 3 million tonnes of phosphate fertilizers per year).

Additionally, the “Baltic ferry” project has been launched in Ust-Luga. This is a railway-car ferry line Ust-Luga – Baltiysk – Sassnitz (Germany). It is important to emphasize that this ferry crossing, while providing stable sea links with the Kaliningrad Region, also becomes the basis for the development of the cross-border transport and logistics cluster on the shores of the Baltic Sea, which is very important for Russia. In particular, at a meeting of the Governor of the Leningrad Region A. Drozdenko with the Head of Mecklenburg-Western Pomerania E. Sellering in June 2015 it was decided to set up a logistics center in the port of Sassnitz-Mukran (Germany).

Currently, there are three vessels operating on the ferry line Ust-Luga – Baltiysk – Ust-Luga. They are owned by subsidiaries of the Russian Railways and make 7-8 voyages per month. Over the entire period of the functioning of the ferry line Ust-Luga – Sassnitz there have been transported about 254 thousand tonnes of cargo, including 861 units of vehicles and 4171 carriages. According to experts [13], in the next 15 years many countries, including France, Denmark, the Netherlands, Belgium and Austria, will become interested in this ferry crossing, as already now there is reciprocal cargo traffic with Russia with the volume of about 20 million tonnes.

With the growth of its transport and logistics potential, the port of Ust-Luga is becoming an increasingly attractive platform for the implementation of major industrial projects. First of all, this involves localization of the gas- and petrochemical cluster in the port area with further intensification of specialization and cooperation and with the growth of the added value of products. It is significant that this is not for the first time that petrochemical and gas chemical industry becomes the driver of a port and industrial complex. For example, Houston (USA) is one of the largest manufacturing centers in the world for petrochemical industry. Houston has more than 3,700 organizations working in petrochemistry, as well as 9 refineries, processing 2.3 million barrels. In total, Houston has 719 enterprises producing chemicals and plastics [14].

The decision of “Gazprom” JSC to build the “Baltic LNG plant” is strategically important for the creation of the gas and petrochemical cluster. The project has been preliminarily approved in the following format: two lines of 5 million tonnes of LNG per year each with a possibility to build a third one. The in-service date of both lines is the fourth quarter of 2020. The volume of investments was estimated at 10 billion USD. Gazprom’s partners can become the Anglo-Dutch «Shell» or Japanese «Mitsui», «Mitsubishi», «JGC Corporation», which possess the necessary licenses and gas liquefaction technologies. All of them are already involved in Russian LNG projects. A strategic partner will get a share of up to 49%. The plant will be located in Ust-Luga, which will require a gas pipeline of 360 km from Volkhov with the capacity of 25 billion m³. It is expected that the construction phase will provide about 4,000 job vacancies [15].

As part of the development of the industrial zone “Ust-Luga”, there has started development of the project for production of ammonia and carbamide – “Baltic carbamide plant” LLC (near the village of Vistino) of the group of companies “East” with the capacity of more than 1 million tonnes of carbamide. The estimated volume of investments exceeds 1.5 billion USD. The construction of the plant will create 780 jobs in the area. To implement this project, the company rents an area of 160 hectares in the eastern part of the industrial zone “Ust-Luga”. The future plant of the “East” group for production of granulated carbamide will be located here. Thesiteareawillbeabout 55 hectares. The project also involves creation of a sea terminal with the length of the quay wall of 300 meters and a depth of 16 m (the transport corridor from the plant is 8 km). If necessary, it will also involve construction of its own branch of a gas offtake from the existing gas pipeline “Kohtla-Järve – Leningrad”, the reconstruction of which is incorporated in the plans of “Gazprom”. The terminal complex and a carbamide plant will be connected by a corridor of communications [16]. An ammonia plant for 700 thousand tonnes,ownedby”EvroChim” JSC,should become an important part of the port and industrial complex.

The already built and planned port terminals, as well as production capacities near the port designed for construction are a strong “pole” of the localized marine economic activity. Thus, they foster renovation of the coastal zone, expanding the impact of the “coastal factor” virtually over the entire territory of Kingisepp District, which becomes, in this regard, not only formally, but also actually (structurally, due to the configuration of centers and flows) a coastal area.

The main local socio-economic effects of the “compressing” and “expansion” of the coastal zone

The variety of regions and territories determines various models of social and economic development. Situation factors significantly adjust such development and expand the “corridor” of opportunities. At the same time, the economic, geographical and geo-economic situation is no longer a “destiny”: it can and must be adjusted (for more details please refer to [17]). The near-border and seaside location can change most successfully, primarily due to the development of cross-border infrastructure (including international automobile border-crossing points, warehouse and logistics infrastructure, commercial areas), as well as port and industrial facilities.

As O.A. Kuznetsova rightly notices, “an economic and geographic position can be assessed as favorable in case of vicinity to major economic centers and large sales markets; in case of a seaside location (maritime transport remains the cheapest, therefore sea ports are actively developing due to the port activity itself as well as due to production facilities associated with imported components and/or delivery of products for export); in case of a near-border location in proximity to economically developed countries (which become sources of investments) [18, p. 128]. It is also worth referring to the opinion of S.S. Artobolevsky, who notes that in modern Russia “one can distinguish three types of areas of growth, formed under the influence of globalization, agglomeration and resource factors: the largest urban agglomerations; export and resource regions; port near-border regions on the main routes of foreign trade “([19], p. 82). Indeed, the territory under investigation falls under the strong influence of Saint-Petersburg; the western part of the area, along with the district center, is part of the Greater Saint-Petersburg (with a population of about 6.5 million people). In addition, the near-border position provides promising opportunities for the development of global economic cooperation. However, under the current circumstances of the sanctions confrontation, many near-border and bilateral projects with Estonia and the EU in general have been frozen. In this situation, the use of the potential of the seaside position, in the first place for its port and economic and port and industrial activities, is undoubtedly a dominant factor in the development of Kingisepp District.

With the focus on Kingisepp District, it should be emphasized that the development of the port of Ust-Luga was accompanied by multidimensional impact on the entire local social and economic system. Just during the period of 2012-2014, the volume of goods and services, produced on the territory of the district, almost tripled. The unemployment rate is steadily declining and now is less than 1%. The average salary in the district in 2014 was 39,500 RUR – this holds the fourth place among the municipalities of the Leningrad Region [20]. To put this into perspective, the average monthly wage in the district in 2010 increased by 19% and nominally amounted to 27,701 RUR in 2011 [21]. At the same time, in 2014,the average monthly wageof employees in largeand medium-sizeprocessing industries on the territory of the districtcompared to 2013increased by10.0%, reaching 40,979 RUR. In largeand medium-sizeenterprises ofall forms of ownership the wage growthwas 8.4%; the average monthly wagefor2014 is 40,564 RUR. Wagesabove averagein Kingisepp District are found in organizationsinvolved in construction(139.7% compared to the average level forthe district) and in transport and communications services(157.7%) [20-21].

The most striking positive social and economic situation in the district is reflected by its considerable migration attractiveness (Table 1).

Table 1

Population migration in Kingisepp District and in certain areas of Leningrad Oblast (2011-2014) *

District	District population in 2011 (thousand people)	Indicator (people)	2011	2012	2013	2014
Lomonosov District	64689	Arrived	1398	1924	2658	2480
		Left	1230	1803	2196	2621
		Change	168	121	462	-141
Luzhsky District	78284	Arrived	2264	2791	2761	3139
		Left	1771	2547	2925	2658
		Change	493	244	-164	481
Kingisepp District	78329	Arrived	2808	3032	3574	3746
		Left	1446	2471	2705	3405
		Change	1362	561	869	341
Tosnensky District	123188	Arrived	6023	7758	7825	8359
		Left	2307	3795	5432	6594
		Change	3716	3963	2393	1765
Gatchinsky District	233682	Arrived	9589	11933	12660	13236
		Left	4280	6823	8516	10021
		Change	5309	5110	4144	3215
Vsevolozhsky District	261145	Arrived	11244	16911	21627	25072
		Left	4855	8002	9619	13406
		Change	6389	8909	12008	11666

*Compiled based on [22]

Kingisepp District is a part of the so-called “belt” of four districts, located to the south of Saint-Petersburg (Fig. 2), which is characterized not only by a significant migration increase, but also by large-scale modernization of the basic infrastructure [20-22].

Figure 2

Compiled based on [22]

(Награфике):

Structure of the migration balance in Leningrad Oblast in 2013

Vyborgsky District

Priozersky District

Vsevolozhsky District

Kingisepp District

Slanzevsky District

Luzhsky District

Volosovsky District

Sosnovy Bor

Lomonosovsky District

Gatchinsky District

Tosnensky District

Kirovsky District

Kirishsky District

Volkhovsky District

Tikhvinsky District

Boksitogorsky District

Lodeinopolsky District

Podporozhsky District

General migration balance

Migration structure of Kingisepp District:

International

Interregional

Intraregional

Therefore, influence of the port is most significantly reflected in social indicators of the development of the territory: unemployment rate, wages (especially in construction and transport), positive migration balance. However, it should be noted that the port turnover, which has substantially increased in recent years, still poorly corresponds with the general demographic and economic characteristics of Kingisepp District, which is quite noticeable when compared to some foreign “near-port” territories (Table 2).

Table 2

Social and economic potential of Kingisepp district compared to some similar territories*

Territory	Population, people, 2015	Area, km²	Population density, person per km²	GDP per person (euro)	GRP, mln euro, 2012	Main port
Kingisepp District (Russian Federation)	79647	2907	27,20	7423	810	Ust-Luga(78 mln tonnes)
Kymenlaakso (Finland)	180900	5148	35,24	32095	5806	Kotka-Hamina (13,41 mln tonnes)
Ostvorpommern (Germany)	105036	1899	55,00	16975	1783	Rostock(21,1 mln tonnes)
Klaipeda District (Lithuania)	333000	5209	63,93	12613	4200	Klaipeda(35,2 mln tonnes)
Kurzeme (Latvia)	301621	13596	22,20	6153	1856	Ventspils(30,4 mln tonnes)

* compiled by the authors based on [12, 23]

The “coastal factor”, implemented due to the development of the port, also impacted the basic center-peripheral architecture of the territory. The emergence of a new “point” of the social and economic growth in the ex-periphery of the municipality (degradation of fisheries, as well as border and environmental constraints, complemented by a lack of transport and other infrastructure, which was overcome only due to the construction of the port, secured such a status for coastal areas) determined the socioeconomic bipolarity of the area. Meanwhile, its traditional center (Kingisepp) became increasingly involved in ensuring implementation of the transport and logistics Ust-Luga project, acquiring features of a “coastal” settlement.

It is indicative that at an early stage of the development of the transport and logistics project it was believed that it is the seaside village of Ust-Luga that in the long run will become the economic center of the area and will draw investment and human resources from Kingisepp. Such a vision was partly caused by the partial degradation of the town-forming basis of the district center (its largest enterprise “Phosphorit” was downsized), which occurred in 2003-2008.

However, as Kingisepp was integrating into an expanding coastal zone, it managed to keep its position. The fact is that the port of Ust-Luga currently employs 3500 – 4000 people; at the same time, there are no more than 3000 people living in the nearest village of the same name (according to the situation in 2015). The vast majority of those employed in the port, in the end, is settled primarily in the district center, where there has been extensive residential construction in the recent years (Residential Complex “Karat”, Residential Complex “Yamburg-City”, Residential Complex “Yamburg”, Residential Complex “Prestige”, residence on Krikkovskoe shosse, microdistrict #6). It is also symptomatic that the district, by the volume of retail space, exceeds the standards already by 4 times. It is exactly Kingisepp where large national retailers come to open their stores.

The settlement of Ust-Luga (located only 12 km away from the port terminals) has also a town-planning perspective. Despite a persisting lack of infrastructure (problems with water supply, gas supply, sewage systems, lack of modern socio-cultural and shopping facilities, etc.), construction of modern residential areas is under way. Such residential areas are designed primarily for port workers.

Implementation of the largest transport and logistics project and an adopted strategy for the development of the port industry have more clearly highlighted the general shortage of land resources (typical of the area with its large surface of wetlands), as well as a conflict of interest among various alternative directions of land use (industrial, transport and storage, residential, agricultural, recreational, and environmental).

Construction of the port of Ust-Luga caused significant imbalances on the local labor market, highlighted a lack of the necessary human capacity (including specialists specifically for work in the port – dock workers, repairmen, installers, riggers, etc.). Currently, Kingisepp District has about 1500 job vacancies (about 10% of those active in the economic activity). Misalignment in the labor market also affects the level of the average salary in the region, which (in certain specialties) can reach 60,000 RUR. At the same time, the level of wages in the port is significantly higher than the average wage in the area (on average, it is higher by 20-100%, depending on the nature of labor and qualification). The current situation led to the opening of a Kingisepp branch of the State Enterprise “Training center of Leningrad Oblast”, aimed at preparation of dock workers, sling operators, crane operators, engine drivers, technicians, boiler facility operators and of other technical professions.

Prospects of transport and logistics and port and industrial activity in Kingisepp District in the new geoeconomic reality

At present, our country is fully experiencing the effects of the destabilization of the geopolitical situation in Eurasia, the consequences of illegal sanctions adopted by the political leadership of the United States, the European Union and several other countries, as well as sharp decline in world prices for major export commodities from Russia – oil and natural gas, which resulted in a nearly twofold decrease in the national currency rate. The geopolitical and geoeconomic context leads to implementation of programs of forced import substitution and enhancement of domestic production in the Russian Federation. This might suggest recalling an interview of London School of Economics Professor Carlota Perez about Russia: “The key issue of the current agenda is what to produce? We have three options: industries of the current technological structure, for example, information and communication technologies; industries of the future technological wave (bio-, nano-, “green” technologies); and finally, industries of former technological structures – from services to agriculture. Which one to choose? The correct answer is that you have to select all of these three options at once. Youshoulddoeverything!” (Cited from [24]).

In the 2000s, signs of new industrialization were seen in the Saint-Petersburg coastal region, including Saint-Petersburg and the western part of Leningrad Oblast. Up until 2013-2014, it was carried out mainly by foreign companies, which were bringing their production in the region. This production was focused on the growing domestic demand. However, due to the significant reduction in effective demand and a high dollar exchange rate, enterprises of the northwest (primarily, those that are the “closest” to the major ports) gained an additional competitive advantage in foreign markets, their products became relatively cheaper. It is no coincidence that some car manufacturers, such as, for example, “Hyundai Manufacturing RUS”, begin to look closely at external markets. In particular, they launched production of “Hyundai Solaris” cars for Egypt and Lebanon, which soon will be exported. By the end of 2015, more than four thousand customized “Hyundai Solaris” cars are planned to be shipped to Egypt and Lebanon [25]. Chances are high that the port of Ust-Luga will handle these shipments.

Many other manufacturers of Saint-Petersburg and Leningrad Oblast are also expanding their export potential.

In 2014, export earnings of the company “Nokian Tyres” LLC, which holds the 13th place among the leading exporters of the Northwestern Federal District, amounted to 690 million USD, which showed an increase of 13% in comparison to 2013. In 2014, “Hyundai Manufacturing RUS” LLC for the first time achieved its export earnings of 650 million USD, and “Atomproekt” JSC (“Rosatom” SC) increased its indicators up to 470 million USD [26]. In 2015, the “Siemens Gas Turbine Technologies” company (SGTT) launched its production in the settlement of Gorelovo. The company immediately announced its export orientation and a desire to ship their products through Ust-Luga.

The military-industrial export of Russia is growing. In 2014, it amounted to 15 billion USD, which showed an increase by 45% compared to 2010. The total order portfolio for the end of 2014 was 49 billion USD [27]. The share of the military exports in the total exports of the Russian Federation in 2014 was 3% (in 2010 – 2.6%). The port of Ust-Luga also has a priority position for its support.

It should be noted that the prospects for expanding industrial exports of Russia in general and of the Saint-Petersburg coastal zone in particular depend on bringing industrial production “closer” to the already established port infrastructure. The latter, at the same time, will become significantly more attractive not only for Russian investors, but also for foreign ones. The appearance of the first foreign state fund of the United Arab Emirates «Mubadala Development» [28] in the port of Ust-Luga could mark a new stage in the development of the whole port and logistics complex. This could create an example for other companies and funds of the Middle East and South Eastern Asia, that are able to invest in projects on the territory of the Saint-Petersburg coastal zone.

Other perspectives are associated with the positioning of Kingisepp District in the global production, information and communication links. First of all, this concerns the Trans-Eurasian Corridor “One Belt, One Road” (“New Silk Road”), which aims to connect China and Europe – inter alia, via Russia. The route of the northern railway corridor goes from Western China to Europe via Kazakhstan and Russia to the Baltic Sea; from there its western branch will go via Belarus and via Poland to Germany and the Netherlands. It is evident that the Russian ports on the Gulf of Finland will be connected to this global artery. Under these circumstances, the role of the coastal zone in the territorial socio-economic development will increase both at the microlevel (separate urban settlements, administrative districts) and at the mesolevel. The range of various effects of marine economic activity will expand even further.

About the authors:

A.G. Druzhinin – Doctor of Geography, Professor, Director of the Northern-Caucasian Research Institute of Economic and Social Problems of the South Federal University.

S.S. Lachininskii – PhD in Geography, Research Fellow at the Laboratory of Comprehensive Studies of the Spatial Development of the regions, Institute of Problems of Regional Economics of the RAS; Assistant Professor of the Department of Economic and Social Geography, Saint-Petersburg State University.

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Doklad glavy administracii MO «Kingiseppskij rajon» V.Je. Geshele na soveshhanii po itogam social’no-jekonomicheskogo razvitija Kingiseppskogo rajona v 2014 g. i zadacham na 2015 g. URL:// http://www.kingisepplo.ru/documents/ dokladi_glavi.htm
Doklad glavy administracii MO «Kingiseppskij municipal’nyj rajon» na soveshhanii po itogam social’no-jekonomicheskogo razvitija v 2011 g. i zadacham na 2012 g. URL://www.kingisepplo.ru/documents/dokladi_glavi2012.htm
Bazy dannyh municipal’nyh obrazovanij-2013. St. sbornik. – M.: Goskomstat Rossii – Rosstat, 2014 g.База Евростата-2011-2014 гг. URL: // ec.europa.eu/eurostat/web/regions /data/database
Эксперт №25 (856) от 21.06.2013, URL://expert.ru/expert/2013/25 /konsensus-ne-dostignut/ (Accessed on: 28.08.2015 г.)
Rossijskaja gazeta. URL://www.rg.ru/2015/08/25/hyundai-site.html (Accessed on: 28.08.2015 г.).
URL://expert.ru/ratings/top-50-krupnejshih-eksporterov-szfo-po-itogam-2014-goda-mln-rub-mln-dollx-eksportnaya-vyiruchka_xx/ (Accessed on: 28.08.2015 г.)
Federal’naja sluzhba po voenno-tehnicheskomu sotrudnichestvu RF, OAO «Rosoboronjeksport»
URL://portnews.ru/news/205305 /( Accessed on: 31.08.2015 г.)

[1]According to our calculations, in accordance with the O. Merck Index (1 TEU, which equals 28200 kg in the metric system, generates 2538 USD of the added value in services), therefore the Ust-Luga Container Terminal should generate about 1.12 billion USD in the port per year.

The crisis of the European integration project: lessons for everyone and for Baltic countries

Admin — Thu, 10 Sep 2015 12:34:40 +0000

Mezhevich Nikolay Maratovich — Doctor of Economic Sciences, Professor of the School of International Relations, Head of the International Master’s Program “Baltic and Nordic Studies” at the Saint-Petersburg State University, Chief Researcher at the Institute of the Problems of the Regional Economy of the Russian Academy of Sciences, Saint-Petersburg.

Sazanovich Liudmila Sergeevna — PhD student of School of International Relations Saint-Petersburg State University, Saint-Petersburg.

Currently, many researchers have noted that the European Union is in crisis. Obviously, at this stage, the original conception of the founders of the EU is no longer relevant: the rapid expansion of the borders, European integration, causing internal political and economic problems, security problems and many other undermine the stability of the Union. The aim of the article is an attempt to analyze the negative factors, influencing the development of the EU, as well as to suggest possible scenarios of its further development. The relevance of this study lies mainly in the fact that it combines the study of political, economic, social and security aspects. To achieve the objectives of the study one has chosen a systematic approach to the study of international relations. It is important to note that for further successful development and existence of the EU it is necessary to resort action in the present time, primarily to stabilize relations with Russia.

The European Union is going through a difficult time. Trying to forestall instability on its borders, it becomes a source of turbulence. Less flexible and slower, the EU is increasing the apparatus of bureaucratic pressure, trying to silence the growing dissatisfaction. As if caught in the trap of “bad infinity”, the European Union can not find a solution to internal and external problems, growing like a snowball.

The famous British historian Eric Hobsbawm, with reason, “cut” the twentieth century by 23 years. From his opinion, it began in 1914 with World War I and ended in 1991 after the collapse of USSR.¹ This approach is debatable but understandable. The significance of both 1914 and 1991 for the European, and world history is obvious.

The beginning of the European integration is now described in the textbooks – The Schuman Declaration, who on May 9, 1950, being the French Minister of Foreign Affairs at that time , addressed the Government of Germany with a proposal to create a French-German Coal and Steel Community. The importance of the Schuman Declaration rapidly emerged beyond the bilateral relations between France and Germany. The concept of “general framework of economic development, which would be the first step towards the European federation” had such potential that it was enough for the rest of the policies and practices of the European Economic Community – the European Union up to the end of the XX century. Approaches of Schuman – Monnet were simple but revolutionary at that time. Overcoming the old tradition of nationalism by creating a united Europe on the principles of democracy, economic prosperity and social consensus, peace and equal cooperation, the architects of the EU hoped for a long and successful life of the European project in the XX century. The twentieth century of European integration began in 1950 and ended in the early years of the new century.

It seemed that new XXI century of European integration began in advance with the conclusion of the Treaty on European Union, which was signed on February 7, 1992 in the Dutch city of Maastricht and entered into force on 1 November 1993, but this period turned to be surprisingly short. Beneath our eyes, in summer 2015 the European integration project suffered tardy resuscitation and … died. It died in the proper sense of the word: the EU died in the form in which it had been planned by Schumann and Monnet. However, the death of the integration project in the post-shumann model does not mean the collapse of the great European idea, and does not necessarily lead to the collapse of the whole Europe. Europe has been and will be, but it will be different. The current model has as much in common with great European ideas as the ideas of utopian socialists in France and UK with the North Korean practice. Why?

The EU Treaty proclaimed as the key objective the creation of Economic and Monetary Union and the introduction of the single European currency, which could potentially bring economic integration to a new level. However, at the same time it launched a campaign of large-scale expansion of the European Union. In 1993-2007 the number of EU members doubled. Only the entry of Finland, Sweden and Austria may be regarded as a simple quantitative increase. Extensions in 2004 and 2007 significantly worsened the economic performance of the EU. At the same time Greece, Portugal and Spain faced the problem of financial equilibrium. “Because of the scale of the expansion the European Union faced the problem of “assimilation” and therefore became more focused on its own challenges”.² A new class of euro wanderers-bureaucrats, even without reading M. Djilas and M. Voslensky, formed precisely in line with their expectations, but not on the Yugoslavian or Soviet base, but in the heart of Europe: Brussels, Strasbourg, Frankfurt am Main, Mons. For them progress on the European career was more important than issues of national economy and analysis of the integration problems. We are seeing the result: the process of European integration has created a supranational bureaucratic monster that subjugated not only local government circles, but also the idea of integration itself. Now the result has gone to the second plan, the most important things are process, operation, reproduction, “sealed” in a closed-loop circulation of bureaucracy.

The more time passes from 2004, the more evidence there is that it was the end of the first era of European integration and the beginning of the second. The first, in fact, was the Western European and successful, the second, with a certain degree of conventionality can be called eastern European and its success is a big question. EU-12 (as of 1995 EU-15) and EU-27 are qualitatively different integration associations. Despite the validity of the new strategic program of expansion and deepening of integration, adopted in the early 1990s, the scale of the consequences of this decision and qualitative changes in the EU were not interpreted as they deserved. They were underestimated, probably for the reason that the political “summit” of EU member states, predominated complete confidence in the value of the European project and the ultimate success.

EU, really achieved a high level of cohesion, could have begun the optimization of achieved, but instead became interested in the policy of expansion, the neighborhood and so on. It had excessively bloated ambitions and virtually no funds for large-scale geopolitical projects, and certainly no adequate political analysis. The fact that the Baltic States were appointed as the major European “progressors” in the framework of “Eastern Partnership” did not require any additional comments. Based on the logic “if the system works, why it should be changed”, they wanted to integrate Ukraine in the same way as Estonia. However, local Ukrainian specificity was not taken into account.

And there is specificity. The economic potential of the Soviet Ukraine was second only to four big European countries. But today’s GDP of Kharkov region, for example, is more than Estonia’s GDP (of course, the earned part, not what is sent from Brussels).

Awareness of the problems in assessing the validity of reality happens in Europe after a long delay. The quote from the analytical report of the Affairs Committee of the House of Lords: “EU and Russia: before and after the Ukrainian crisis” (2015): “The Committee believes that the European Union and therefore Britain are guilty, that they have entered into this crisis, without being aware of what is happening, like a sleepwalker. Lack of strong analytical resources, both in the UK and the EU, in fact has led to a catastrophic misunderstanding of climate on the eve of the crisis”.³

However, the main problem is not the analysis, but that the West, considering itself a global center, strives to new peripheral space, even, in fact, without its sole purpose – to find new markets for its products, to ensure the influx of cheap labour and access to other resources. Along the way, it solves the problem of preserving the attractiveness of the EU as an integration project – it is important in terms of intra-European political process, so it uses any means. Thus, the problem lies not only in adequate quality of evaluation of integration. An ambitious program of “Eastern Partnership”, which implies a de facto extension of the EU’s borders to the Caspian Sea, is not only dead, but did everything to ruin the whole working model of European integration. “The fear and anger of the fathers of EU diplomacy, that Russia is once again becoming too powerful and rich, and therefore dangerous for Europe, led to a fatal error: “Eastern Partnership” from the original project of European integration of post-Soviet space, has become a platform for attempts of political and economic isolation of Russia. It eventually provoked an acute crisis in Ukraine. So current problems of the EU are to a large extent the work of its own hands.⁴

Problems of European integration are evident today not only to Europeans, but also for the whole world. The former model of European economic and political integration has exhausted itself. Based on modern Greek history, Aeschylus, Aristophanes and Euripides could have created decent work – a comedy, a tragedy and a drama. What looked like a triumph of the EU, caused mixed consequences and obvious failures, and the expansion speed to the new frontiers of European integration seemed to be haste. Of course, the external factor – global financial crisis – has played a huge role in the current misadventures of EU: “Strategies, built on ideas from the past, including problem-solving through the manipulation of competitive exchange rates, are failing”.⁵

However, the first difficulties arose prior to the crisis, and the root of this “emergency” state of the EU should be found inside it. United Europe is developing much slower than the global economy. In 2015 and in the coming years, the economy of European macro-region will be in a very difficult situation. Europe cannot respond quickly to the changes. Despite the diversity of the structures of European economies, the industrial sector in Europe in the whole is stagnant, so the potential for a return to a sustainable growth is limited. Although the EU remains a key industrial entity, since 2008 the industry cut 3 million jobs, while industrial production fell by 10%.⁶At the end of 2014 the total economy of the 18 countries using euro, rose only by 0.9%.⁷

In 2015, economic recovery of the European Union will be even more uncertain. The weakness of demand is a chronic disease. Germany will remain the driving force of the European economy, but it will not have such power, as two years ago. In France, economic growth will be around 0.7%. Italy must overcome the remains of the crisis, but the euro zone as a whole is unlikely to reach more than 1% growth and will not significantly change the official unemployment rate, which now stands at 11.7%.⁸

The head of the European Central Bank Mario Draghi stated, that in 2015 the European Union can face the threat of deflation and the risk to maintain low rates of economic growth, but the term “crisis”, according to him, does not currently fit to describe the situation in the economies of eurozone.⁹ It was said in January, when all economic parameters were approximately the same as in June. So now, in autumn 2015, is it also not a “crisis”? According to forecasts, recently published by IMF, the growth rates in 2015-2016 in the EU will not exceed 1.5-1.6% (assuming that the crisis in relations with Greece will be settled). In the developed world as a whole, they will increase from the current 1.8% to 2.4%.¹⁰ Thus, if the situation in the global economy is not ideal, the European is just bad. And M. Draghi’s comment about “no crisis” in this sense, is comparable only to that of the known expression of the hanged and the rope.

Constraining factors also lie outside the economy – in political and socio-cultural spheres. Historical memory, cultural heritage of Antiquity and Christianity, suffered by Europe losses in two world wars influenced the formation of European values to a large extent. It should be noted again: it is not a crisis of the European idea, it is a crisis of specific practice of its implementation in the political sphere. Not the dip of the European Constitution led to the growth of euroscepticism, but euroscepticism, based on an understanding of the ineffectiveness of post-Maastricht model of EU led to the failure of the European Constitution. Errors in internal and external relations, economic failures, consequences of arrogant decisions taken on the basis of geopolitical, “value” and not pragmatic reasons: “The EU from a sample of reasonable foreseeability became, in fact, one of the most obvious sources of global uncertainty”.¹¹ Therefore the destruction of the current model of European integration is inevitable.

The report of Notre Europe, dedicated to the restructuring of the EU-USA relationship, written in 2010, noted: “In the absence of a common foreign policy on major strategic issues, the EU is unable to influence events beyond its borders”.¹² Among the authors of the diagnosis are P. Prodi, G.Verhofstadt, Buzek, Y. Fisher and others. Now, in autumn 2015, it should be clarified, if the EU is able to set the agenda in its borders.

At present time there is a discussion about the so-called “realistic European force”, partly written with the American approach to “smart power”. As in the American case, we are talking about a combination of “hard” and “soft security”. However, it is not difficult to notice fundamental differences of the European prerequisite from US realities. Important, however, is not adequate theory, but realistic practice. “American leadership after the Cold War and NATO’s eastward expansion hoped that the Old World would be able to solve at least its own problems, but time after time it turns out – whether Balkans, Middle East, or single currency – that Europe is not in a position to do it”.¹³ But could it be otherwise?

In Europe there can be no effective «hard security». Is it possible to build an independent foreign policy based on borrowed security from overseas? One should recall the article of the American political scientist Robert Kagan “Power and Weakness,” published in 2002.¹⁴ His idea is the following: the US created hothouse conditions for the European Union. America carries on its shoulders the burden of responsibility, and the EU is engaged in chatter and mutual persuasion. Counting on the law, it actually mired in complacency and conformism. Personal and social status of R. Kagan obliges us to be attentive to his estimates.

Patterns of American neocons, unfortunately, are demanded by the European Union. Robert Cooper, director general of the Department for External and Politico-Military Affairs of the Council of the EU, said: “NATO and the US’ military presence in Europe gave confidence that the US would protect them from the Soviet Union. (…) NATO summed everyone to voluntary dependence on the military power of the United States. NATO managed to establish a system of collective security in the best sense of the word – security requirement, which for centuries separated Europe, now has united it. So it’s how the European Union appeared.¹⁵ He calls NATO as the defense against chaos as the key element of “post-balanced” Euro-Atlantic security system (after the reunification of Germany, the end of the Cold War and the collapse of the Soviet Union). “And the most logical way to end the chaos is the colonization”.¹⁶ Economic toolkit of the EU is derived from military might of NATO forces, controlled by the United States and stationed in Europe. Not Coal and Steel Union, but namely NATO is the backbone of the modern European Union. This is another symptom, confirming not only inevitable death of the European project in the current form¹⁷, but also the impossibility of joining the Eurasian and European projects in modern conditions.

Membership in the European Union is no longer the final aim of integration aspirations of a country to the West, but only an intermediate step on its way to the main goal – NATO membership. The signing by Ukraine, Georgia and Moldova Association Agreements with the European Union was presented as a purely economic event, but in fact turned out to be one of the hidden ways of NATO expansion: the retraction of the countries in the military-political cooperation with NATO is formally done through rapprochement with the EU.¹⁸

This circumstance is one of the main obstacles to expand the process of economic cooperation between Russia and the EU at full – in this tango, apparently, there would be the third party for long. This third is the United States, and through it – NATO.

The assessment of the impact of NATO in the system of foreign policy-making in Europe should be based on the principle of actually used three keys, each of which is sufficient to achieve a decisive influence on the foreign policy of a European state. The first key is direct control over the foreign policy of the state. It works in case of a country within the block, and in relations with formally neutral states outside NATO but participating in affiliate programs of the Alliance. The second key is control through the structure of the NATO. The third key is cooperation through the coordination structures of the European Union focused on foreign policy and defense decisions. The combination of these keys provides the US and NATO control over not only military, but also economic projects in Europe.

One should note the contradiction of political and economic goals of the United States towards Europe. In economic terms, Europe would be consistent with Canada’s status and the nature of economic growth in Europe in such case would depend on the United States to the same extent as it is happening in contemporary Canada. However, from the standpoint of policy, the United States complies with the rules of the game last few decades: Europe pretends it has foreign policy and the US continues to manage it.

The United States, who has been perceiving Europe only as junior partner for a long time, doesn’t have any illusions about the real situation in the EU. As an example, one can refer to a publication in the prestigious American edition «Foreign policy», where the author proves the existence of five problems of the European Union: 1) excessive expansion; 2) collapse of the Soviet empire; 3) euro crisis; 4) deterioration of the situation in the region; 5) sustainable nationalism.¹⁹

Of course, let’s not overlook the fact that the vectors of geopolitical interests of the leading states of the EU are often different. German policy in the Balkans, French in Africa, do not “overlap” with the policies of other European centers of power. In other cases, the apparent intersection could be noted. A classic example is Ukrainian conflict. Plus in the European Union there are neutral (or trying to be) states: Italy, Austria, Finland, and partly Hungary, Slovakia and the Czech Republic, for example. Their voices are quite significant. And a number of new Member States rightly regard foreign policy initiatives of “old” Europe as a threat to subsidies in the address of the European budget.

However, it doesn’t affect general line against Russia and its integration initiatives (other than the “integration of integration” and it is worth recalling the idea of D. Medvedev of a common Euro-Atlantic security system, so categorically rejected by the West). During 2014, EU leaders have repeatedly said they would not change its policy with regard to Russia, instead they planned to change the foreign policy of Russia, even if it affected the economy of Eastern Europe.

In this context, economic suicide of the Baltic states is significant: countries, loudly demanded to “punish Russia,” are suffering now from the sanction war most of all (turnover of the port of Tallinn, “dipped” by 20.7% in the first half of 2015, compared with the same period last year. There are growing problems in Riga and Ventspils. Export to Russia is continuously reducing, Russian tourists are leaving the market of the Baltic states).

Various tools to “punish Russia” can certainly aggravate the efficient development of our country. However, one should keep in mind the warning of two senior experts, recently officials of US State Department: “So far, the West was more aimed at punishing Russia and its leaders … than at solving the problems in the relationship, which brought the parties to a dead end”.²⁰ The practice of realization of the “Eastern Partnership” by West expected work on a well-known principle of “Me – head, you – fool”. Minsk, Yerevan, Baku didn’t agree with this approach. Finally Kiev, put by the European Union in a situation of “either with us or against us”, has been forced to postpone the issue of European integration until 2016. This practice meets huge resistance in Chisinau and Tbilisi. Symptomatic detail: according to the US National Democratic Institute in May 2015 about a third of Georgians supported integration into the Eurasian Union (31%)²¹, in August 2014 the figure was 20%, and in November 2013 – 11 %.

What are the possible scenarios of European integration? The choice is not rich.

1. The destruction of the current model of European integration. The unification of Europe, at least in its current form, cannot give a synergistic effect and is not able to bring it to a new level of global influence, relevant to the existing potential. Economic policy of the EU is a problem which has no practical solutions. Its current model is operating at full capacity.

2. “Cosmetic” repair of the current model of European integration. Reform of European integration, understood as a limitation of spatial expansion, rejection of the expansion of the eurozone at any cost, removing the UK “outside European integration”, establishment of effective cooperation with all economic partners and, above all, with Russia are the minimum key points of the reform today.

List of References:

Hobsbaum E. Epoha krajnostej: Korotkij dvadtcatyj vek (1914—1991). M.: Izdatelstvo Nezavisimaia Gazeta, 2004. 632 s.
Hirdman S. Rol Rossii v Evrope // Moskovskij centr Karnegi. M, 2006. – s.19.
See more: The EU and Russia: before and beyond the crisis in Ukraine / House of Lords, European Union Committee. 6th Report of Session 2014–2015. London, February 2015. URL: www.publications.parliament.uk/pa/ld201415/ldselect/ldeucom/115/115.pdf
Urbanovich Ia. Voinstvennye strahi Vostochnoj Evropy. 03.04.2015. URL: http://ria.ru/analytics/20150403/1056439589.html
Dixon H. How to counter Europe’s rising populism // International New York Times, November 24, 2014. – P. 22.
Alvaru Santush Pereira, Hose Manuel Soria, Korrado Passera, Arno Montebur, Philipp Resler Novaia industrial`naia politika Evropy // «Ekspert», №7 (839), February, 18 2013.
Manukov S. Hermaniia podtianula evropejskuiu ekonomiku / «Expert Online», February, 14 2015. URL: http://expert.ru/2015/02/14/ne-vse-tak-ploho/
Evropa 2015: god neuverennosti http://euroua.com/europe/eu/3557-evropa-2015 02.01.15
Dragi: ekonomiku ES zhdet zatiazhnoj period slabosti. January, 2 2015. URL: http://dv.ee/novosti/2015/01/02/dragi-jekonomiku-es-zhdet-zatjazhnoj-period-slabosti
Jean-Pierre Robin. Le FMI estime l’Europe en voie de guerison // Le Figaro, 15 avril 2015. – p.23.
Lukjanov F. Oborotnaia storona Gretcii / Rossijskaia gazeta. July, 8 2015. URL: http://www.rg.ru/2015/07/07/kolonka.html July, 8 2015.
Reshaping EU-US Relations: a Concept Paper. Reflection Group: Romano Prodi, Guy Verhofstadt (co-chairs), Jerzy Buzek, Etienne Davignon, Jacques Delors, Joschka Fischer, Paavo Lipponen, Tommaso Padoa-Schioppa / Notre Europe, 2010. – p. 12.
Lukjanov F.A. Stabilnost radi vyzhivaniia // Rossiia v globalnoj politike. July, 13 2015. URL: http://www.globalaffairs.ru/redcol/Stabilnost-radi-vyzhivaniya-17579.
Kagan R. Power and Weakness // Policy Review, № 113, 2002.
Cooper R. The European Union and the Habsburg Monarchy // Transit. Europaische Review, 10.12.2012. URL: http://www.eurozine.com/articles/2012-12-10-cooper-en.html
See more: Cooper R. The breaking of nations: order and chaos in the twenty-first century. New York, 2003.
See more: http://www.format-a3.ru/events/event-212/
Ukraina, Gruziia, Moldaviia: put v NATO cherez Evropejskij soiuz. K sammitu NATO v Uelse September, 4-5 2014 goda. Analiticheskij obzor / Centr mezhdunarodnoj zhurnalistiki i issledovanij «Rossiia Segodnia». 2014 g. 74 s.
Stephen M. Walt, Does Europe Have a Future? // Foreign Policy. July 16, 2015. URL: http://foreignpolicy.com/2015/07/16/does-europe-have-a-future-stephen-walt-testimony-house-foreign-affairs-committee/
Charap S., Shapiro D. Kak izbezhat novoj holodnoj vojny // Rossiia v globalnoj politike. October, 14 2014. URL: www.globalaffairs.ru/ukraine_crysis/Kak-izbezhat-novoi-kholodnoi-voiny-17041
Za ES – 68%, NATO – 65%, Evrazijskij Soiuz – 31% – rezultaty oprosa NDI. 11.05.2015. URL: http://www.apsny.ge/2015/soc/1431371449.php\

List of literature:

HobsbaumE. Epohakrajnostej: Korotkijdvadtcatyjvek (1914—1991). M.: Izdatelstvo Nezavisimaia Gazeta, 2004. 632 s.
Hirdman S. Rol Rossii v Evrope // Moskovskij centr Karnegi. M, 2006. – s.19.
See more: The EU and Russia: before and beyond the crisis in Ukraine / House of Lords, European Union Committee. 6th Report of Session 2014–2015. London, February 2015. URL: www.publications.parliament.uk/pa/ld201415/ldselect/ldeucom/115/115.pdf
Urbanovich Ia. Voinstvennye strahi Vostochnoj Evropy. 03.04.2015. URL: http://ria.ru/analytics/20150403/1056439589.html
Dixon H. How to counter Europe’s rising populism // International New York Times, November 24, 2014. – P. 22.
Alvaru Santush Pereira, Hose Manuel Soria, Korrado Passera, Arno Montebur, Philipp Resler Novaia industrial`naia politika Evropy // «Ekspert», №7 (839), February, 18 2013.
Manukov S. Hermaniia podtianula evropejskuiu ekonomiku / «Expert Online», February, 14 2015. URL: http://expert.ru/2015/02/14/ne-vse-tak-ploho/
Evropa 2015: god neuverennosti http://euroua.com/europe/eu/3557-evropa-2015 02.01.15
Dragi: ekonomiku ES zhdet zatiazhnoj period slabosti. January, 2 2015. URL: http://dv.ee/novosti/2015/01/02/dragi-jekonomiku-es-zhdet-zatjazhnoj-period-slabosti
Jean-Pierre Robin. Le FMI estime l’Europe en voie de guerison // Le Figaro, 15 avril 2015. – p.23.
Lukjanov F. Oborotnaia storona Gretcii / Rossijskaia gazeta. July, 8 2015. URL: http://www.rg.ru/2015/07/07/kolonka.html July, 8 2015.
Reshaping EU-US Relations: a Concept Paper. Reflection Group: Romano Prodi, Guy Verhofstadt (co-chairs), Jerzy Buzek, Etienne Davignon, Jacques Delors, Joschka Fischer, Paavo Lipponen, Tommaso Padoa-Schioppa / Notre Europe, 2010. – p. 12.
Lukjanov F.A. Stabilnost radi vyzhivaniia // Rossiia v globalnoj politike. July, 13 2015. URL: http://www.globalaffairs.ru/redcol/Stabilnost-radi-vyzhivaniya-17579.
Kagan R. Power and Weakness // Policy Review, № 113, 2002.
Cooper R. The European Union and the Habsburg Monarchy // Transit. Europaische Review, 10.12.2012. URL: http://www.eurozine.com/articles/2012-12-10-cooper-en.html
See more: Cooper R. The breaking of nations: order and chaos in the twenty-first century. New York, 2003.
See more: http://www.format-a3.ru/events/event-212/
Ukraina, Gruziia, Moldaviia: put v NATO cherez Evropejskij soiuz. K sammitu NATO v Uelse September, 4-5 2014 goda. Analiticheskij obzor / Centr mezhdunarodnoj zhurnalistiki i issledovanij «Rossiia Segodnia». 2014 g. 74 s.
Stephen M. Walt, Does Europe Have a Future? // Foreign Policy. July 16, 2015. URL: http://foreignpolicy.com/2015/07/16/does-europe-have-a-future-stephen-walt-testimony-house-foreign-affairs-committee/
Charap S., Shapiro D. Kak izbezhat novoj holodnoj vojny // Rossiia v globalnoj politike. October, 14 2014. URL: www.globalaffairs.ru/ukraine_crysis/Kak-izbezhat-novoi-kholodnoi-voiny-17041
Za ES – 68%, NATO – 65%, Evrazijskij Soiuz – 31% – rezultaty oprosa NDI. 11.05.2015. URL: http://www.apsny.ge/2015/soc/1431371449.php\

Features of innovation policy in developed countries of the Baltic region

Admin — Mon, 29 Jun 2015 19:59:11 +0000

Mikhaylova Anna Alekseyevna – Ph.D. student, analyst of Marketing and Analytics Division, Office of Development and Strategic Planning, Immanuel Kant Baltic Federal University, Russia

The study examines the characteristics of the formation and implementation of national and regional innovation policies in the developed countries of the Baltic region: Denmark, Finland, Germany, Norway, and Sweden. Building on in-depth case studies of the given countries, the author has conducted retrospective analyses of the processes of formation of the innovation policy, which is treated as a result of combining the individual instruments and mechanisms of the scientific and technological, educational, industrial and regional policies in a single set of influence on the innovation system. The article assesses the innovation development of Denmark, Finland, Germany, Norway, and Sweden; it presents the current scheme of their national innovation systems with a special emphasis on the most significant actors. The author highlighted the key trends and characteristics of the innovation policies of the given countries at the present stage with a focus on the tools used in five thematic areas: education, basic science, applied science and entrepreneurship, regional development, internationalization. Additionally the paper highlights the issue of regional participation in the process of strategy elaboration and subsequent implementation of the chosen course of innovative development.

Introduction

The interest in innovation as a source of economic development and welfare of the society began to form in the beginning of the twentieth century under the influence of scientific ideas developed by A. Marshall, JA Schumpeter, ND Kondratyev, P. Sorokin, S. Kuznets and other outstanding scientists of that time. Addressing the multi-faceted innovative economy, complex in its multidimensional image, researchers throughout the twentieth century set themselves the task not only to grasp the essence of the phenomenon of innovation and scientific category, but to identify a set of spacial-temporal, institutional, social, cognitive and other regularities of innovative processes and its impact on the development of territorial socio-economic systems of different level and scale. The fundamentals of the innovation theory evolved in close connection with the development of theories and concepts focus on the cyclical nature of the processes in the economy, specific placement of productive forces, international division of labour and competitiveness, internationalization, regionalization and territorial capital.

Since the end of the twentieth century there is a growing need for applied research that can create and enrich the knowledge base for political decision-making in the field of science and technology, and also innovations. There was a number of scientific concepts, that to some extent were reflected in the strategic and program documents, securing the long-term objectives and priorities for national and regional innovation development, that acted as a basis for the development of mechanisms and tools of the innovation policy. The most common were concept of clusters, national and regional innovation systems, triple spiral, networking, open innovations, regional knowledge, innovation environment, knowledge triangle, entrepreneurial university, global challenges, service innovations, social innovations and innovations in the public sector, live labs, technopolis, competence centers and others.

Empirical studies are also in demand, whose task is to study and analyze the experience of different countries and regions of the world in solving important and essential problems in the innovation. As a rule, such research is thematic and narrowly focused, with a strong territorial binding, but as a whole it allows to catch and to generalize current development trends of the global innovation system and is often the basis for new up-to-date concepts or the improvement and adaptation of existing ones, taking into account changes of contextual factors and conditions.

This article is the result of such study, when the author tries to reveal the features of the innovative policies of developed European countries, based on the comparative assessment of innovation systems of five Baltic countries: Sweden, Denmark, Norway, Finland and Germany. It should be specified, that under the innovation one means a comprehensive view of the state policy, which is a formation of scientific, technological and industrial policies implemented at national and regional levels.

Characteristics of innovation development of the Baltic region

The choice of the countries for the study is not accidental and is due to the innovative nature of sustainable development for a long period, what to some extent can be considered as an indication of the effectiveness of innovation policy, implemented at the state level. The results of a comparative evaluation of scientific and technical potential of the Baltic region [1, 3, 8] and the analysis of a series of periodic international rankings, dedicated to innovation and competitiveness, demonstrate consistently high positions of Sweden, Norway, Denmark, Finland and Germany not only compared to the Baltic countries, Poland and Russia, but also among the countries of the European Union and the world, which allows to assign them to a group of “global innovation leaders” (Table 1).

Table 1

Level of innovation development of the countries in the Baltic region, 2014

Country	Index
	globalinnovative			globalcompetitivity			Innovation panel of EU				Economy of knowledge*			knowledge*
	value	rank		value	rank		value	rank			value	rank		value	rank
	value	world	BR	value	world	BR	value	ЕC28	BR	world	BR	world	BR	value
Sweden	62,29	3	1	5,41	10	3	0,75	1	1	9,43		1	1	9,38	1	1
Finland	60,67	4	2	5,50	4	1	0,68	4	4	9,33		2	2	9,22	2	2
Denmark	57,52	8	3	5,29	13	5	0,73	2	2	9,16		3	3	9,00	5	3
Germany	56,02	13	4	5,49	5	2	0,71	3	3	8,90		8	5	8,83	10	5
Norway	55,59	14	5	5,35	11	4	0,48	-	6	9,11		5	4	8,99	6	4
Estonia	51,54	24	6	4,71	29	6	0,50	13	5	8,40		19	6	8,26	21	6
Latvia	44,81	34	7	4,50	42	8	0,22	27	9	7,41		32	8	7,15	33	8
Lithuania	41,00	39	8	4,51	41	7	0,29	24	7	7,80		37	7	7,68	40	7
Poland	40,64	45	9	4,48	43	9	0,28	25	8	7,41		38	9	7,20	39	9
Russia	39,14	49	10	4,37	53	10	-	-	-	5,78		55	10	6,96	43	10

Remark: * on data of 2012; BR – Baltic region

Source: [14, 15, 18, 19]

Table 2 contains statistic indicators of innovation system development in these countries at present. In general, it is characterized by significant accumulation of human resources, what is due to priority of national authorities to support the education system and focus on the flow-in of skilled workers. More than 30% of the population in Finland, Norway and Sweden have higher education, slightly less in Denmark – 27%, and 24.1% in Germany. For comparison, in Russia, according to the census 2010, the share of the population with higher education was 23.4% [6], which can be comparable with Germany, however, is significantly lower than in the Nordic countries. On average, about 39% of the total economically active population in Sweden, Denmark, Germany, Finland and Norway are engaged in the field of science and technology, accounting for nearly 27% of the total population. The leaders in terms of the concentration of human resources in science and technology sector are Denmark (40.5%) and Sweden (39.3%). Another characteristic of innovation systems in these countries is the level of employment in high-tech industry (3.9%), which is higher than the EU average both in production sector and service.

Table 2

Indicators of innovation development of developed countries of the Baltic region, 2013

Indicator	Sweden	Denmark	Germany	Finland	Norway
Share of population with higher education, %	30,3	27,0	24,1	32,1	32,4
Engaged in science and technology to economically active population, %	39,3	40,5	36,4	38,4	38,7
Engaged in high-tech spheres of industry and service to economically active population, %	4,9	5,5	4,1	5,7	3,6
Volume of venture investments to GDP, %	0,4	0,6	0,2	0,3	0,2
Export of high-tech products as a share of all export, %	13,0	9,3	14,2	6,2	…
Share of innovative products in full turnover *, %	6,1	13,9	13,0	11,1	5,2
Expenses for research and development, %
To country’s GDP	3,3	3,1	2,9	3,3	1,7
From general expenses of state budget	1,6	1,8	2,0	1,7	1,8
Expenses structure on research and development on source of funding, %
Business	61,0	59,8	66,1*	60,8	43,1
State	28,2	29,3	29,2*	26,0	45,8
High education	1,0	0,0	0,0*	0,2	0,5
Non commercial companies	3,1	3,8	0,4*	1,4	1,0
Foreign sources	6,8	7,2	4,3*	11,5	9,5
Applications for patents in the European Patent Office *, pcs
For mln citizens	289,9	223,2	278,2	270,6	111,7
For bln EUR of internal expenses on research and development	197,9	164,3	287,8	213,9	86,6

Remark: * data of 2012

Source: compiled based on data of Eurostat [11]

One of the most important indicators of the dynamics of the innovation system includes the volume of financing research and development activities (R & D). In Sweden, Finland, Denmark and Germany the ratio of expenditure on research and development to gross domestic product (GDP) is well ahead of the average for the EU (2%) and Baltic region (1.95%). Sweden and Finland show solvent high levels of funding in the long run. Since 2000 the share of R & D expenditures in the GDP of these countries did not fall below 3.2%. However, one should note the tendency for decrease of the level of funding of scientific and technical sphere in Sweden, due to lower expenditures for the development of technologies for defense.

Denmark and Germany on the contrary show a significant increase in the share of research and development expenditures in the said period. If in the early 2000s the ratio of R & D spending to GDP was slightly more than 2%, in 2013 it amounted to 3% with a positive dynamics. It should be noted that these high rates are due to structure of R & D funding,prevailing in these countries, where the main role belongs to business sector (60%). The exception is Norway, where the contribution of the state and business in the research and development is nearly equivalent: 45.8 and 43.1% respectively in 2013. As shown in Table 2, lack of high interest from Norwegian business in investments in R & D, even with share of budgetary allocationscomparable with other countries in the Baltic region, has a negative impact on the total value of the financing of the innovation system of Norway. During 2000 – 2013 the share of expenditure on research and development in the country’s GDP fluctuated around 1.6%, without reaching the EU average.

An essential role in encouraging innovation is played by high-risk investments in companies that are engaged in development of new products and / or technologies, but not listed on the stock market. The need for its finance is formed in early stages of development (seed and start-up), and later (growth and expansion). The highest level of venture capital investment to GDP is in Denmark and Sweden: 0.6 and 0.4% respectively. This indicator is higher than in other EU countries and Baltic region, but the dynamics of such investments is unstable and still below the real needs (Pic. 1).

Pic. 1 – Dynamics of volume of venture investments to GDP of Denmark, Sweden, Germany, Finland, Norway, %

Source: compiled based on data of Eurostat [11]

As the result of innovation Table 2 indicates the share of innovative products in total trade, exports of high technology products and patents. Germany shows the highest return on investment in research and development. Bearing in mind 2.9% expenses on R & D of GDP, Germany shows the highest performance in turnover and export of high-tech products, as well as higher patent activity in terms of unit costs, compared with other developed countries of the Baltic region.

Innovation policy in Sweden

The innovation system in Sweden evolved throughout the twentieth century with limited natural resources and domestic market, which was the main driving factor for the development of technology and export industry with high added value. The need to enter international markets and compete led to the formation of several large transnational companies that currently are the main investors in research and development. The participation of small and medium-sized companies (SMEs) in the innovation process is relatively small, so the state is forced to use various motivating mechanisms for their involvement in R & D. In order to overcome the negative effects of industrial policy of 1980 – 90 and stimulate economical growth Sweden developed a long-term strategy of innovative development «Innovative Sweden», which presented a nationwide vision of Sweden as a competitive, dynamic and knowledge-based economy, attractive for investments of large and small high-tech companies.

In 2012 Sweden adopted a new long-term innovation strategy «The road to a world-class innovation climate 2020», which became a continuation of the ideas of pan-European growth strategy «Europe 2020». The strategy is aimed at improving the quality of life and sustainable development through the maintenance of competitiveness and job creation in the global knowledge-driven economy. The main principles of its implementation are the creation of favourable conditions for innovation; support of people, business and organizations that are systematically engaged in innovation; implementation of a holistic approach based on a common vision. The structure of the modern national innovation system of Sweden is shown in Picture 2.

Picture 2 – National innovation system of Sweden

Source: compiled based on [13, 16]

The Government of Sweden is responsible for the development of innovation policy at the national level. The main role in this process is assigned to the Ministry of Education and Science and the Ministry of entrepreneurship and innovation. In 2001 their department established two major agencies: Swedish Research Council and Swedish governmental agency for Innovation Systems (VINNOVA), whose tasks included the implementation of the main directions of the state innovation policy. The activity of Swedish Research Council focuses on the support and development of basic scientific research. VINNOVA is strengthening cooperation between all actors of the innovation system, co-financing of research initiatives with further monitoring and control of its implementation, as well as support of international collaboration. In addition, support functions and the financing of industrial R & D were split between several dozens of specialized state research councils and agencies that focus on meeting the needs in knowledge of the society in individual spheres. An alternative to government agencies and large industrial companies in funding R & D is various para-public and private research funds, which have their own budgets. For example, Swedish Foundation for Strategic Research (SSF), Knowledge Foundation (KKS), Foundation for Strategic Environmental Research (MISTRA), Swedish Foundation for International Cooperation in Research and Higher Education (STINT), Swedish Foundation for health care sciences and allergy research (Vårdal), Knut and Alice Wallenberg Foundation, Swedish Cancer Society, and others.

A characteristic feature of the innovation system of Sweden is a relatively small number of research institutes established in the second half of the twentieth century and united in holding «RISE group» in order to improve the efficiency of use of financial, material and human resources and enhance its expertise and complementarity. The consequence of a lack of research institutions engaged in applied research and development has become the laying of their functions to universities with the increase in financial support of the latter. According to the Parliament decision dd. 1979 [17] University in Sweden combines three missions: education, basic research, interaction with business, being transformed from a classic structure in the enterprise.

One of the most urgent problems of the Swedish innovation system is the lack of commercialization of university research. It reflects the emergence of the concept of «the Swedish paradox» [7, 13], when a large amount of expenses for research and development and education shows a disproportionately low return of innovation. In many respects it is a consequence of the negative impact of legislation («teacher’s correction», laws on the public domain and state acquisition and others [5, 9]) and insufficiency of venture capital on initial stages.

Overcoming the effect of «the Swedish paradox» is done through the implementation of the state policy of promoting the commercialization and innovation in the framework of realization of strategic ideas of national «knowledge triangle», what brings together education, research and innovation. The main efforts of the government in this area are aimed at increasing the efficiency of the implementation capacity of universities by strengthening and deepening cooperation with other actors of the innovation system. Swedish universities dispose a developed network of incubators and science parks, as of 2010 they have created Bureau of innovative interaction – contact interuniversity platforms to improve the efficiency of R & D and stimulate innovation.

It should be noted that such measures of stimulating innovative economy as tax incentives and credits for businesses carrying out R & D did not gain widespread in Sweden. The most widely used tools are venture capital financing; subsidized loans for small and medium-sized business; state guarantees; grant support on a competitive basis (at the individual, institutional level) in the framework of national programs; advisory services; assistance in the training of personnel; creation of special areas for cooperation of participants of actors «triple spiral», etc. In recent years, active work has been carried in order to liberalize the law on state acquisition in order to use it as a driver for innovation in social sectors: infrastructure, health and welfare, environment. Particular attention is paid to support of small and medium-sized businesses, including issues related to the expansion of the participation in research and development and implementation of international activities (program «Explore and grow» and «VINN NU»). A number of organizations of supporting infrastructure were created: investment companies («ALMI Invest», Industrial Development Fund and others), technology transfer centers (Swedish organization to support innovation and technology transfer (SNITTS) and others), agency for attracting investment («Business Sweden» and others), network organizations, bringing together participants of «triple spiral» (Swedish Entrepreneurial Forum and others).

Important areas of modern innovation policy of Sweden are regional development and support of the creation of innovation clusters. As of 2001 has been launched a national flagship initiative «Vinnväxt – Regional growth through dynamic innovation systems», whose aim is to promote sustainable regional growth by developing internationally competitive innovations in priority areas. In 2007 the idea of a differentiated approach to regional development and growth gained formal acknowledgement in the «National strategy for regional competitiveness, entrepreneurship and employment in 2007-2013»; expanded long-term strategy «National strategy for regional growth and attractiveness 2014-2020» , whose base was cross-sectoral approach, multi-level control mechanism for dialogue between participants and collective training, as well as clear focus on results, entered into force in 2014.

In recent years, the authority of the regions of Sweden to participate in the development of regional policy has greatly increased. Currently each region is obliged to form and implement its own development strategy, including vision, goals and long-term priorities, taking into account regional characteristics and competitive advantages. Regional development strategy should contribute to the coordination of initiatives in the field of regional development, held at different levels. It should be noted that we mean regions of level NUTS 3, i.e. län or regions in which the responsibility for the implementation of national policies is traditionally divided between the county administrative boards (länsstyrelsen) – representatives of the national government at the regional level and regional district councils (landsting). By 2015 each of the 21 regions of Sweden has already formed its own regional development strategy with a planning horizon until 2020, maximum until 2025 or 2030. A number of them have also developed a strategy of innovative development, for example, the regions of Skåne and Blekinge, focusing on strengthening of its competitive advantage through the development of cooperation and the formation of clusters and internationalization.

Innovation policy of Denmark

Denmark as well as Sweden shows high level of innovation development among the world, Europe and Baltic region. Historically, the Danish economy is based on traditional sectors: agriculture, fishery, manufacturing. At the beginning of the twentieth century the country was highly competitive in agricultural production, which allowed it to consolidate its status as one of the world’s leading exporters of meat and dairy products. The logical consequence of active development of the agricultural sector which even at present forms the demand for qualified personnel and new technologies, was the establishment of the educational and research system of the country. Its basis was established in 1769 with the formation of the Royal Danish Agricultural Society, under whose support later were established various schools, colleges and universities that are still operating. A strong manufacturing sector of Denmark is the result of industrial and technological policy in 1960 – 1970es. Currently, the country was able to implement the industrial potential in sectors such as engineering and metalworking, food processing, chemical industry and oil refining, pharmaceuticals and medical equipment, electronic and electrical industries.

Danish modern economy is export-oriented with a growing share of service export (about 39% in 2013 with a positive trend in the long run [4]). On one hand, it is based on the success achieved in the traditional industries, and on the other hand – it demonstrates the commitment to the development of new high-tech sectors (ICT, biotechnology, alternative energy, bioeconomy, medical technology and others). The employment of the majority of the working population is provided by SMEs. Large businesses cover a major share of Danish exports, as well as a considerable amount of investment in research and development. It should be noted that the Danish economic model developed in a relatively low domestic resource capacity and low capacity of the national market that unites it with the Swedish, is characterized by a strong dependence on the situation on the international markets. It most strongly appeared during the economic crisis of 2008-2009. Maintaining the effectiveness of such model requires government’s continuous work to improve the investment and business climate, improve the system of science and education, improve the overall competitiveness of the economy, creation of favourable innovation environment.

The answer to the current challenges of the world economy was the development in 2010 of the national strategy «Denmark 2020: knowledge – growth – prosperity – welfare», which was based on the principle of more effective use of internal resources due to the consolidation of public finances, increasing productivity, increasing commercialization of R & D results by universities and public research organizations, introduction of new technologies (especially with a positive environmental impact), development of health care, reduction of bureaucracy level, strengthening of the competitive environment, greater involvement of the country and its regions in the process of internationalization and international cooperation (incl. scientific sphere). Innovation policy in this context is one of the key tools in achieving the strategic objectives of a long-term development of the country.

In 2012 it adopted a long-term national innovation strategy «Denmark – country of decisions. Strengthening cooperation and improving the innovation systems on enterprises», considerable attention in it is paid to the formation of an effective mechanism for the transformation of budgetary allocations for science and education to economic development, employment growth and improvement of social welfare. Key issues to be addressed in 2020 are associated with slow economic growth, insufficient level of productivity, need to shift from European markets to the world ones, weak position of SMEs in niche markets, imbalance in support of thematic research and development towards the dominance of certain sectors (pharmaceuticals, biotechnology, energy). The strategy developed a set of 27 tools in three areas of the innovation policy:

1. «Innovations in solving social problems»: optimization of the national innovation system through restructuring a number of government research councils, agencies and foundations; increasing transparency and easier access to government programs of innovation support; Danish participation in the expansion of EU initiatives on the principles of co-financing; issue of the catalog «INNO +», that identified key strategic areas of investment in innovation (transport, environment, urban development, food and bioeconomy, health, ICT, energy, innovative production); launch of initiatives to create social innovation and pilot partnerships in regions with strong scientific and business positions;

2. «The transformation of knowledge into innovation»: support of clusters and networks; involvement of SMEs in innovative activity (the program «Industrial PhD», «Promotion of Innovation», «Startups graduates», system of innovation vouchers (small lines of credit to finance R & D expenses), development of Danish network of international innovation centers); optimization of the number of incubators by increasing critical mass of residents; facilitating the exchange of knowledge between research and business sector by increasing public funding of joint projects, expansion of the target audience of Danish science e-library, document flow, creation of additional jobs for researchers;

3. «Strengthening the innovation potential through education»: increase in the practice at all levels of education; support innovation in education, including new forms and methods of training; systematic support of young talents; development of innovative and entrepreneurial skills of students; strengthening cooperation between business and educational institutions.

Picture 3 shows present structure of the national innovation system in Denmark after the optimization carried out at the level of institutions, which formed and implemented innovation policy, and at the level of direct participants of the innovation process (for example, by consolidating universities).

Pic. 3 – National innovation system of Denmark

The document dd. 2008 «Research 2015», identifying priority areas for research and development, was replaced by a new one in 2012 – «Research 2020». The current index, which was a result of joint work of universities, research organizations, ministries and research councils, represented a common vision of Sweden as a healthy, high-tech, competitive, inclusive society, developing «green» economy with a powerful innovative potential, strengths and competencies and high quality of life. According to this document, by 2020 Denmark should be among the top five OECD countries among the share of innovative SMEs, the level of private investment in R & D relative to GDP and the share of employees with higher education in the commercial sector.

Among the most important instruments of national innovation policy, in addition to the above, one should note personal tax credits for foreign researchers and other high skilled employees in Danish companies and research institutions, in force as of 1992; tax credits for income tax for the companies involved in R & D spending; framework and project grants provided by national programs supporting research and innovation; loans and loan guarantees provided by the Danish SME Development Fund; investment in large-scale infrastructure in the framework of the Roadmap for the development of research infrastructures (2011) and others.

Regional level of innovation policy is implemented through regional forums of economic growth, in force since 2006 in five regions of Denmark (Capital Region, North and Central Jutland, South Denmark, Zealand) and, separately, on the island of Bornholm. It is advisory bodies to the regional councils that do not have their own fund and are re-elected every 4 years. Among their main functions one can note development of regional business strategy, monitoring of trends in regional and local economies, development of recommendations for co-financing of regional measures to support entrepreneurship and innovation. All regional forums for economic growth closely cooperate with the Danish Board of economic growth in order to coordinate national and regional innovation policy. From 2007 to 2012 regional forums of economic growth were responsible for the preparation of medium-term or long-term development strategies for each region, taking into account its specific character, strengths and weaknesses, as well as national priorities. Despite the significant differentiation in the level of economic and innovative development of the regions, common to all strategies were emphasis on public education, training and attracting skilled labour, support for entrepreneurship, new technologies and innovations. Among the main measures of regional innovation policy one should mention public-private partnerships, cluster policy, open innovations, government acquisitions and innovation in the public sector, support of start-ups and innovative SMEs, promoting the exchange of knowledge, development of intellectual demand and innovation in the service sector. An important mechanism to support Danish regions is the EU framework program, funding of which is used also on creation of cross-border clusters (the most successful – «Medicon Valley») [2].

Innovation policy in Germany

In accordance with the principle of the federal government, enshrined in the German constitution, the responsibility for the formation of innovation policy is divided between the federal authorities and the authorities of 16 states with the release of exclusive questions and sharing knowledge. At the federal level, a significant role is played by two ministries: Education, Economy and Energy. Other ministries are involved in the development of research programs and support research within its field of competence, including the establishment of research institutes. All government institutions under the jurisdiction of the federal ministries are united in the association «Working Group of department research institutions». State authorities and management in Germany have a number of advisory bodies that assess the overall dynamics of the innovation system of the country and develop recommendations to strengthen it. The most significant and oldest is the German Council of Applied Sciences and Arts, established in 1957 by an administrative agreement between the Federal Government and the states. In addition to consulting services on higher education and scientific research, the Council carries out accreditation of non-state universities and severally liable with the German Research Foundation for funding the advanced university research within the framework of a comprehensive program «Excellence initiative».

The basis of innovation policy at the federal level is stated in a number of strategic and program documents, the most important of which is a comprehensive strategy in research and innovation «Strategy of high technology». It was launched in 2006 and combined a wide range of government initiatives and programs. In 2010 the country adopted an updated version of the document till 2020, where it fixed the key areas of development of promising markets and technologies (biotechnology, nanotechnology, micro-optical systems, new materials and production technology, aeronautical engineering and ICT); increased cooperation between science and business; coordination of political initiatives on both federal and regional levels. Also appeared separate national strategies on building research infrastructure, including international importance («National roadmap for research infrastructures», 2013); development of bioeconomy as an alternative to non-renewable energy sources («National research strategy bioeconomy 2030», 2013); internationalization of research activities («Strengthening of the role of Germany in the global scientific society», 2008); support for higher education and growing need for highly qualified professionals («Higher education pact 2020», 2007) and a number of others which form the basis for regional initiatives.

Federal states possess broad authority to develop and implement research and educational policies. Each land forms its own legal framework in this area and the budget to finance public higher education institutions and non-university research organizations and institutions. Some of the most innovative active regions developed comprehensive development strategy (North Rhine-Westphalia, Berlin, Brandenburg, and others) and issued series of program documents (Bavaria, Hesse, and others). The centerpiece of the current regional innovation policy in Germany is concluded in the idea of smart specialization, based on the existing regional differences in the innovative development of land; support for SMEs, whose activities are focused on innovation; formation of strong regional clusters. A joint scientific conference, whose members are the Ministers of relevant ministries, was established in 2007 to coordinate the activity of the Federal Government and state governments in research policy. The range of issues within the conference is quite broad and incorporates financial, strategic and international areas of focus.

Funding of research and innovation in Germany is implemented through a wide range of government (federal, regional and joint), semi-public and private non-profit foundations, which include scientific and academic, party, church, industrial and other types. Basic tools of stock support are focused on three areas: research projects, promising young personnel, innovative SMEs. The Association of German research funds is designed to assist in overcoming disunity between funds in the implementation of its programs.

Research and development sector of the country is represented by a wide variety of participants, some of which trace their history from the beginning of the twentieth century and earlier: public and private universities, academia, public research organizations and institutions of basic and applied research, scientific research centers, companies with R & D divisions, etc. The major research associations in Germany are four non-university public research organizations: Fraunhofer Society, Helmholtz Association of Research Centres, Leibniz Association, Max Planck Society, who has its own research funds. It should be noted that, traditionally, German research organizations and industry are characterized by close cooperation ties and, as a consequence, persistently high level of funding of science and research business, which is largely a result of strong government technology policy of the second half of the twentieth century. Modern innovation system of the country is represented in Picture 4.

Pic. 4 – National innovation system of Germany

One of the main tools of the innovation policy in Germany is the development and financing of programs to support research and development projects: a) private or thematic, which are based on long-term frameworks in specific areas of technology (biotechnology, nanotechnology, ICT, medicine and health, environmental protection, space etc); b) open, which support more versatile research and are not intended to thematic restrictions. By the beginning of 2013 the total number of programs was 242, of which 92 were federal (including 20 – open) and 150 – regional (incl. 115 – open) [10]. In order to improve the efficiency of research activities, most of the thematic programs are focused on the use of public-private partnership. Table 3 shows the major government initiatives to support research and innovation in Germany.

Table 3

Main initiatives on support of science research and innovations in Germany

Program	Main lines and tools
Initiatives to support innovative SMEs and start-ups
«Innovative SMEs», «Central innovation program for SMEs», «Program Venture Capital», «EXIST Program», «Industrial collective research», «SIGNO», «Go-Inno» and others.	facilitating the access to finance research activities of SMEs; increasing transparency and reducing costs for SMEs, including the purchase of R & D and specialized services, management of innovation networks, staff; financing of start-ups (direct equity investments in the seed stage, co-financing of private investment in the early stages, repeated investment and the provision of state. guarantees in the later stages, preferential loans with below-market rate%); improving the framework conditions for the development of entrepreneurship in universities (grant support start-ups and spin-offs created by academics); facilitating access to the results of research and development for SMEs; grant support for the formation of self-organizing research associations; co-financing the costs of patenting; consulting services
Initiatives to improve the system of higher education
«Initiative: Qualification for Germany», «Promotion through education: open universities» and others.	improving the quality of higher education in order to create a pool of qualified professionals; funding on a competitive basis, and initiatives to improve the integration of university curriculum
Initiatives in the field of regional development and the creation of innovation clusters
«innovative concept», «innovative regional growth centers», «potential growth centers», «Center of Innovation Competence», «Innovation Forum», «InnoProfile», «ForMaT», «Twenty 20 – Partnership for Innovation», «Competition of advanced clusters» «Innovative alliances» (subsequently merged into «Entrepreneurial regions») and others.	strengthening of smart specialization through the creation of innovation clusters; stimulating creative thinking and the development of competencies; support for cooperation of large industrial conglomerates and government organizations of R & D to develop innovations that require long-term studies; funding of innovation in the priority areas; systematic support of the regions in East Germany; reimbursement of labour costs, establishment and development of infrastructure, equipment and staff training, purchase of consulting and research services; grants, tax breaks (including by reducing social security contributions)
Initiatives to support young talents
«Initiative of excellence», «Germany sholarship», «Joint Initiative for Research and Innovation», «Qualification initiative», «Increasing scholarship» joint programs with various foundations and others.	postgraduate funding of young scientists; long-term contracts with young researchers in universities; grants, student loans, scholarships to young talents; support of non-traditional research approaches; increased scholarships for students; supporting women researchers; funding for joint research projects and the participation of German researchers in international conferences

In addition to the above initiatives, Germany used a number of additional tools and mechanisms, such as fiscal incentives for the creation of a more favorable environment for financing start-ups and innovative SMEs at the early stages (new laws on venture capital and equity participation, 2008); the mechanism of state acquisition of innovative products (a joint initiative of six federal ministries «Decision to step up innovation-oriented state acquisition», 2007; Act, encourage competition, 2009); liberalization of immigration laws in order to increase the flow-in of highly skilled experts and scientists (German Immigration Act, 2005; «Labour migration helps to ensure a sufficient number of skilled workers in Germany», 2008; «The recognition of foreign skills», 2012); creating a legal framework to ensure the continued co-funding of universities by the Federal Government and the states (federal law to provide assistance in training, German Basic Law (Art. 91b) in ed. 2014) and others.

Innovation policy in Norway

A switch to innovation policy in Norway is due to the desire of national authorities to restructure the economy in order to reduce dependence on traditional industries, which became very crucial in the second half of the twentieth century as a result of an open and active development of oil and gas. At present, products of oil and gas sector is the basis of the country’s export, and major oil companies («Statoil», «Norsk-Hydro» and others) are the main investors in research and development. One of the mechanisms linking actors of industrial and research sphere is an instrument of «goodwill agreement», involving the provision of benefits to companies for the acquisition of exploration rights in return for the purchase of specialized R & D and services produced in the country. It should be noted that despite the high profitability, such model of economy is quite vulnerable to fluctuations in world oil prices, and its vital resource is limited by proven hydrocarbon reserves. The maintaining of the existing system of connections increases the risk of a sharp collapse of investment in research and development as a result of negative trends in the commodity sector.

The desire to achieve greater stability and balanced development of the country prompted the national authorities for increased support of alternative sectors of the economy, such as biotechnology and bioeconomy, ICT, new materials, aquaculture and others and transfer their experience in innovation, known in traditional sectors: mining, agriculture, navigation and fishing. Because of the limited number of large national companies focused on R & D, priority is given to the development of small and medium-sized businesses, capable of forming strong competitive clusters in the regions (especially agricultural and peripherals). The main tool to stimulate innovation in Norway is a tax credit system to support «Skattefunn», introduced in 2002 for SMEs, and since 2003 spread to all enterprises subject to taxation within the country. Ten years’ experience of this system proved its high efficiency, including comparison with other innovation policy instruments (grants, subsidies, etc), which has pushed the government to significantly increase the size of tax deductions in 2014.

In the field of science and education in connection with the new national development priorities one can outline a number of trends: firstly, decentralization and focus on support for innovation, resulting from the research activities of the regional universities and colleges; secondly, creation and implementation of social and environmental innovation. The result of the reorganization of the leading organizations and institutions of the institutional infrastructure, done in the 2000s, was the formation of the modern structure of the innovation system in Norway, shown on Picture 5.

Pic. 5 – National innovation system of Norway

The Parliament and the Government of Norway are responsible for the course of the innovation policy of the country. A key role in this process is assigned to the Ministry of Education and Science, which is responsible for coordinating the overall efforts of other ministries and is the main source of financing educational and research spheres. Other ministries are involved in supporting R & D within the framework of its specialization. Some of the largest budgets for research are granted by the Ministry of Health and Social Welfare and the Ministry of Commerce, Industry and Fisheries. The fundamental document for the development of science, education and innovation are the white book «Innovative and Sustainable Norway» (2009), «The long-term plan for research and higher education in 2015 – 2024» (2014), «The strategy of cooperation in research field with Europe» (2014). To support the priority technology areas and industries Norway also developed a number of thematic research and innovation strategies, including bioprospecting (2009), environment, biotechnology (2011), nanotechnology (2012), ICT (2013).

In 1993, as a result of the merger of five research councils in the innovation sector of the country appeared a large state player – The Research Council of Norway (RCN), which received the right to participate in the development of science and technology policy, to fund research and act as a communication platform for «triple spiral». RCN accumulates funds of all ministries. The level of funding from each ministry is different and depends on the tasks facing it. Currently RCN uses four groups of instruments for financing research activities [12]: a) «research programs» (support on a grant basis of collective, strategic and targeted research initiatives, promote the commercialization of innovations in a certain subject area); b) «independent projects» (funding of individual projects in the field of basic science, which are not linked to specific research programs); c) «infrastructure and institutional arrangements» (creation of the innovation infrastructure, various research institutions, purchase of scientific equipment, databases / collections); d) «network partnership event» (strategic initiative to create partnerships between actors within the country and international cooperation).

In 2003 it created a government agency – «Innovation Norway», whose tasks included the simplification of the formation and development of innovation and supporting infrastructure; strengthening of relations between regional development, innovation and internationalization; representation of national interests in the sphere of trade abroad. At the moment, «Innovation Norway» is acting as the center of the support for Norwegian business and innovation at all levels of management with a wide range of tools: high- and low-risk loans, grants, venture capital, consulting and advertising services, development of business networks and clusters. Also, the Agency is implementing main directions of the state regional policy: a) regional innovation clusters (strengthening and revitalization of the cluster cooperation, increase of innovation and competitiveness of regional businesses); b) business network (support of SMEs in the value chain, forming strategic partnership); c) development of competencies (improving the availability of new knowledge for regional business community through collaboration with universities and university colleges); d) program of regional development (expertise of regional programs for restructuring, management and control of its implementation).

Another important actor in the innovation system of Norway is the state company «Industrial Development Corporation of Norway» (SIVA). Being established in 1968 in the department of the Ministry of Commerce, Industry and Fisheries, by 1990 – 2000 it has expanded its role in stimulating innovation development at national level through the creation and support of innovation infrastructure (business incubators, business – «gardens», science parks in the community colleges, regional venture capital and seed funds), investment in commercial real estate and consulting services. In the 2000s, RCN, SIVA and «Innovation Norway» formed the Triple Alliance, which aim is to provide a complete package of services and public funding for science and innovation. Significant joint initiative of the Union was to launch three cluster programs that involve long-term financial, technical and consulting support on a competitive basis: «Arena» in 2003, «Norwegian competence centers» (NCE) in 2006 and «Global competence centers» (GCE) in 2014. Currently, they are combined into a single integrated multi-level program «Innovation clusters of Norway».

There is a relatively little number of funding sources for R & D sector, that are independent from the triple alliance. Among them are some large industrial companies and organizations in the service sector, private foundations, funding specialized studies (Norwegian Cancer Society (NCS), National Public Health Association (NAPH) and others) and individuals. The EU Framework programmes are an important source of foreign funding.

Describing the participation of regional authorities, represented by the districts (fylkeskommuner) and the municipalities of the third level, in the formation of innovation policy, one should note the tendency to expand the area of its responsibility for the selection of priority areas of development, management, coordination and co-financing activities in the area of innovation. The main mechanisms to involve regions in the government initiatives to support the competitive regional innovation systems is the «regional program of research, development and innovation» (2007), including complex financial instruments, notably the creation of regional research funds.

Research and development works in Norway are carried out by universities, specialized and regional university colleges, research institutes of two types («research» and «with research») and R & D divisions of large Norwegian companies. In 2000 as a result of merging of Norwegian Council of Universities and Norwegian Council of University Colleges was formed the Norwegian Association of higher educational institutions (UHR), which serves as a coordinating body between universities and university colleges and represent it on key issues in education and science questions in cooperation with public authorities. Since the beginning of the 2000s higher education has become actively involved in the creation of technology transfer centers, science parks and incubators. The cooperation on a contractual basis between universities and research institutes was enhanced, what established a separate joint research organizations to conduct case studies.

Innovation policy in Finland

Finland is one of the first countries that adopted the concept of national innovation system as a fundamental idea of the strategic development of the state and the basis for the formation of innovation policy. Its innovation system has evolved over a long period and can be considered as the oldest in the Baltic region. A critical factor for changing the Finnish industrial and technological policy of the second half of the twentieth century and its subsequent transition to a comprehensive innovation policy, was the need to maintain national competitiveness through gradual restructuring: from a traditional resource-based model of industrial growth in the economy, and subsequently innovation. The process of formation of the Finnish national innovation system includes four significant periods: a) «institutionalized» (1960 – 1970es), which can be characterized by the creation of the institutional framework of the system (key institutions and links between them), development of a conceptual framework, principles and mechanisms for scientific and technical policy, implementation of measures to promote education and support industrial R & D; b) «target orientation» (1980es), associated with the beginning of the implementation of national technology programs and a set of measures for the commercialization of research results (also through the creation of science parks, competence centers, etc.); c) «systemic innovation» (1990es), uniting four basic ideas of new economy, «knowledge», «education», «innovation environment» and «internationalization» as the strategic guidelines for national development, maintained by the appropriate level of public financing; d) «optimization» (2000es), characterized by enlargement of main institutions of the innovation system of the country and the consolidation of their resources, structural reforms aimed at strengthening the interdisciplinary and social significance of the research activities, deepening of international cooperation, development of innovative services, improving the effectiveness of existing mechanisms for attracting foreign direct investment.

Current structure of Finnish innovation system has some similarities with the innovation systems in Sweden and Norway (see Pic. 6). Among its important characteristics one should note system integrity; high institutionality and significant role of state support; focus on applied research and commercialization of R & D; strong educational component; accumulated social capital and, as a consequence, development of network connections based on trust; high degree of integration of business and science in the international context. Key themes of the innovative development are bioeconomy, alternative energy, information and communications technology and health care. Also, considerable attention of Finnish government is paid to the area of innovative services and creative industries.

Pic. 6 – National innovation system of Finland

Implementation of the basic principles of national innovation policies is carried out through a set of tools, including tax incentives (tax credits for tax on personal income for invited foreign experts and researchers and on income tax for companies in terms of labour expenses for personnel engaged in R & D; the postponement of the payment of capital gains tax for business angels, who provide venture capital to SMEs, tax credit for SMEs engaged in research activities, accelerated depreciation, etc.); the mechanism of state acquisition of innovation, aimed at promoting advanced energy and environmental solutions (such as «green» technologies), increase of the participation of SMEs in innovative activity, increase in the number of new small innovative companies; venture capital financing; long-term investment loans, grants, provided on a competitive basis through various support programs, including public and semi-public funds; targeted subsidies, etc.

Regional innovation policy in Finland is formed mainly at the national and pan-European (through structural programs EU) levels. Its main purpose is to increase the competitiveness, sustainable development and the creation of a balanced regional structure. The main instrument of innovation development of Finnish regions for nearly 20 years has been the program «Centres of excellence», transformed as of 2014 into the program «Innovative City». Events of old and new programs are focused on strengthening strategic competencies of regions and creation of competitive innovation centers (clusters). The participation of regional and municipal authorities (councils) in the formation of regional innovation policy is limited. The regional councils are responsible for the overall development of regions, forming the regional plan and a strategic program based on targets of regional development, developed at other levels, including the sphere of innovation (Pic. 7). Municipal councils are involved in supporting the system of universities of applied sciences (polytechnics otherwise) and participate in the creation of campuses.

Pic. 7 – Formation and implementation of regional development policy in Finland

Conclusion

According to the analysis the innovation policy in the developed countries of the Baltic region is being held since the late 1990s, but its basis was laid much earlier – in the middle of the twentieth century in the framework of industrial, scientific, educational and technological policies that were formed in parallel and in conjunction with the formation of key institutions, that subsequently formed the core of national innovation systems. Features of modern innovation policy of Sweden, Denmark, Norway, Finland and Germany are largely a consequence of the tasks facing their governments throughout the twentieth century to restructure national economies in order to increase competitiveness in the international arena. Context conditions that accompanied the transition to the development of high-tech activities in these countries, as a rule, advocated a small domestic market capacity, resource constraints (human resources, investment, natural resource, etc.), high dependence on the international situation, increasing negative impact on the ecology. Common to the developed countries of the Baltic region at the current stage is the pursuit of sustainable and dynamic development by improving productivity, ensuring high standards of living, overcoming imbalances in territorial development and deepening integration into the global community. Innovation policy in this context is the main instrument for achieving the strategic guidelines.

The common features of national innovation policies are systematicity, integrity, continuity, result-orientedness, goal orientation and a high degree of institutionalization. Note that the process of formation and implementation of innovation policy in Sweden, Denmark, Norway, Finland and Germany simultaneously affects several hierarchical levels: pan-European, national, regional and local, but in different degree. Because of the involvement of regional authorities in the development of innovative policy we have identified three country groups: those with a strong position of the regions (Germany), moderate (Denmark, Sweden, Norway) and weak (Finland). Developed countries of the Baltic region, as well as others, that implement an innovative model of the economy, still see relevance of issues related to lack of venture capital, need to attract highly qualified specialists, weak involvement of SMEs in research activities, mismatch of volume of commercialized R & D results to state investments in the research sector, strong differentiation of regions in terms of innovation, lack of patent activity, etc. Each of the countries, taking into account the general line of the European Union, is developing its range of innovation policy tools aimed at addressing these problems, but in general, there are five clusters of influence: education, basic science, applied science and entrepreneurship, regional development, internationalization. Among the most striking trends in innovation policy of the countries in question until 2020 we marked interdisciplinarity and intersector approach, focus on consolidation of internal resources and improve of the efficiency of its use, development of ideas for smart specialization of regions, increased attention to the social and environmental importance of innovations, more active support of the internationalization of SMEs, implementation of the concept of open innovation, strong educational component, associated with the support of talented youth.

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Arctic dimension of German politics: National approach and aspects of international cooperation

Admin — Mon, 29 Jun 2015 19:54:20 +0000

Vyatkin Kirill Sergeyevich — Ph.D., Amber Bridge Fund, Head of the Berlin office.

Recently Germany has been more clearly indicating growing interest towards the Arctic region. It is determined by a number of political and economic processes in the modern world, occurring against lack of study of the dynamics of climate changes on the planet. The article analyzes the most important factors specifying the interests of Germany in the Arctic; it examines the potential opportunities and a set of tools at the disposal of German policy to achieve its goals; it assesses the nature and degree of involvement of Germany in the process of international cooperation in the Arctic area. Special attention is given to forecasts of further development of Germany in the Arctic project, including international development.

As it is known, Germany is among the countries that do not have direct access to the coast of the Arctic Ocean and, therefore, does not have legal rights to the independent development of the Arctic shelf. Its location is not close to the Arctic Circle and doesn’t have sovereign territories in the Arctic[1].

However, in November 2013, Federal Republic of Germany adopted a document entitled “Guidelines for German policy in the Arctic” [4], which largely explains the renewed interest of Germany to the region.

ARCTIC “MAGNIT” OR GERMAN INTERESTS IN THE ARCTIC

First of all, like most other countries outside the region, the Arctic attracts Germany with its immense hydrocarbon reserves. According to some foreign estimates (which, however, generally refer to the US Geological Survey data [6]), it may contain about a quarter of undiscovered deposits of hydrocarbons in the world. While the proportion of the Arctic in global oil resources is relatively small (less than 7 percent), the amount of gas resources is considered to be much more significant – about 25 percent or more[2].

As an alternative to nuclear power (and the trip of the last reactor is scheduled to 2022) Germany today is focusing on priority development of the so-called “renewable” energy sources – solar, wind, biological and so on. So far, however, even optimistic adherents of “green energy” provide long-term forecasts. So it seems clear that in the short and medium term Germany is likely to increase the consumption of traditional energy resources – oil, gas and coal. Therefore no wonder that the Arctic hydrocarbon reserves and the ways of its transportation are in the center of attention of political Berlin.

Secondly, the Arctic region possesses (again, mostly presumably) considerable reserves of rare metals, minerals, ores and other raw materials of strategic importance. This category, in particular, includes estimated deposit apatite, nickel, cobalt, copper, tungsten, titanium, chromium, manganese, platinum group metals, tin, mercury, gold, silver, diamond and so on. An important feature of a number of known nickel deposits is integrated ore composition, allowing – in the presence of appropriate technology, that Germany has – simultaneously remove additional amount of copper, platinum group of metals, gold, silver, selenium and tellurium. It dramatically increases the value of the ore, despite the high cost of extraction and production in the Arctic Circle [1, Volume 1, p. 126].

Thirdly, the Arctic attracts Germany, as well as other European countries, with its biological resources. The Arctic Ocean is the habitat to more than four hundred unique species of fish and animals. It is home of important species for European fisheries, namely, herring, cod, salmon, flatfish and others.

Fourthly, the Arctic is the area of emerging international transport corridors. In case positive forecasts are right (what happens sometimes), one can expect a lot of new opportunities for further development. When it comes to sea routes, one obviously means the Northern Sea Route (NSR), which runs near the Arctic coast of Russia, and the so-called Northwest Passage, located along the northern coast of Canada. Assuming the continuation of melting ice NSR is likely to become a major transport artery of world importance that will significantly reduce the shipping routes between Europe and Asia-Pacific region[3].

Finally, fifthly, Germany, and many other countries of the world are concerned about global climate change, which is believed to have a direct impact on the environment, economic activities, public health. That is why the monitoring of the climatic situation in the Arctic is of primary importance for the scientific community of Germany. For these purposes the country has already created and successfully launched a number of institutions involved in research in polar regions, including environmental monitoring in the Arctic and Antarctica.

INSTITUTIONAL ARRANGEMENTS

The mechanism of the formation and implementation of the Arctic policy in Germany is quite efficient. Traditionally, the main coordinating role in this important political direction is done by the Office of the Federal Chancellor. Four departments – Ministry of Foreign Affairs, Ministry of Defense, Ministry of Education and Research and Ministry of Economy and Energy are responsible for practical implementation of the basic provisions of the above-mentioned political strategy.

The lead operator for the preparation and conduct of research studies in various regions, including the Arctic region, is the Federal Agency for Geosciences and Mineral Resources (BGR), which is subordinated to the Ministry of Economy and Energy.

One of the main activities of the agency in the Arctic is the study of geodynamic processes in the coastal regions of the Arctic water areas. In this regard, since 1992 the agency has been implementing a multi-year international program CASE (Circum-Arctic Structural Events) [7]. During the reporting period over 15 major research (with a focus on geological and geophysical surveys) expeditions to Svalbard, northern Greenland, the Canadian Arctic and polar regions of Siberia were organized within the program[4].

Since all lands in the Arctic area (ie located to the north of the 66th latitude), as well as adjacent offshore areas are under the territorial sovereignty of well-known five states – members of the Arctic Council, German authorities strictly and consistently adhere to the principle of prior consultation with the countries concerning their programs of scientific and practical studies, which are usually held on the terms of cooperation.

Thus, BGR works on Svalbard are conducted in cooperation with the Norwegian Polar Institute. With respect to Greenland, which is under the sovereignty of Denmark, BGR cooperates with the Geological Service of Greenland in Copenhagen. Project in Canada is implemented within a multi-year program of scientific and technical cooperation (WTZ) between two countries. The main partners from the Canadian side are the Geological Service of Canada and the University of Laval / Quebec. The partners of BGR in the Urals in the frame of the same program[5]are institutes of the Russian Academy of Sciences in Moscow and Syktyvkar (Komi Republic).

“Siberian” part of the project is a priority for BGR. Among its most important exploratory tasks in the Arctic region, in particular, are:

- a range of issues related to the possible continental extension and access mid-ocean ridge of the Arctic Ocean on the mainland of Siberia;

- potential of Laptev Sea bed in terms of mineral (especially hydrocarbon) resources;

- potential of polar Urals in terms of chromite and platinum group elements[6];

- the phenomenon of permafrost and its resource potential; dynamics in this sector and its impact on the processes of climate change on the planet[7].

Thus, in 2001-2003 in the framework of the aforementioned program for scientific and technical cooperation (WTZ) with Russian Federation BGR implemented the project PURE (Polar Urals Expedition), by carrying out three geological expeditions to polar Urals. Long-awaited expedition to New Siberian islands[8] organized in 2011 as part of the program CASE-13 was considered a great success of BGR. The first phase associated with marine geophysical work in Laptev Sea, was finished in the mid-1990s (in cooperation with Murmansk Institute Sevmorneftegeofizika).

The next stage (project CASE-3, 1998), aimed at carrying out complementary geological studies on land, ended in a relative failure. It is essential that the year of default was not the best for polar research in Russia. Extremely unfavorable weather conditions in that year, huge problems in logistics, supply and financial support caused the premature cessation of work.

The subsequent adjustment of the political and economic course of our country, fundamental change in approach towards the Arctic allowed to provide favorable conditions for mutually beneficial international cooperation. The result of intensive and fruitful cooperation between BGR and a number of Russian institutions (the main partner – A.P. Karpinsky Russian Geological Research Institute in St. Petersburg) was the success of obtaining unique scientific data during the international expedition CASE-13 in 2011. Scientists not only from Russia and Germany, but also from France, Britain, Italy and Sweden took part in that project.

Starting from 2015 German Ministry for Education and Research is implementing the third framework program “Research for Sustainable Development» (FONA-3). The Arctic region is one of the key regions of the studies held in the framework of this program. Annually the Ministry allocates an average of about 20 million euros to support research projects in the Arctic. In general, Germany invests around 200 million euros per year in polar and marine research [8].

Among the research institutions of Germany dealing with Arctic issues, the main is undoubtedly Alfred Wegener Institute for Polar and Marine Research (AWI), located in the north of Germany in Bremerhaven town. The Institute is one of 18 major research centers united in the Helmholtz Society. It has about 780 employees, including 450 scientists, employed on a permanent basis, what means a lot for the German standards. The annual budget of the institute amounts to 60 million euros. 90% of the funding comes from the Ministry of Education and Research.

AWI Institute has three departments:

- Research Center in Potsdam

- Biological Institute Helgoland[9]

- Wadden Seastation Sylt [10]

In 1992 in accordance with the recommendations of the Scientific Council of the federal government, a research unit of the Institute AWI was opened in Potsdam in order to preserve the practices and scientific potential of the former GDR in geophysics and polar research. Today its main activities are focused on geophysical surveys in regions of permafrost, as well as experimental studies of atmospheric processes in the polar regions (primarily in areas of permafrost in Siberia and Svalbard). Scientists from “climate science»[11] department explore physical and chemical processes in the system “ocean – ice – atmosphere” and its importance for the development of the global climate. Working groups are engaged in studies of regional and large-scale circulation system and physical and chemical processes in the atmosphere. Current research in this area covers various topics, including influence of clouds and sea ice in the energy exchange between the ocean and the atmosphere, circulation of water masses in polar regions, study of natural climate change and modeling of atmospheric circulation in the Arctic.

A distinctive feature of the Research Center in Potsdam is a close scientific and practical cooperation with the university centers in Brandenburg state, and a number of other federal states. Well-organized system of scientific exchange and cooperation with partners in the universities of Berlin (Technical, Free, Humboldt), Potsdam (University of Brandenburg), Erlangen (Bavaria), Hamburg, Bremen, Kiel (Schleswig-Holstein), Trier (North Rhine-Westphalia) is designed to stimulate the flow of new knowledge and to ensure continuity, including personnel, in the area of polar research.

The Research Center is focused also on two research areas – «Earth Science» and «Biological sciences». Within «Earth Science» scientists reconstruct changes that have taken place in the past. Scientists from Bremerhaven, Potsdam and Sylt study the effect of occurring earlier processes on the climate development. They study the structure of oceanic sediments, surface deposits, polar ice caps. In particular, they analyze composition and distribution of marine sediments, material and energy flows in areas of permafrost and changes in the structure of the crust and polar ice sheets.

«Biological sciences» (which is the main focus of research scientists from Biological Institute Helgoland) cover environmental, physiological and ecotoxicological issues. Particular attention is paid to the study of processes in offshore and coastal zone of the North Sea. Research subjects include reaction of cells, organisms, populations and communities to external influence and organization and dynamics of populations, communities and ecosystems.

Scientists from AWI Institute often conduct research in the high seas or directly in the ice of Arctic and Antarctica. They have stations AWIPEV[12] (Svalbard, 79 ° N) and “Samoylovsky” (island Samoylovsky in the delta of the Lena River, 72 ° N).

As of 1998 island Samoylovsky locates a base for field research. In 2013 it was completely renovated to become a modern well-equipped Arctic research station. Initially the main organizers were AWI Institute from German side and Arctic and Antarctic Research Institute of Roshydromet (at the federal level) and Melnikov Permafrost Institute of the Siberian Branch of Russian Academy of Sciences (at regional level) from Russian side. Currently the station is on the balance of the Institute of Petroleum-Gas Geology and Geophysics of the Siberian Branch of the RAS (Novosibirsk) and is a part of the Arctic Centre, specially created in the institute. It should be emphasized that the whole station was built and equipped with Russian assets, the German side only finances the work of their representatives.

«Experimental Station on island Samoylovsky» is one of three projects (two others – «Global change in the seas of Eurasian Arctic shelf: frontal zones and polynyas in the Laptev Sea» and «Otto Schmidt Laboratory for Polar and Marine Research (OSHL)»), which are part of a large-scale Russian-German program «Laptev Sea System». In turn, the project «Laptev Sea System» is a branch of the Russian-German program «Trans-system of the Arctic Ocean» (Transdrift) and can rightly be regarded as «longevity» and one of the most successful ventures in the history of Russian-German joint research in high latitudes of Arctic.

In addition, Institute AWI incorporates year-round functioning German station Neumayer-3 (71 ° S) as well as Kohnen Station (75 ° S) and laboratory Dallman (68 ° S) in Antarctica. The stations in Arctic and Antarctic carry out meteorological and geophysical measurements all year round.

The main mobile research platform is icebreaker «Polarstern» («Polar Star», in fact being the only icebreaker in Germany)[13]. At the same time it carries out a close international cooperation – about a quarter of the members of the expedition on «Polarstern» are traditionally foreign researchers. In addition, the Institute operates five research vessels to work in temperate latitudes, and two polar aircrafts Polar 5 and Polar 6.

In addition to fundamental and applied scientific research institute AWI also provides coordination and advisory services. Particular attention is paid to biological monitoring, science and technology, infrastructure and logistics support for polar research in Germany, as well as advising the Government of Germany.

In April 2015 a delegation of German politicians and scientists led by the Minister for Education and Research Johanna Vank visited Svalbard. The program of the visit included a visit of a number of German and international research centers.

One of the aims of the visit was a visit to the Norwegian settlement of Ny-Alesund, which is the world’s most northern permanent public settlement. Here is located the world’s most northern permanent civil research station. Researchers from Norway (who has administrative control over then territory), Germany, France and China permanently work there. On a temporary basis the station is visited by scientists from Italy, Britain, Netherlands and Japan. In addition, the politicians got acquainted with the activities of the research station of the Institute AWI, which now operates in a joint German-French-format (AWIPEV).

In general we can say that polar research in Germany is based on an extensive network of public and private institutions that coordinate financial, scientific and practical activities in this area. Ministry of Economy and Energy and Ministry of Education and Research provide primarily institutional support. In addition, Ministry of Education and Research conducts targeted support of research projects in the Arctic.

Since the beginning of the 1990s the German Research Foundation (DFG)[14]actively supports polar research. In 1992 the Presidium of the company established the Special Committee SCAR / IASC (Scientific Committee on Antarctic Research / International Arctic Science Committee), whose tasks include planning and coordination of scientific and practical activities of German universities and university centers with institute AWI and relevant government departments in the field of polar research. Currently, with the support of DFG on the basis of a number of German universities functions an interdisciplinary program of comparative research in Antarctica and Arctic (in 2012 the program has been extended until 2018).

Some more specialized projects for the Arctic are conducted with the participation of the institutions of Max Planck Society, Leibniz Association. Finally, the most important instrument in terms of interdisciplinary coordination and cooperation is the German Society of Polar Research (DGP) that brings together representatives of various scientific disciplines.

POLITICAL ORIENTATION

Obviously, in the foreseeable future Germany will continue the policy of further strengthening of “indirect voting rights” in its Arctic affairs, primarily relying on their undoubted achievements in the field of research and scientific practice. With good expertise in qualified scientific works, as well as solid financial, technical and technological potential for further development, Germany intends to use expert assessments to influence political decision-making, relating to the Arctic.

In this regard, Germany, for example, appreciates the opportunities for cooperation in the framework of the International Arctic Science Committee (IASC). Secretariat of the Committee is based in the branch of the Institute AWI in Potsdam, and the Executive Secretary of it is the authoritative German expert on Arctic F. Rahold. IASC members are national scientific organizations. Germany is represented by the aforementioned German Research Foundation DFG.

Executive Director of the International Association on permafrost (IPA) is held by a German (an employee of the Institute AWI K. Schollen). At the same time, Germany has been active in the European Polar Board (European Polar Board). As a division of the European Science Foundation (European Science Foundation, ESF), it is an important platform for the coordination of polar research between interested countries – EU members. The German experience in the field of polar research has formed the basis of the relevant areas within the next 8-th EU program for research, covering the period 2014-2020.[15]

The specificity of the German Arctic strategy lies in the emphasis on the environmental consequences of industrial development in the Arctic. If desired, one can discern the intention of the international community to form a negative attitude towards any attempt to operate Arctic resources without the use of special “green” technologies. In an effort to ensure high standards of environmental safety as international standards, Berlin, obviously is trying to secure for its own (and European) companies more favorable conditions for the promotion to the Arctic.

At the same time it should be noted, that Germany is quite realistic regarding its competitive opportunities in several areas. For example, Germany so far has only one relatively large oil and gas company operating on an international scale – Wintershall. Concerning the Arctic, its strategic focus is the development of offshore fields in Norway.

However, the company has been recently gradually consolidating its position as one of the largest producers of gas on the Norwegian continental shelf. A subsidiary of the BASF concern has successfully established itself as an integrated enterprise in the field of exploration and production. One of the backgrounds of its growth is its rich portfolio of licenses. Wintershall is one of the largest license holders on the Norwegian continental shelf: it has about 50 licenses, over half of which endows it with the rights of the operator works. Most recently, in January 2015, the Ministry of Petroleum and Energy of Norway issued the company 8 new licenses, giving great prospects. Yet it must be acknowledged that the scope of its activities is not up to a level comparable with world known giants of oil and gas industry.

Obviously, in the foreseeable future Germany will stop its Arctic ambitions by concentrating on production of renewable resources (fish and seafood) as well as on the exploitation of the Northern Sea Route[16]. In this regard, it would be appropriate to recall that Germany has the largest fleet of containerships in the world, therefore it should be interested in the development of new transport communications. Besides, it is an additional opportunity for the development of the national shipbuilding industry. Thus, in December 2012, the Federal Agency of Sea and River Transport of Russia and the German company «Nordic Yards» signed a state contract for the construction of two multipurpose salvage vessels with capacity of 7 MW, designed to work in the Russian Arctic. The total amount of orders amounted to 150 mln Eur. The ships were transferred to the Russian side in time and became part of its fleet at the beginning of the year[17].

Germany is likely to leave the development of the access to the region’s energy resources to its partners – Norway and Russia. Berlin is satisfied with the role of the distributor of Russian raw materials on the world market.

Most of German experts are rather skeptic regarding the thesis that the “Arctic is growing potential conflict,” and that predicted by some researchers conflicts in the Arctic will be conflicts over access to hydrocarbon resources. [2] The extent of the reserves in the region, mostly widespread in pseudo-scientific circles, is greatly exaggerated. German experts (in particular, from BGR) are more careful about such estimations. According to them, data on stocks, which are now provided by different sources, are very approximate – primarily due to poor knowledge of the region. For the time being it’s mostly forecasts. Proved reserves are significantly low[18].

It is also noted that in order to assess the potential for conflict in the northern polar regions it is important, that almost all estimated hydrocarbon reserves of the Arctic are concentrated in the exclusive economic zones of coastal States, ie within their undisputed jurisdiction. The central part of the Arctic Ocean, which could theoretically meet claims of coastal states over the continental shelf, is of little promise in search for hydrocarbon resources[19].

In other words, there is simply no reason for the emergence of a new «arms race» in the region[20]. It is significant that the participants of the last annual Security Conference in Munich (February 2015) did not discuss the current situation and its development in the Arctic – apparently due to lack of reasonable forecast expectations for the foreseeable future acute conflict situations in the region.

It entirely corresponds to the estimates from defense authorities of Germany. For example, published in July 2014 analytical study «Climate Change and Security in the Arctic after 2014″ prepared by planning department of Bundeswehr concludes that a widespread and military interstate conflict in the Far North is unlikely to happen. Even in the context of the ongoing melting of ice the Arctic will remain quite stable region for Germany, having nevertheless increasing economic and environmental value. In light of this, German security policy will primarily face the task of a comprehensive and long-term-oriented monitoring of the situation in the region [3, S.24]. For the process to be monitored and analysed one can attribute, for example, political dynamics associated with the autonomy of Greenland (which, in turn, could lead to the transformation of the «Arctic» status of Denmark), or increased political activity in the Arctic Council of «observers» among Asian countries (mainly China and Japan).

Sharing the opinion of the majority of Russian, Norwegian, Canadian experts, German experts say that today the military are able to fully ensure the safety and protection for civilian use such a wayward region as Arctic. However, they note that there is currently no need for additional support of Arctic forces of German partners in NATO with forces and means of Bundeswehr. Improving capacity and operational capabilities of German armed forces in Arctic is neither today nor in foreseeable future a priority of the development [3, S.25].

List of References

Аrkticheskij region: problemy mezhdunarodnogo sotrudnichestva. Khrestomatiya v 3-х tt. Izdatelstvo RSMD. М., 2013.
Corinna Röver, Katrin Ridder-Strolis, «Nachhaltigkeit in der Arktis: Prämissen, Probleme und Potentiale». Länderberichte der Konrad-Adenauer-Stiftung e.V. Oktober 2014.
Klimawandel und Sicherheit in der Arktis nach 2014. Hat die friedliche und kooperative internationale Arktispolitik eine langfristige Zukunft? Planungsamt der Bundeswehr, Dezernat Zukunftsanalyse. Juli 2014.
Leitlinien deutscher Arktispolitik. Verantwortung übernehmen, Chancen nutzen. Auswärtiges Amt, November 2013.
Nichtstaatliche Konflikte in Räumen begrenzter Staatlichkeit. Planungsamt der Bundeswehr, Dezernat Zukunftsanalyse. Future Study 2012.
United States Geological Survey. URL: http://www.usgs.gov/newsroom/article.asp?ID=1980#.VWRhOEa8xip
Bundesanstalt für Geowissenschaften und Rohstoffe. URL: http://www.bgr.bund.de/DE/Themen/Polarforschung/Arktis/Expeditionen/expeditionen_node.html

Bundesministerium für Bildung und Forschung. URL: http://www.bmbf.de/de/26677.php

[1] Perhaps Svalbard archipelago may be a specific exception, the territory of which is under sovereignty of Norway. Since 1925 Germany is a party to the Paris Treaty on Spitsbergen of 1920, which provides that parties equal rights to exploit natural resources of Svalbard and its territorial waters

[2]See f.e.: http://polpred.com/?ns=1&ns_id=1159650&searchtext= or

http://www.zeit.de/wissen/2015-05/arktis-klimawandel-erderwaermung-eisschmelze-rohstoffe

[3] With a relatively favorable ice and weather conditions taking NSR from the German Hamburg to Japanese Yokohama could make only about 6,600 nautical miles, while through Suez Canal – 11 400 miles. Accordingly, the transportation time of cargo could be reduced to 40%. [5,S.26].

[4] Indeed, regions (and hence organizations) of United States are not present in this list.

[5] It is based on an agreement on scientific and technical cooperation (WTZ), which was signed by Germany and Soviet Union in 1987, subsequently was subject to repeated amendments and additions, in particular, during German-Russian intergovernmental consultations in July 2009.

[6] This area is of particular interest to Russia because after the collapse of the Soviet Union, it lost access to the largest in the USSR deposits of chrome ore in Kazakhstan.

[7] In this case, the Germans seem to be “engaged” in a very promising process. The fact is that as long as the Americans are developing shale gas, the world begins to develop a much more substantial reserves of “blue fuel”, which, in compressed form – so-called gas hydrates – are stored in the permafrost on the seabed and on land. According to the Russian Ministry of Energy (2013), reserves of gas hydrates are more than twice of the total reserves of shale and conventional natural gas. Russia has large deposits of natural hydrates found in areas of permafrost in Yakutia and West Siberia. Large reserves are discovered on the Sakhalin shelf in the Okhotskoye Sea (in particular in the area of the east coast), and the Kuril Islands (which, by the way, is so eager to get Japan).

[8] New Siberian Islands – Russian archipelago in the Arctic Ocean, located between the Laptev Sea and East Siberian Sea.

[9] Helgoland – German-owned archipelago located in the Bay of Heligoland in the south-east of the North Sea.

[10] Sylt – Germany’s largest island in the North Sea, which is part of the waters of the Wadden Sea; since 1927 the island connected to the mainland by a causeway.

[11] This area is part of one of the six areas of basic research, on which Helmholtz Societyis concentrated: Energy, Earth and Environment, Health, Aeronautics, Space and Transport, Key Technologies, Structure of Matter.

[12] The base is named after Carl Koldewey, in honour of the head of the first German polar expedition in 1868. It was founded in Germany in August 1991 as a base of the Alfred Wegener Institute (AWI), and in 2003 it merged with the base of the French Institute Paul Emile Victor (IPEV).

[13]The construction of the new multi-polar vessel, which should replace the current ship carrying “scientific watch” since 1983 is planned by the end of 2019.

[14] The Foundation is the central organization for promotion of research in Germany. It operates on the principles of self-government and is organized on the basis of civil law. Its main task is research funding of universities and public research institutions of Germany. The Foundation itself is financed mainly at the expense of federal and state governments.

[15]http://www3.uni-bonn.de/forschung/euroconsult/8.-frp

[16] It should, however, added that in these areas Germany prefers cautious forecasts. For example, regarding the NSR it is noted that severe weather conditions and unpredictable ice conditions will remain for the foreseeable future dependence of marine transportation vessels of icebreakers and, most importantly, trained personnel, what in financial terms largely eliminates the possible gains from reducing the distance and travel time. Therefore transarctic container transport (especially those which are carried out on an urgent basis “just-in-time”) are not a short thing of the future.

Equally uncertain (and in fact, simply unexplored) remain assessments as to whether the result of the temporary exemption of ocean space from ice is to expand commercial fish habitat and thus will lead to an increase in their populations.

[17]Being a class of Icebreaker 6, the vessels may conduct rescue operations in difficult conditions. They can be used for icebreaking operations in port and at sea in the thickness of the ice up to 1 meter, extinguish fires on floating objects and coastal oil spill.

[18]F.e., opinion of expert of BGRG.Elsner in: http://www.zeit.de/wissen/2015-05/arktis-klimawandel-erderwaermung-eisschmelze-rohstoffe/seite-2

[19]Expert BGRK. Reihert, the same source.

[20] In particular, experts of authoritative German Foundation for Science and Policy, acting as a leading consulting center for the government of Germany, followed in their assessments this line. See: http://www.swp-berlin.org/publikationen/kurz-gesagt/arktische-kooperation-trotz-europaeischen-frosts.html

The Kaliningrad nuclear power plant project and its regional ramifications

Admin — Mon, 29 Jun 2015 19:45:39 +0000

Prof. Leszek Jesień is the head of the Institute of International Affairs and Sustainable Development at the Collegium Civitas University in Warsaw.
Dr. Łukasz Tolak is a specialist on nuclear energy at the Collegium Civitas University.

The project of Kaliningrad nuclear power plant, if of much greater capacity than conceivable needs of the oblast, will necessarily influence plans and feasibility of the nuclear power plants intended and/or planned in the Baltic Sea region. Complexity

of the nuclear situation in the region is greatly enhanced by diverging concepts and imaginations about the nuclear-for-electricity as energy generation technology. In the region, there are countries that do not intend to have nuclear electricity capacity (Denmark), or that want to get rid of it (Germany). But there are also those that firmly rely on nuclear electricity generation (Finland), or those that seem to agree to

it because of its climate action preferences (Sweden). At the same time, there are those that signal their intention of building one or two nuclear power plants (Poland), or those that want to return to their nuclear generation past (Lithuania).

The situation is complex also because the former Soviet electricity system that used

to embrace all the former Soviet Union countries (including now firmly again independent Baltic states of Lithuania, Latvia and Estonia), as well as Poland as a part of former communist bloc, still operate in the Baltic states. That makes for a awkward situation when an important part of the European Union (the Baltic states), potentially an indispensible connection north-south from Scandinavia to the European mainland in Poland, cannot contribute to making of the common electricity system of the EU. Conversely, if they finally switch over to the European electricity standard, they will make the Kaliningrad oblast an electricity island within the EU, much as it stands in all other areas. A possibility of the Kaliningrad region switching to the EU’s electricity standard together with other three Baltic states would naturally reverse the logic and would separate – in electricity terms – the Kaliningrad oblast from the Russia mainland.

Fig 1. Planned Kaliningrad NPP capacity versus total electricity consumption of

the Kaliningrad oblast and the Baltic states (TWh/year)

Source: Own calculations, data on total electricity consumption from the World Factbook, 2013-14.

Here is where the local nuclear power plant plays a huge role. Its capacity greater than the needs of the local Kaliningrad market means that the Russian authorities play on the logical assumption of either the Baltic states remaining firmly in the post-Soviet electricity system, or the Kaliningrad oblast joining the EU standard. If the capacity is to be greater than the needs of Kaliningrad and Lithuania combined, as intended in the first project, than its feasibility may rely on export opportunities to the EU standard neighbours, mainly Poland, perhaps Sweden, or even Germany.

This seems possible only if Kaliningrad oblast switches to EU electricity standard.

The Kaliningrad nuclear power plant project

The Russian Federation is planning a significant strengthening of their nuclear sector as a way to increase its share in electricity production. According to the adopted plans, by 2030 the nuclear share will grow to about 25-30% of the global electricity production and then to 45-50% after the next two decades1. The aim is to achieve three objectives that seem crucial for the Russian economy. The first is to make available a significant amount of gas for exports. Approximately 70% of Russian annual gas production is consumed by the domestic market2. The second reason, most obvious, is to secure increasing energy needs in next two or three decades. Last but not least is to make Russian nuclear technology more competitive on the international market. In order to meet the above tasks, the process of lifetime extension of existing reactors is in progress. More than 35 new reactors are under construction, or planned3. With exception of the most advanced investments, the future of the suggested, new nuclear power plants is uncertain.

In the context of ambitious Moscow plans, the Baltic Nuclear Power Plant (NPP) (Kaliningrad) has got a very special status. The first proposal to erect a new nuclear power plant in the Kaliningrad province has been announced by InterRAO UES in 2008. The construction agreement with the Kaliningrad authority was signed in April 2008 and the future installation located in the town of Neman near the Lithuanian border4. The initial plans assumed building a twin AES-92 plant with two VVER-1000 reactors5. It was supposed to be the first nuclear installation in Russian Federation with its output destined for export. Energy needs of Kaliningrad were of secondary importance. The energy security of the town is currently guaranteed by its thermal power plant (Kaliningradskaya Thermal Power Plant 2 – 875MWe)6.

The nuclear power plant is expected to be the first case in the history of nuclear industry of Russian Federation to have the anticipated foreign equity share (albeit no more than 49%)7. Part of the main plant modules is to be developed in cooperation with foreign industry. The contract signed in February 2012 by the Alstom-Atomenergomash (AAEM) company provides, among the other things, that Alstom would deliver steam turbines ARABELLE and moisture separator re-heaters, power generators and other auxiliary equipment. The contract is estimated at 875 million euro8.

According to a more recent project, the new nuclear power plant would be based on the larger and more modern AES-2006 design with two pressurized water reactors (PWR) VVER- 12009. Each VVER-1200(V491) reactor has the thermal capacity of 3200MWth and electrical capacity of 1170MWe gross. The design is the common project of OKB ”Gidropress” and “Atomenergoproekt” with the scientific supervision of Kurchatov Institute from Moscow10.

The Russian VVER-1000/1200 family are equivalent of the Western PWR reactors (generation III and III+). VVER-1200(V-491) based on AES-2006 design, are classified as generation III+ with an expected service life of 60 years. It would probably be the most modern project of the Russian nuclear industry until the beginning of the next decade. As many as 17 of similar VVER-1200 reactors are expected to be commissioned in other locations in the Russian Federation by 202011. It’s also an export success. The identical project is planned in Turkey (Akkuyu nuclear power plant). The Turkey-Russia agreement of May 2010 provides for the construction of four VVER-1200 reactors around 2020-23. The total electrical capacity of the Akkuyu will be about 4800MWe12. The contract value is about 20 billion dollars.

The doubts about nuclear safety raised in connection with the Kaliningrad nuclear power plant investment, can be referred to all the latest-generation reactors. There might be problems, as in case of all III/III+ generation projects, with the reliability of the most important modules in assumed long-standing service life13. The VVER-1200 reactors are based on many-year-experience with operating of earlier generations of VVER family. There are about 50 VVER-440 and VVER-1000 operating units in Russian Federation and abroad. They are more reliable in comparison to other Soviet designs (RBMK reactors in particular). According to the official information, the VVER-1200 reactors that are currently under construction contain extensive passive and active safety systems with the increased share of the passive one. It comprises, inter alia, a passive heat removal system and a passive reactor scram system, as well as a passive hydrogen removal system and a secondary system of passive heat removal via steam generators14. In the opinion of the Russian specialists, the concept of the safety system is comparable to the western designs of PWR reactors of the III and III+ generation.

The preparatory work of the project in Kaliningrad has begun in February 201015. The first elements of concrete were poured two years later. According to the plan, the first reactor should be in commercial service by 2017. The cost of the project is estimated at 6-8 billion euro.

Due to the electricity exports objectives of the project, there are several conditions to be fulfilled, before it gets operational. The first one was to attract foreign investors and loans to finance the project. The second one was to attract the real interest for future foreign customers. Only a small part of planned output (2300MWe) may be consumed by energy needs of Kaliningrad. The long-term contracts from foreign partners are necessary to ensure the economic side of the investment. Last but not least, there are grid connection requirements. The Russian enclave has got a limited capacity transmission line with Lithuania and no connection to Poland. This situation makes a future export of electricity impossible, unless fundamentally changed. Project of such a big nuclear power plant in the Kaliningrad Province, if not fully connected of to the EU grid system, is not really arguable in economic terms.

In the course of last five years none of the conditions mentioned above was fulfilled.

There is no long-term contract for future supplies of electricity, although the proposal

has aroused some interest. The project seems to be in direct contradiction with energy strategies of neighbouring countries, all of which are very much interested in raising their energy independence ratio.

The latest news from Kaliningrad indicate a possible change in the schedule of the project’s implementation. This could mean, at least, a significant delay of the works, if not abandoning of the project altogether. A possible scenarios assumes that the VVER- 1200 reactors could be replaced by a smaller design, thus better corresponding to the real energy needs of the region itself, and less relying on the external markets.16

Poland still uncertain

In Poland, until now with no nuclear generated electricity, in November 2008 the government took decision to explore possibilities for building two nuclear power plants that should be operational by 2023-24. It therefore created a special purpose company, that is a consortium of mostly state owned electricity utility companies PGE, Tauron and Enea, together with the KGHM, a copper mining conglomerate. So far, the three possible locations were all considered at the Baltic Sea shore in either Gąski, Choczewo, and/or Żarnowiec, as seen from the West to the East.

However, the Polish public opinion remains divided on the issue. On one side, the nuclear generated electricity could enhance the country energy security, so far – for electricity generation – largely (by 90%) based on coal and lignite. It would also significantly contribute to lowering the country’s CO2 emissions, thus contributing to the EU’s driven climate change action. Yet, when things got to local, things turned bad. In a local referendum in Gąski (February 2012), an overwhelming majority of 95% of 50% turnout voted against any new nuclear power plant built in vicinity. Although, there was no public awareness campaign before, and the local population was not familiarized with the benefits of such an option, still the results were considered straightforward in saying ‘no’.

In politics, two parliamentary left wing parties, Ruch Palikota and SLD, with one fringe right wing party Solidarity Poland, are all against, while all major mainstream parties of both the government and the opposition are favourable for building a nuclear electricity generating capacity in Poland. In short, over three quarters

of the current parliament is in favour of the nuclear power plants in the country.

Fig 2. Polish parliament split on nuclear electricity generation, 2013

Source: own analysis of party platforms. Those bolded are against, or rather against nuclear power plants;

L = left; R = right; C = centre; (-) and (–) = against nuclear; (+) and (++) = for nuclear; (-/+) = split.

It plays a role, that Poland is in fact currently surrounded by the nuclear producing countries: Germany, Czech Republic, Ukraine, Belarus, and Sweden with Finland across the Baltics. There are several well known exceptions to that picture that do and will play a role. Germany has announced its Energiewende, the energy transition that presupposes also closing their nuclear power plants by 2022. Lithuania used to be a strong player on the local market thanks to its Ignalina nuclear power plant, but this was closed at the end of 2009 as a part of their accession deal with the EU, the installations there considered not secure enough. The Kaliningrad oblast, although Russian territory, does not produce nuclear based electricity for now. And Denmark, again across the Baltics, has decided already in 1985 not to produce nuclear energy at all. Even if it imports electricity from Sweden and Germany, thus partially imports the nuclear derived elec-tricity, it was able to successfully exert pressure on the Swedish public opinion. Consequently, the Swedes closed two Barsebäck units, what ultimately happened in 1999 and 2005 respectively.17 Finns apparently managed to solve the nuclear waste problem, and seem to proceed to the final stage with their European Pressurized Reactor (EPR) at Olkiluoto 3. The EPR there, although much delayed now (from 2008), is expected to go operational in 2016, with almost tripled costs of now estimated 8.5 bn EUR18. This, along with the French Flamanville project and the British one, could contribute to the possible implementation of the European nuclear energy design EPR.

Lithuania going for and hesitating

An interesting project, from the point of view of the Baltic Sea nuclear situation is the

Lithuanian concept of Visaginas, the new nuclear power plant. It has been construed as one not only to replace the closed Ignalina, but also to provide a backbone to the long needed and awaited north-south connection from the Scandinavian Finland and Sweden, via the three Baltic States of Estonia, Latvia and Lithuania, to Poland in the south. The region suffered long from incompatible inheritance of the Soviet times when it was largely connected east-west, to the USSR as a pole and source of energy and dependence. The Visaginas project started in 2007 with participation of companies from Lithuania, Estonia, Latvia and Poland, which subsequently withdrew in 2011. The main technology provider, and strategic investor would be Hitachi GE, which should start to build a single 1350 MWe Advanced Boiling Water Reactor in 2015, intended to be operational as of 2021. It is estimated to cost almost 5 bn EUR. Still, the project has been over-shadowed by the national referendum in Lithuania, which in October 2012 proved negative sentiment by a large margin of almost 65%.

Although non-binding, the referendum might indicate problems with the project at a later stage.19

The Visaginas has been planned to be the cornerstone of the new Baltic Energy Market Interconnector Plan (BEMIP), which is intended to link Poland with Finland and Sweden, via the three Baltic States. It gets support of the European Union which funds several of its parts: LitPolLink (Lithuania-Poland), Estlink-1 and Estlink-2 (Estonia-Finland), NordBalt (Lithuania-Sweden). The links as the interconnectors should effectively reverse the situation when, now, Lithuania, Latvia and Estonia are still parts of the Russian controlled IPS/UPS electricity system. With the three Baltics states connected to the European Network of Transmission System Operators (ENTSO), the Kaliningrad oblast would get isolated from the mainland Russia. Apparently, the Russians recognize this situation and Rosatom proposed to build a link between Poland and Kaliningrad that would effectively forge the Kaliningrad electricity system with that of the EU. This prospect would eventually facilitate greatly any Kaliningrad nuclear generated electricity exports to the EU, either Poland, or Lithuania, or even all the eastern and southern Baltic states.20

Eventually, Poland would add one or two of its own nuclear power plants, if the government’s plans are going to materialize. The decision on the technology, the reactors and design, has not been taken, however. With the Swedish 10 nuclear reactors, and their public opinion strongly backing them as a viable strategy for climate action, the Baltic Sea nuclear prospects seem a bit diversified. But there are interesting patterns emerging where the Kaliningrad nuclear power stations or the Polish nuclear power plants may play important roles. Particularly, if we take into account the Germans going the Danish road to abandoning the nuclear electricity generation, with their Energiewende. This way, the west of the Baltics would be free from nuclear energy capacity, while there would be strong production sites in the north, south and east of it.

The situation in the north and east of the Baltic Sea seems clear: both the Swedes and

especially the Finns are seemed prone to rely heavily on nuclear for their electricity

generation. Their capacities are construed. Specifically, the Finnish seem to generate

electricity from nuclear fission – based their cooperative concept of ownership of the nuclear capacities – for domestic purposes, and not really intended for serious exportation.

Sweden nuclear, but…

The current status of Sweden’s nuclear industry is a result of the decades of development, beginning with the top secret nuclear weapon program for advanced nuclear

industry. As far as today more than 40 percent of Swedish electric power comes from ten nuclear reactors at three nuclear power plants. Four of them entered commercial

service in the 1970s (Oskarshamn 1,2 and Ringhals 1,2) and six began to operate in 1980’s. As mentioned, the Barsebäck nuclear power plants were ultimately closed in 2005.

Interestingly, for more than 30 recent years, the Swedish nuclear power plants have undergone consistent process of expanding nuclear capacity as well as their operational lifetimes. In case of the Ringhals nuclear power plant it has meant an increase of about 337 MWe21 to 450 MWe by 2012.22 This action, despite the closure of the Barsebäck has allowed to maintain the strong position of nuclear energy in the Swedish electricity mix and to add about 1050MWe to the ten working reactors by the end of 2008.23 Further investments of this kind are planned.

Sweden has one of the most advanced programs of nuclear waste management. The Swedish Nuclear Waste Fund is administrated by the Swedish Radiation Safety Authority and will cover costs associated with the decommissioning of nuclear reactors and waste storage. The fund is financed from the fees of nuclear power operators.

According to the plans of the Swedish Nuclear Fuel and Waste Management Company, SKB, the ultimate repository for used fuel from Swedish NPP will be located in Söderviken, close to the Forsmark Nuclear Power Plant. The repository will be placed at the depth of approximately 500 m in geologically stable granite bedrock. The beginning of the construction is planned for 2019 and the investment will be completed about 2025. The repository will be in use until about 2070 and at that time it will have 60 km of tunnels and about 4 square kilometers of underground storage surface. Its total capacity is expected at 12000 tons and it will be able to store as many as 6000 iron, copper-cast canisters containing used fuel.24 The canisters will be stored in the holes bored in the tunnel floor. Each canister will be surrounded by bentonite clay to isolate it form the bedrock and to absorb water. That is to help to stop a corrosion process of the copper canister. In case of leakage or other damage of a canister the clay insulators of the granite bedrock would delay radioactive materials from reaching the surface.25

This kind of storage is known as the KBS method. The technology should isolate radioactive material from people and living nature for at least 100 thousand years. Given the time-span of the storage project, the speed of corrosion of the copper containers seems to be a crucial safety problem. The bentonite clay as well as the repository environment are both intended to help to stop the corrosion process of copper, but there are still controversies over the safety issues of the technology. The newest report of the Swedish Radiation Safety Authority indicated that the corrosion had occurred on the surface of the copper elements during the last tests. The issue would require further research to solve the controversy.26 In the last three decades Sweden went through ambivalent nuclear ”phase out” policy. The US Three Mile Island catastrophe of 1979 was the reason for the Swedes to organize a referendum about future of the Swedish nuclear energy. In 1980 a majority of Swedes voted for not developing the next generation of nuclear power plants after having ended lives of those plants already operational or under-construction. Conse-quently, the Swedish parliament took a decision to close all twelve nuclear power plant by 2010. For economical reasons and under a strong pressure from industry and labor unions, the Swedish political elite has not made a serious attempt to implement this decision and the 2010 target was subse-quently abandoned.27 In 2010, in spite of resistance from the political opposition and ecological movements, the Swedish government adopted a new plan of replacement of all ten nuclear reactors by new ones, and passed it through the parliament. The plan is strictly limited and assumes replacements only. The number of reactors is not allowed to exceed ten, and all of them must be built at the same site of as currently existing nuclear plants.28

According to the plan, the first new nuclear reactor would be required after 2025.

Today, it is difficult to foresee future of nuclear energy in Sweden. Still, taking into account the public opinion shift in favor of continuing of the nuclear power program and ambitious government’s plans, atom seems to be an important part of the Swedish climate policy. Together with renewable energy sources, nuclear plants will contribute towards environ-mental goals and will help to impose further limits on the fossils fuel share in the Swedish energy mix.

Finland firmly nuclear

The nuclear industry in Finland is providing nearly 30% of the electricity. The first generations of nuclear power plants, like in Sweden, were completed from 1977 to 1980. All four nuclear power reactors built at the time, are currently in use. Unlike Sweden, Finland has not developed its own nuclear technology capacity. Olkiluoto 1 and 2 are based on the Swedish technology, and Loviisa 1 and 2 on the Russian one. In spite of this, an average lifetime capacity factor is one of the highest in the world – over 85%. Moreover, as in the case of the Swedish nuclear power plants, the nominal capacity of the Finnish reactors have been uprated ever since they were built. In case of the Olkiluoto, the nominal capacity of each reactor has increased from 658 MWe to 880 MWe.29

The decision about the future of the nuclear industry in Finland has been taken in 2002. For economical reasons, in May 2002 the Finnish parliament approved a proposition to build fifth nuclear reactor.30 According to the initial investment plan, developed together with French Areva (EPR reactor EPR reactor, 1600 MWe), it should have been in commercial service in 2013. Unfortunately, due to the sophistication of the project, serious technical problems and delays have been encountered. The budget exceeded more than twice by now, and today its commercial operation is planned for 2016.31

All these problems have not stopped the Finnish intentions to further expand its nuclear power industry. Of two new projects, the first one – Olkiluoto 4 – is intended to be one of the modern western designs, while the other one – Hanhikivi 1 NPP, led by the new consortium in the nuclear power industry: Fennovoima Oy – would most likely get partnered with the Rusatom Overseas to develop the AES-2006 design based on the VVER-1200 reactor.32 In July 2010 the Finnish parliament approved construction of the new reactors.

Finland’s nuclear waste management program was initiated in 1983, and is in general similar to the Swedish one. The key player is Posiva Oi, company responsible for the final disposal of spent nuclear fuel. The company is owned by two Finnish nuclear power plants operators: TVO – 60% and Fortum – 40%.33 The final repository and waste encapsulation plant will be placed at Olkiluoto up to 450 meters underground in the stable bedrock. Disposal will be based on the Swedish SKB-3 concept with the copper canister and bentonite clay as the second barrier.34 The planned capacity of the deposit is 9000 tons and will allow to dispose of all spent fuel from the four existing reactors as well as the new Olkiluoto 3 and 4 units. The future of the spent fuel from Hanhikivi 1 nuclear power plant is still unclear.35

The cost connected with the final disposal and decommissioning of nuclear power plants will be covered by the state owned Nuclear Waste Management Fund. The fund is financed from the charges on the generated electricity which amounts to about 10% of the total electricity production cost. According the Ministry of Employment and Economy, at the end of 2012 the Fund has amassed about 2.16 billion Euro.36 This amount of money seems sufficient to cover all the costs of management of current nuclear waste stockpile as well as decommissioning of the existing power plants.

In Finland the nuclear energy is perceived as a reliable and safe source of electric power. The Finnish public is among the strongest supporters of the nuclear energy in Europe. Successful finishing of Olkiluoto3 and the two planned projects will extend a nuclear horizon far beyond 2050 and will root nuclear power deeply in the Finnish climate and energy strategy. The future of nuclear energy in Finland seems to be stable and certain.

Conclusion

To sum up, the nuclear electricity generation on the south and east side of the Baltic Sea remains mixed. There are several reasons for that, with perhaps the most important one being social and political uncertainty about the projects and their public perceptions among nations and locally. External developments, with Fukushima disaster, German Energiewende, and pressures from the non governmental organizations, which in many cases do not recognize nuclear electricity generation as beneficial for climate action and they still press for the development of renewable resources.

The other very important reason is an apparent competition between three major concepts: Kaliningrad power station, Visaginas project in Lithuania and Poland’s plan for two major power plants, all of them intended to be nuclear and located in the north of the country. It seems either – or. With serious inroads of the renewable resources into the electricity mixes and consumption needs, there seem not to be place for more than one project regionally.

Moreover, their business chances are interlinked – any increased possibility of advancing and implementing of one of them does and will indeed influence chances of financing and building the others. Clearly, capacity of the projects to raise money and loans are inter-linked as all investors and banks would naturally look into the externalities of each project.

Finally, neither of them have yet crossed their respective points of no return. While the Kaliningrad project seemed most advanced, it got stilled. The Visaginas has been clouded by the Lithuanian public opinion referendum. And the Polish plans are still far from being stable.

Interestingly, the European Union does not play any important role in these cases. As only natural with energy projects, especially of this magnitude of investment needs, the national authorities are the key players. Even if the case of local cooperation across and along the Baltics would normally call for somewhat closer cooperation on the issue, this is not the case. The European Commission might get interested in the issues, especially with its interest for the single energy market, but it has not been noted as an important player among the parties here. Its role is marked in pressing for making of the north-south energy and transportation connectivity, but not on the choice of ways of electricity production. While this being national prerogative, Brussels would still seem only a natural point of meeting and coordinating of regional plans, a helping hand to be.

List of References:

Nuclear Power in Russia, World Nuclear Association,

http://world-nuclear.org/info/Country-Profiles/ Countries-O-S/Russia–Nuclear-Power/#.

UkseEb7wFRA (accessed: 27.09.2013).

Statistical Review of World Energy 2013, BP June 2013,

http://www.bp.com/content/dam/bp/pdf/ statistical- review/statistical_review_of_world_ energy_2013.pdf (accessed: 22.09.2013).

Nuclear Power in Russia, World Nuclear Association,

http://world-nuclear.org/info/Country-Profiles/ Countries-O-S/Russia–Nuclear-Power/#. UkseEb7wFRA (accessed: 27.09.2013).

Kaliningrad plan for Baltic States market, “World Nuclear News”, 17 April 2008, http://www.world-nuclear-news.org/NNKaliningrad_plan_for_Baltic_States_market_ 1704086.html (accessed: 30.09.2013).
Ibidem.
Kaliningradskaya Thermal Power Plant 2, JSC INTER RAO — Electric Power Plants website, http://irao-generation.com/en/stations/kalinigradg/ (accessed: 30.09.2013).
Baltic NPP Project, Rosatom website, http://www.rosatom.ru/en/investmentstrategy/ projects/ (accessed: 27.09.2013).
Russian joint venture of State Corporation Rosatom and Alstom will supply the turbine island to the Baltic nuclear power plant, Alstom, 2 February 2012,

http://www.alstom.com/Global/Group/Resources/Documents/Investors%20document/Regulated%20 Information/Russian%20joint%20venture%20of%20 State%20Corporation%20Rosatom%20and%20 Alstom%20will%20supply%20the%20turbine%20island%20to%20the%20Baltic%20nuclear%20power%20 plant.pdf (accessed: 27.09.2013).

9. Baltic nuclear plant brought forward, “World Nuclear News”, 27 August 2008

http://www.world-nuclear-news.org/NN_Baltic_ nuclear_plant_brought_forward_2708083.html (accessed: 27.09.2013).

10. IAEA Status report 108 – VVER-1200 (V-491) (VVER- 1200 (V-491)), International Atomic Energy Agency (IAEA), 2011,

http://www.iaea.org/NuclearPower/Downloadable/ aris/2013/36.VVER-1200(V-491).pdf (accessed: 30.09.2013).

11. Mark J. Harper, Advanced Reactor Technology Development for Near Term Deployment, Nuclear Energy Management School Tokai Mura, Japan June 2012,

http://www.iaea.org/nuclearenergy/ nuclearknowledge/schools/NEM-school/2012/Japan/ PDFs/week1/5-1_HARPER_Current_LWR_Technology_ NEMSchool.pdf (accessed: 29.09.2013).

12. Akkuyu NPP JSC website

http://www.akkunpp.com/index.php?lang=en (accessed: 29.09.2013).

13. Jozef Mišák, Evolution of safety assessment appro-aches for Gen III systems and implications for future systems, INPRO Dialogue Forum on Nuclear Energy Innovations 1-4 February 2010, IAEA, Vienna http://www.iaea.org/INPRO/1st_Dialogue_Forum/ 22-Misak.pdf (accessed: 29.09.2013).

14. Status and perspectives of VVER nuclear power plants, Meeting of the TWG-LWR IAEA, Vienna, Austria, 26 -28 July 2011, http://www.iaea.org/NuclearPower/Downloads/ Technology/meetings/2011-Jul-26-28-TWG-LWR-HWR/Session-I/21.TWG-LWR-Russia.pdf (accessed: 29.09.2013).

15. Baltic site works, “World Nuclear News”, 27 August 2010,

http://www.world-nuclear-news.org/NN_Baltic_ site_works_2708101.html (accessed: 19.09.2013).

16. Grid concerns for Baltic project, “World Nuclear News”, 11 June 2013,

http://www.world-nuclear-news.org/NN_Grid_ concerns_for_Baltic_project_1106131.html (accessed: 19.09.2013).

17. Barsebäck nuclear power plant own website:

http://www.barsebackkraft.se/index.sp?ItemID=1291 (accessed: 25.08.2013).

18. Sonja van Renssen, New nuclear power in Europe – will Finland show the way?, “European Energy Review”, EER Monthly, February 2013.

19. Results of the referendum from the Central Electoral Commission of Lithuania,

http://www.vrk.lt/2012_seimo_rinkimai/output_ en/referendumas/referendumas.html

(accessed: 13.09.2013).

20. Nuclear Power in Lithuania, World Nuclear Association,

http://world-nuclear.org/info/Country-Profiles/ Countries-G-N/Lithuania/#.UkiVbdK-1vI (accessed: 1.09.2013).

21. Own calculations, data on the Ringhals NPP reactors from PRISM – Power Reactor Information System, IAEA, 30 September 2013, http://www.iaea.org/PRIS/CountryStatistics/CountryDetails.aspx?current=SE

(accessed: 01.10.2013).

22. Nuclear Power in Sweden, World Nuclear Association

http://www.world-nuclear.org/info/Country- Profiles/Countries-O-S/Sweden/#.Ukqqwr7wFRA (accessed: 15.09.2013).

23. Ibidem.

24. A repository for nuclear fuel in 1.9 billion year old bedrock, SKB – The Swedish Nuclear Fuel and Waste Management Company, 4 April, 2010,

http://www.skb.se/Templates/Standard____28848. aspx (accessed: 30.09.2013).

25. Harold Feiveson, Zia Mian, M.V. Ramana and Frank von Hippel, Managing Spent Fuel from Nuclear Power Reactors, Experience and Lessons from Around the World, International Panel on Fissile Materials (IPFM), p. 78 92, September 2011,

http://fissilematerials.org/library/rr10.pdf (accessed: 30.09.2013).

26. Barbro Plogander, Sweden’s Planned Nuclear Waste Storage Faces Problems, The Epoch Times, 12 February 2013,

http://www.theepochtimes.com/n2/world/ swedens-planned-nuclear-waste-storage-faces-problems-346787.html (accessed: 25.09.2013).

See also: Nuclear Waste State-of-the-Art Report 2013 – Final repository application under review: supplementary information and alternative futures, Swedish National Council for Nuclear Waste, Stock-holm 2013,

http://www.karnavfallsradet.se/sites/default/files/ sou_2013_11_eng_vers.pdf (accessed: 01.10.2013).

27. Johan Bergenas, Nuclear power in Sweden, The Stimson Center, 15 April 2011,

http://www.stimson.org/spotlight/nuclear-power-in-sweden/ (accessed: 15.09.2013).

28. Sweden to replace existing nuclear plants with new ones, “BBC News”, 18 June 2010, http://www.bbc.co.uk/news/10347187 (accessed: 05.09.2013).

29. Nuclear power plant units Olkiluoto 1 and Olkiluoto 2, Teollisuuden Voima Oy (TVO), January 2008,

http://www.tvo.fi/uploads/File/nuclear-power-plant-units.pdf (accessed: 30.09.2013). See also: OLKILUOTO-1, PRISM – Power Reactor Information System, IAEA, 30 September 2013,

http://www.iaea.org/PRIS/CountryStatistics/ ReactorDetails.aspx?current=159 (accessed: 01.10.2013).

30. Finland opts for new nuclear reactor, “BBC News”, 24 May 2002

http://news.bbc.co.uk/2/hi/europe/2006191.stm (accessed: 01.10.2013).

31. Dome in place at Flamanville EPR, “World Nuclear News”, 16 July 2013,

http://www.world-nuclear-news.org/NN-Dome_in_ place_at_Flamanville_EPR-1607134.html (accessed: 26.09.2013).

32. Hanhikivi contract by year end, “World Nuclear News”, 3 September 2013

http://www.world-nuclear-news.org/NN-Hanhikivi_ contract_by_year_end-0309137.html (accessed: 26.09.2013).

33. Posiva Oy, Posiva Oy website, http://www.posiva.fi/en/posiva (accessed: 28.09.2013) .

34. The Principles for Final Disposal, Posiva Oy website, http://www.posiva.fi/en/final_disposal/the_ principles_for_final_disposal/ (accessed: 28.09.2013).

35. No room at the repository, “World Nuclear News”, 9 march 2012,

http://www.world-nuclear-news.org/WR-No_ room_at_the_repository-0903127.html (accessed: 28.09.2013).

36. Finnish waste fund continues to grow, “World Nuclear News”, 26 March 2013,

http://www.world-nuclear-news.org/wr-finnish_ waste_fund_continues_to_grow-2603134.html (accessed: 22.09.2013).

Source: BSR Policy Briefing 4/2013, Centrum Balticum, www.centrumbalticum.org

A Russian Sudden Stop or Just a Slippery Oil Slope to Stagnation?

Admin — Mon, 29 Jun 2015 19:42:05 +0000

Torbjörn Becker is the Director of the Stockholm Institute of Transition Economics at the Stockholm School of Economics.
Web: www.hhs.se/site

Can the Russian economy weather the combined effect of falling oil prices and massive capital outflows while preserving some growth or is the economy heading for a sudden stop scenario with falling GDP?

Recent forecasts of Russian growth

Forecasts for Russian GDP growth have been revised down several times over the last couple of years, starting well before the conflict with Ukraine and the sanctions that followed. This is well illustrated by how different vintages of the IMF’s World Economic Outlook forecasts change in Figure 1.

Figure 1. IMF forecasts of Russian real GDP growth

The forecasts from 2012 projected a real GDP growth of around 4 percent per year for 2014 and 2015, and then just slightly below 4 percent over the next two years. In 2013 the April forecast was lowered to around 3.5 percent over the forecast horizon, while the October forecast the same year was revised down significantly for 2013 as the poor growth performance that year became hard to ignore. However, it nevertheless showed a strong rebound in growth in 2014 and in 2015, and going forward the forecast was back at 3.5 percent growth. Then in April 2014, there was a sharp downward revision of growth for 2014, from 3 to less than 1.5 percent, followed by a long-run growth forecast of 2.5 percent. The slippery slope of growth revision has not stopped there and the latest forecast in October 2014 projects a barely positive growth rate for 2014 and a modest pick-up in 2015 before a gradual climb back to 2 percent growth in 2018 and 2019.1

Implications for income levels

It may not sound very dramatic that growth falls a percent or two in the revised forecasts, but summing up all the growth revisions – both in the short-run and adding the significant drops in projected long-run growth — amounts to enormous losses of income for the Russian economy should the forecasts be realized. Figure 2 compares how income levels evolve until 2019 using the April 2012 and October 2014 forecasts.2

Figure 2. Income levels based on different forecast of real GDP growth

Source: Authors calculations based on IMF WEO forecast April 2012 and October 2014

In the April 2012 growth scenario, Russian GDP would be 12 percent higher in 2014 than in 2011 and by 2019, growth would have lifted GDP by more than 35 percent. However, the October 2014 forecast has GDP in 2014 only 5 percent higher than in 2011 after the end of 2014 and merely 13 percent up in 2019. Comparing the two scenarios, the income level at the end of the forecast period is 20 percent lower based on the current forecast compared with the April 2012 projection.

However, also the 2014 forecast shows increasing income levels which given the latest development of oil prices and capital flows seems unrealistic. The following sections of this brief will detail why Russian GDP growth is in grave danger of not only continue a slow slide down but could instead enter a “sudden stop” scenario with falling GDP.

Oil and growth

The price of oil is the single most important determinant Russia GDP growth. Figure 3 shows how real oil prices and income per capita in USD have developed over the last two decades. The rising incomes from 1999 to late 2008 were strongly correlated with a real oil price index that went from around 25 to over 180. Similarly the decline in income in 2009 was concurrent with the oil price index sliding to 116. With oil prices rebounding in 2010 and 2011 before leveling off in 2012, Russian income levels followed suit. Of course many other factors changed in the economic environment, not least in 2008/9, but in many ways this just reinforces how strong the link between oil prices and Russian incomes is.

The question is if the strong relationship evident in Figure 3 between oil prices and income levels also holds for growth rates, which would be a bit less susceptible to criticism of spurious correlations between non-stationary time series. Figure 4 shows that the impression from time series of price and income levels follows through also when both series are in growth rates and presented in a scatter plot. Note that the charts include oil prices and not oil revenue, so it abstracts from changes in oil production. In this sense, it does not capture what would be included in the calculation of real GDP (which would include changes in production rather than prices) but simply the correlation between an exogenous variable — international oil prices — and Russian growth.

Figure 3. Oil prices and income growing together

Source: IMF oil price index, World Bank for GDP per capita in 2005 USD

Figure 4. Scatter plot of oil prices and income

Source: Author’s calculation based on data from IMF and the World Bank

A simple OLS regression presented in Table 1 quantifies the relationship in Figure 4. It is quite striking how a regression with one explanatory variable manages to pick-up 60 percent of the variation in growth of Russian GDP per capita. The estimated “model” basically says that without any changes in oil prices, Russian GDP growth would be just above 2 percent. This happens to coincide rather closely with the IMF’s October 2014 longer-run forecast. In addition, a 10 percent increase (decline) in oil prices adds (subtracts) 1.5 percent GDP per capita growth. The coefficient on oil price changes is not only highly significant from an economic perspective but also from a statistical. The equation is estimated with only 16 observations and no other control variables are included, so there are reasons to take the result with plenty of caution. Nevertheless, it is not often a one-variable regression accounts for this amount of variation in a country’s growth rate. Again, it should be stressed that it is the price of oil – which is an exogenous variable – that is included in the regression and not the value of Russian oil export revenues.

Table 1. Regressing income growth on oil price changes

Dependent variable is GDP/capita in 2005 USD (% change)

Coeff. Std.err. t-stat

Real oil price (% change) 0.15 0.03 4.8

Constant 2.42 0.89 2.7

Adj. R-square 0.60

Imports, growth and capital flows

The reason oil prices are so important for Russian growth is that it determines how much the country can import, which in turn contributes significantly to domestic consumption and investment. It may be puzzling at first that imports contribute to growth since it enters the national income accounting identity with a negative sign.3 However, whatever is imported is either used for consumption or investment, and since this consumption or investment is usually accompanied by domestically produced inputs, it means that the overall effect on growth from imports is positive. Russia GDP growth also shows a strong positive correlation (90%) with import growth as can be seen in Figure 5.

Figure 5. Scatter plot of quarterly GDP growth and changes in import

Source: Author’s calculation based on Goskomstat data

However, imports are not included in the regression above since it is part of GDP and thus an endogenous variable with respect to growth. The scatter plot in Figure 5 can obviously not be given a causal interpretation for the same reasons, but it is still informative that imports have shown a higher positive correlation with growth than exports have. In fact, net exports, the difference between exports and imports that enter the accounting relationship with GDP with a positive sign, showed massive “contributions” to GDP growth in all of the quarters of 2009 when GDP growth fell significantly. Again, this was linked to large declines in imports coupled with sharp contractions of investments. In other words, what at a first glance can look as an improved trade balance may instead be a sign of lost confidence and reduced external financing for domestic investments and consumption.

Figure 6. Net capital flows, private sector

Source: Central Bank of Russia

In many emerging market countries, capital inflows are highly correlated with imports as well, since they are needed to finance imports when export revenues are not sufficient to do so. For Russia, strong growth in oil revenues due to increasing prices has made the country less dependent on capital flows to finance imports in the past. However, with lower oil prices, this will change and capital flows will be a more important factor also for Russia in this respect.

Capital flows are basically determined by expected returns on financial and real investment in a country relative to alternative investments abroad. These expectations are in turn dependent on many different factors, including real growth prospects linked to macro economic policies, economic and legal institutions and the elusive concept of market “sentiment”. Attracting the necessary capital will be a challenge for Russia if policies do not change.

Net private capital flows have been negative in all but three quarters since mid-2008 with peak outflows of $132 billion in the final quarter of 2008 in the midst of the global financial crisis (Figure 6). With the crisis in Ukraine, capital outflows accelerated in the beginning of 2014, reaching almost $50 billion in the first quarter alone. Over the first three quarters of 2014, outflows amounted to $85 billion, which is more than the total value of imports in the second quarter.

The net outflow of capital and lower oil prices are also leaving a mark on Russia’s external balance sheet. Often when Russia’s external position is discussed, the focus is on the Central Bank of Russia’s (CBR)4 large international reserves. However, they are also not immune to changes in oil prices or capital flows since the CBR intervenes in the foreign exchange market to stabilize the ruble as is evident in Figure 7. Nevertheless, even after significant interventions, reserves were around $450 billion at the end of September 2014, which is a non-trivial amount for a $2,000 billion economy and the third largest in the world after China and Japan. The CBR can probably continue to intervene at a similar rate as it has done in 2014 for several years, but the question is if Russia do not have better ways to spend $50-100 billion a year. Another question is how confidence in the foreign exchange market is affected by these interventions. It may be good to keep the ruble from a complete free fall, but at the same time, the CBR does not want to find itself in a situation that looks too much like a central bank that loses much if its reserves in a regular speculative attack on a fixed exchange rate.

What has been less in focus, but came into the spotlight already in the global financial crisis, is the external debt of the private and public sector beyond regular sovereign borrowing. Banks and non-financial firms in the private and public sectors had together borrowed over $700 billion at the end of the first quarter of 2014, which is the latest available number. If borrowing has remained unchanged in the following two quarters, it would mean that external borrowing is now over $250 billion more than the international reserves held by the CBR. External debt at 35 percent of GDP is in itself not alarming but if major companies are unable to access international markets it can soon become a problem.

Figure 7. External debt and international reserves

Source: CBR and author’s calculations

Despite significant interventions by the CBR, early October the ruble had lost 20 percent of its value against the dollar since the beginning of 2014, as had the stock market (Figure 8). In some ways the global financial crisis was a good lesson for the CBR on the cost of trying to defend an overvalued currency. Then the CBR lost more than $200 billion while trying to keep the ruble exchange rate fixed. The currency defense did not prevent the ruble from falling by around 30 percent at the end of 2008 and beginning 2009. Since then, the exchange rate has been allowed more flexibility, although the CBR tries to avoid more abrupt changes. Russia also intends to focus its policy on inflation rather than the exchange rate going forward, but the question is if this is credible given what has happened in the second half of 2014.

The stock market is also affected by capital outflows, falling oil prices, and a deterioration of confidence in the Russian economy that has come with the sanctions related to the conflict in Ukraine. At around 1,000, the RTSI is back to its 2005 level, after having peaked at almost 2,500 before the global financial crisis and then reaching a post-crisis peak of 2,000 in 2011.

Although the sanctions have played a role in the developments in 2014, it is clear that the decline in both the stock market and exchange rate goes back to 2011 when oil prices leveled off and growth started to slow. In other words, the structural dependence on increasing oil prices to generate growth again shows its importance also for capital flows, the exchange rate and stock market returns. The reform program launched by then-president Medvedev in 2009 in response to the crisis, under the “Russia forward” heading, made little difference since the most important parts were never implemented.

Figure 8. Exchange rate and stock market

Source: MICEX

Sudden stops dynamics and a more realistic growth forecast

In a paper studying the correlates of output drops, Becker and Mauro (2006) look at a long list of shocks that include both macro-financial shocks as well as real shocks. One of the findings is that sudden stops in capital flows cause the most damage in emerging market countries. In a typical sudden stop triggered crisis, the average emerging market country loses an aggregate of 64 percent of initial GDP, which is related to a large initial drop in income and several years of recovering to bring income back to the pre-crisis level. The sudden stop episodes in the paper are defined as a reversal of capital inflows that suddenly turn around and become outflows. In countries with insufficient export revenues, this leads to a sharp contraction in imports, which (as discussed above) leads to a significant drop in output.

Reducing imports may sometimes be interpreted as a sign of a country being able to produce more at home and therefore a sign of strength. But when imports contract very quickly in response to a drop in available financing, it signals something different; the lack of confidence in an economy, with large economic costs in terms of falling incomes as a consequence. This type of scenario is a very real possibility in Russia given recent developments. All the indicators above — oil prices, capital flows and imports — point to a much more negative growth outlook than the IMFs World Economic Outlook forecast published in October 2014. Since July of 2014, the WTI price has fallen from around $100/barrel to just north of $80/barrel in mid-October. The IMF World Economic Outlook in October 2014 forecasted a continued decline in oil prices for 2015 and 2016, but this was based on mid-year prices rather than mid-October prices. Futures contract over the next five years price oil around $80/barrel for the entire period. Although this is mostly a function of historical oil prices following a random walk so it makes it hard to predict changes up or down, it still means that there is currently no information that would suggest that oil prices will move up any time soon.

Taking $80/barrel as the relevant forecast for 2015 it would be a drop in oil prices of over 20 percent compared to mid-2014. If we use the simple growth-oil price equation estimated above — which despite its simplicity generated an adjusted R-square of 60 percent — it implies that the oil effect on growth is around minus three percentage points. The intercept in that regression is 2.4 so the forecast from this regression is negative growth of around half a percent for Russia in 2015. Of course this empirical estimate is not really a proper macro model and excludes a long list of other important variables that will affect growth, including policy changes.

However, one crucial factor that will contribute to the downside risk of the already negative forecast based on falling oil prices is capital outflows — linked to investor confidence — which suggests that there will be less money for imports and further negative pressure on growth rates in 2015 and forward. Capital usually flows to countries with good growth prospects and rewarding investment opportunities. Capital rarely flows to places where the growth outlook is negative and uncertain. It is not easy to predict capital flows with any precision. In the event capital outflows continue at the pace they have in the first three quarters of 2014, it will push imports down by a significant amount and perhaps shave off another 1 to 2 percent of an already negative projected growth rate for 2015.

Import growth has already turned negative in the first two quarters of 2014, and if the trend continues, there is a strong likelihood that imports decline so much that quarterly GDP growth turns negative in the last part of this year. It may still be that the growth for the full year stays positive, but probably not by much. The real problems with growth will then be for 2015 if nothing positive happens with oil prices and capital flows. In sum, the no-change scenario for Russian growth in 2015 points to a real danger of a sudden stop type of output decline of 2-3 percent rather than IMF’s October 2014 forecast of 1.5 percent positive growth. Needless to say, if the sudden stop scenario rather than the IMF forecast materializes it will have serious effects on Russian income levels in the years to come as was illustrated in Figure 2 earlier.

Policy options to avoid a growth collapse

The question is then how Russia can avoid a full-blown sudden stop scenario with accelerating capital outflows, shrinking imports and a collapse in growth. What policies can be implement to generate growth in the economy in 2015? The first option is to do nothing and hope for higher oil prices. A significant increase in oil prices will in all likelihood provide conditions to resume import growth that can feed domestic consumption and investment. However, this is not in the cards at the moment as discussed above.

The economic policy areas under control of Russian policy makers include monetary and exchange rate policy, fiscal policy and the “catch-all” area of structural reforms. The latter a crucial area that affect investor and consumer sentiment which determine capital flows and domestic demand. A closer look at these areas below suggests that the policy space is mainly in the area of structural reforms.

First out is monetary and exchange rate policy. As students of basic macro knows, in a world of capital mobility, policy makers have to either focus on targeting inflation or the exchange rate. Attempts at steering both will regularly have only short-lived effects or be associated with significant economic costs coming from trying to regulate capital flows more vigorously. Russia has over the last couple of years stated that inflation rather than the exchange rate should be the primary policy target for the CBR from 2015. The inflation target is initially set at 5 percent and supposed to move to 4 percent over the medium-term. Governor Nabiullina of the CBR states that the inflation targeting framework and associated goals will not be implemented if the cost of doing so is too high (CBR, 2014). However, with inflation now running at around 8 percent, capital flowing out of the country and the exchange rate falling, trying to stimulate growth with looser monetary policy does not seem to be a viable option regardless of the CBR pursuing an explicit inflation target or not.

Fiscal policy can possibly help stimulate demand. The low oil prices put pressure on fiscal policy as well, but the falling exchange rate means that the ruble value of oil revenues is kept up. The result is a relatively modest fiscal deficit of around 1 percent of GDP at the General government level.

Behind this is a nonoil deficit of around 12 percent of GDP. In other words, government oil revenues account for around 11 percent of GDP, which is a strong indication of the importance of oil in all sectors of the economy. The reserve and wealth funds that have been accumulated from past oil revenues provide some additional fiscal room to maneuver.5 In September 2014 the reserve fund stood at $90 billion and the wealth fund at $83 billion. These are of course significant amounts, but relative to net capital outflows of $85 billion in the first three quarters of 2014, they are perhaps a bit less impressive. It is also noteworthy how quickly the reserve fund was run down in response to the global financial crisis. From the start of 2009 to 2011 the reserve fund went from almost $140 billion to $25 billion, or a drop of $115 billion, more than what is currently in the reserve fund. The message for fiscal policy is that there is some room for providing stimulus but the funds are not sufficient to keep doing this for several years. It may be enough to add a few percent to GDP in 2015, but if nothing else then happens, 2016 will not have the same fiscal space available. At best, fiscal policy can buy a year or so of time, but it really just delays much needed reforms aimed at underlying structural weaknesses that puts a drag on confidence and economic performance.

The most obvious “reform” is for Russia to con- tribute to a peaceful resolution of the conflict in eastern Ukraine. This would alleviate the serious confidence effect the sanctions have had on investment and capital flows. More importantly, the main effects of the sanctions are still to come when important Russian companies need to refinance large loans in 2015 and 2016. If they are shut off from international financial markets it will contribute to net capital outflows as the expiring international loans are replaced by domestic ones. The impact on capital flows does not stop with the direct sanctions targeting specific firms since the confidence effect of sanctions hit all possible investments in Russia. Even if some international loans will be available to Russian firms, the conditions for such loans will be worse as long as the sanctions are around, which is a real cost for the Russian economy. It is hard to quantify the exact gain of restoring confidence and removing sanctions for the Russian economy, but in the current circumstances, confidence is a crucial element to avoid a full-blown sudden stop scenario.

In addition to the hugely important aspect of resolving the conflict in Ukraine, Russia has a long structural reform agenda ahead if its leaders want to move Russia’s citizens up the global income ranking where they currently are in 51st place just behind Argentina and a few places behind Latvia in 47th place.6 Again, this is not news to the leaders of Russia and several key elements were part of Medvedev’s “Russia forward” plan of 2009. Institutional reforms aimed at fighting corruption at all levels, creating a rule of law and modernizing government are still high on the list of priorities. However, it is hard to see how real changes in these areas are going to be made, in particular if the leader(s) that push reforms want to stay in power once the reforms are implemented.

Any internal reform efforts that directly contribute to a positive development for the Russian economy is likely to also have important indirect effects through its trading partners. Although the Russian economy is not large enough to alone make a significant impact on world growth directly — it accounts for less than 3 percent of global GDP — its importance for trade and finance should not be ignored. Besides being one of the key energy providers to the global economy, it is also capable of affecting confidence and market sentiment in the rest of the world. The exact effect is hard to quantify but in times of ample volatility in financial markets, removing one piece of uncertainty would possibly be of great importance. From a Russian perspective this is also important since improved sentiment in the global economy is likely to lead to increased energy demand and upward pressure on oil prices.

Without serious reforms aimed at rebuilding international financial confidence and trade ties, the Russian economy will likely face a sudden stop scenario in 2015 or at best find itself on a slippery slope towards stagnation. This is not in the interest of the current leaders and citizens of Russia, nor of its neighbors and trading partners. There are clear win-win propositions in terms of policies that Russia can undertake today to avoid an economic crash landing. The question is if Russia is ready to move towards the modern approach of looking for win-win solutions or if it will remain stuck playing strategic games where your gain is always my loss.

Notes

1 Note that this brief was written in mid-October 2014 and therefore based on the data and forecasts available at that point in time.

2 The original April 2012 forecast ends in 2017 and the forecast to 2019 here is based on extending the 2016 and 2017 forecast of 3.8 percent growth over 2018 and 2019.

3 The basic accounting identity says that national income is equal to private and public consumption and investment, plus exports minus imports.

4 The Central Bank of the Russian Federation, also called Bank of Russia, will be abbreviated as the commonly used acronym CBR which is also its web address www.cbr.ru.

5 The initial oil fund was called the Stabilization fund but was divided up in a National wealth fund and a Reserve fund in 2008, where the former should support future pensions while the latter has the stated purpose of financing the federal budget when oil and gas revenues decline.

6 Income ranking based on market exchange rates and IMF data from 2013.

References

Becker, Torbjorn and Paolo Mauro, 2006, “Out- put drops and the shocks that matter”, IMF Working paper, WP/06/172.

CBR, 2014, The Central Bank of the Russian Fed- eration (Bank of Russia) Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017, Draft as of 26.09.2014. Available at http:// cbr.ru/Eng/today/publications_reports/on_15- eng_draft.pdf

IMF, 2014, “Russian Federation, 2014 Article IV consultation — Staff report”, IMF country report No. 14/175, International Monetary Fund, Wash- ington D.C.

IMF, 2012-2014, World Economic Outlook fore- casts available at www.imf.org.

Source: BSR Policy Briefing 4/2014, Centrum Balticum, www.centrumbalticum.org

Germany’s trade with the Baltic countries

Admin — Mon, 29 Jun 2015 19:31:39 +0000

Maria Vladimirovna Gracheva — Ph.D. in Economics, leading researcher of Institute of World Economy and International Relations, Russian Academy of Sciences, Moscow.

The article of Maria Gracheva examines the characteristics of Germany’s trade with the countries that along with the FRG are the members of the Council of the Baltic Sea states. The analysis is based on the statistics of German federal statistical office (Statistisches Bundesamt) in the period of 1992-2014. The author considers such indicators as the share of Baltic states in the German foreign trade turnover, the volumes of Germany’s trade with the particular countries, the trade’s breakdown into the commodity groups. The main Germany’s trade partner countries and the key trade growth/downturn drivers among Baltic countries are identified. Special attention is paid to the peculiarities of the commodity structure of the Germany’s trade with the particular countries, including their comparison with the relevant indicators of the total German foreign trade. The main commodities of the Germany’s export/import to/from Baltic countries by the three-digit classification are analysed as well as the roles of the particular countries as the German buyers and suppliers. Some important facts of the period of 2008-2014 are registered, such as the decline of the oil/gas import from Norway and Russia and the growth of the oil products’ import from Russia. The data of German- Baltic trade’s reduction in the first quarter of 2015 are presented and explained chiefly by the negative dynamics of the Russian import due to the termination of the compensation by means of the oil products. The author comes to the conclusion, that in two-three years already Russia can come down to the Germany’s second-class trade partners, and within the Baltic region the main beneficiaries thereon will be Poland, Sweden and Norway.

The Baltic States are important trade partners of Germany: in 2014 their share in the foreign trade turnover of Germany amounted to 13.3%, including 12.2% in exports from Germany and 14.6% in imports into the Federal Republic of Germany (the rest of European countries accounted for 56.0% of the German turnover, including 55.8% of exports and 56.4% of imports)[1].

Pic. 1. Role of the Baltic States in the foreign trade of Germany

(Share of import from the Baltic States in the cumulative import to Germany

Share of export to the Baltic States in the cumulative export from Germany)

In 1992-2008 indicators of the Baltic countries showed a relatively constant growth: from 8.8 to 14.2% of turnover, including a growth from 8.1 to 13.4% of exports from Germany and a growth from 9.6 to 15.0% of imports into Germany (see. Fig. 1), while the share of the rest of European countries declined (turnover – from 66.1 to 58.5%, exports from Germany – from 68.9 to 61.1%, and imports into Germany – from 63.1 to 55.4%). Since 2009, there has been a downward trend in the role of both the Baltic States and other European countries in the foreign trade of Germany (the importance of the countries of Asia – primarily China, by contrast, has increased). Information on the volumes of German trade with individual countries of the Baltic region is presented in Tables 1 and 2.

Table 1. Trade between Germany and the Baltic States in 1992-2014.

Country/ group of countries	1992-2014
	Turnover, Germany			Export from Germany			Import into Germany			Balance for Germany
	Bln euro	%	position	Bln euro	%	position	Bln euro	%	position	Bln euro	%
Poland	919,9	3,07	1	518,2	3,18	1	401,7	2,95	2	116,5
Russia	855,2	2,86	2	387,8	2,38	2	467,4	3,43	1	-79,6
Sweden	580,3	1,94	3	342,2	2,10	3	238,1	1,75	4	104,1
Denmark	472,7	1,58	4	260,7	1,60	4	212,0	1,56	5	48,7
Norway	431,0	1,44	5	125,1	0,77	6	305,9	2,25	3	-180,9
Finland	280,7	0,94	6	150,1	0,92	5	130,6	0,96	6	19,5
Lithuania	51,9	0,17	7	32,3	0,20	7	19,6	0,14	7	12,6
Latvia	29,2	0,10	8	19,6	0,12	8	9,6	0,07	8	10,0
Estonia	26,2	0,09	9	18,8	0,12	9	7,4	0,05	10	11,4
Iceland	16,0	0,05	10	6,7	0,04	10	9,3	0,07	9	-2,6
Total Baltic States	3.663,1	12,24		1.861,4	11,41		1.801,7	13,23		59,7	2,22

Whole world	29.926,6	100,00		16.307,5	100,00		13.619,1	100,00		2.688,4	100,00

Note: The Baltic States are presented in descending order of their turnover with Germany in 1992-2014.

Table 2. Main partner countries of Germany in its trade with the Baltic States in 1992 and in 2014.

Indicator	Country	1992		Indicator	Country	2014
Indicator	Country	Bln euro	%	Indicator	Country	Bln euro	%
Turnover Germany – Baltic States	Sweden	14,7	24,9	Turnover Germany – Baltic States	Poland	87,5	32,1
	Denmark	14,0	23,7		Poland	87,5	32,1
	Denmark	14,0	23,7		Russia	67,7	24,8
	Poland	8,4	14,3		Russia	67,7	24,8
	3 main countries, total	37,1	62,9		2 main countries, total	155,0	56,9
	Turnover Germany – Baltic States, total	59,0	100,0		Turnover Germany – Baltic States, total	272,8	100,0
Export from Germany to the Baltic States	Sweden	7,5	26,9	Export from Germany to the Baltic States	Poland	47,7	34,4
	Denmark	6,6	23,8		Russia	29,3	21,1
	2 main countries, total	14,1	50,8		2 main countries, total	77,1	55,5
	Export from Germany to the Baltic States, total	27,8	100,0		Export from Germany to the Baltic States, total	138,9	100,0
Import from the Baltic States to Germany	Denmark	7,3	23,5	Import from the Baltic States to Germany	Poland	39,8	29,7
	Sweden	7,2	23,1		Poland	39,8	29,7
	Sweden	7,2	23,1		Russia	38,4	28,7
	Norway	4,7	14,9		Russia	38,4	28,7
	3 main countries, total	19,2	61,6		2 main countries, total	78,2	58,4
	Import from the Baltic States to Germany, total	31,2	100,0		Import from the Baltic States to Germany, total	133,8	100,0
Balance for Germany – cumulative surplus	Sweden	0,3	90,0	Balance for Germany – cumulative surplus	Poland	8,0	32,0
	Sweden	0,3	90,0		Sweden	7,4	29,6
	1 main country, total	0,3	90,0		2 main countries, total	15,4	61,7
	Cumulative surplus for Germany, total	0,3	100,0		Cumulative surplus for Germany, total	25,0	100,0
Balance for Germany – combined deficit	Norway	-1,8	47,6	Balance for Germany – combined deficit	Norway	-10,7	53,7
	Denmark	-0,7	19,2		Norway	-10,7	53,7
	2 main countries, total	-2,5	66,8		One main country, total	-10,7	53,7
	Combined deficit for Germany, total	-3,7	100,0		Combined deficit for Germany, total	-20,0	100,0

Note. The main partners are listed as countries in descending order with the largest volume of trade, export, import and balance, which together accounted for more than 50% of the respective indicators in 1992 and 2014.

Within the whole period of 1992-2014, Germany’s main partners among the ten Baltic States were the following four countries – Poland, Russia, Sweden and Norway, including:

- Poland, Russia, Sweden – in turnover and exports from Germany,

- Russia, Poland, Norway – in imports to Germany,

- Poland and Sweden – in surplus for Germany,

- Norway – in deficit for Germany.

For more than twenty years there have occurred major shifts: in 1992, the most important contractors were Sweden, Denmark, Norway and Poland; now Denmark is not among them, and Sweden and Norway have been overshadowed by Poland and Russia.

In 1992-2014 Germany formed a surplus in trade with the Baltic countries totaling 60 billion euros, but its share in the German foreign trade surplus as a whole (2.7 trillion euros) was only 2.2% – much lower than the corresponding figures of turnover (12.2 %), exports from Germany (11.4%) and imports to Germany (13.2%). This situation is due to the sustained deficit in German trade with Norway and Russia (these countries are on the second and third places after the Netherlands in terms of the German trade deficit). In 1992-2003 the German-Baltic trade balance was variable with a predominance of the negative balance for Germany. Since 2004 it has become steadily positive for Germany (mainly due to a rapid increase of surplus in the trade with Poland).

Key countries to determine the dynamics of the German trade with the Baltic States are shown in Tables 4 and 5. The most powerful driving forces in general over the last 22 years were Poland and Russia (they were the main factors of growth both in exports from Germany, as well as in imports into Germany, and in 1992-2014 provided respectively 37 and 28% of growth of the German-Baltic turnover). Sweden and Norway took the second place (with growth of 10% and 9%).

Table 4. Key forces – countries of the German – Baltic trade in 1992-2014, 1992-2000 and in 2000-2008.

Country/group of countries

Total change 2014/1992

Change 2000/1992

Change 2008/2000

Export from Germany

Import into Germany

Export from Germany

Import into Germany

Export from Germany

Import into Germany

Growth

Growth share

Growth

Growth share

Growth

Growth share

Growth

Growth share

Growth

Growth share

Growth

Growth share

Bln euro

Poland

+43,5

+39,2

+35,5

+34,6

+10,3

+34,3

+7,7

+23,5

+26,2

+35,3

+13,9

+24,3

Russia

+26,1

+23,5

+34,5

+33,6

+10,8

+33,1

+25,7

+34,5

+22,4

+39,1

Sweden

+6,0

+20,1

Growth in the Baltic countries

+111,1

+100,0

+102,7

+100,0

+30,1

+100,0

+32,7

+100,0

+74,3

+100,0

+57,3

100,0

Table 5. Key forces – countries of the German – Baltic trade in 2008-2014 and 2012-2014.

Country/group of countries

Change 2014/2008

Change 2014/2012

Export from Germany

Import into Germany

Export from Germany

Import into Germany

Growth

Decline

Growth share

Decline share

Growth

Decline

Growth share

Decline share

Growth

Decline

Growth share

Decline share

Growth

Decline

Growth share

Decline share

Bln euro

Poland

+7,0

+65,4

+13,9

+85,2

+5,9

+62,1

+6,7

+77,7

Russia

-3,0

-76,4

-8,8

-99,5

Norway

-3,1

-82,0

-7,0

-59,7

Growth in the Baltic States

+10,7

+100,0

+16,3

+100,0

+9,5

+100,0

+8,7

+100,0

Decline in the Baltic States

-3,9

-100,0

-3,8

-100,0

-8,8

-100,0

-11,8

-100,0

Note. The main factors are countries listed in descending order with the largest increase/reduction of export/import, which total share in the growth/decline of the corresponding indicators was more than 50%.

In certain periods the following countries were the main trade partners:

- In 1992-2000: for exports from Germany – Poland and Sweden (growth factors), for imports into Germany – Russia and Poland (growth factors);

- In 2000-2008: for exports from Germany – Poland and Russia (growth factors), for imports into Germany – Russia and Poland (growth factors);

- In 2008-2014 years in general and in 2012-2014 in particular: for exports from Germany – Poland (growth factor) and Russia (recession factor), for imports into Germany – Poland (growth factor), and Norway (recession factor).

Poland would return as a source of positive pulses after each case of decrease of the indicators of its trade with Germany in 1992-2014. Russia, too, managed to do this for 20 years, but in the last two years it has dramatically changed its role, becoming the brake of the German-Baltic trade instead of its accelerator. The share of Poland in the foreign trade turnover of Germany rose from 1.3% in 1992 to 4.3% in 2014, the corresponding indicator for Russia rose from 1.1 to 3.3% (maximum – 4.0% – was achieved in 2012).

As for the remaining six of the Baltic countries, among them are two larger counterparts of Germany – Denmark and Finland, and four smaller – three post-Soviet states (Lithuania, Latvia, Estonia) and Iceland. Both in 1992-2000 and in 2000-2008, all six countries were factors of growth for the trade between Germany and the Baltic States (being inferior to a group of four countries mentioned above). But in 2008-2014 only the new European trio played a positive role, while the “old Europeans” generated negative pulses (Finland and Iceland – in both directions of trade, Denmark – for imports to Germany). As a result, the total share of Lithuania, Latvia and Estonia in the foreign trade turnover of Germany rose from 0.1% in 1992 to 0.4% in 2014, thus indicating that the growth rate of Germany’s trade with these countries turned out to be the highest within the Baltic region.

Distribution of the indicators of the German trade with the Baltic countries and the whole world for four product groups, that are classified in accordance with the increase in the degree of processing of the goods (and, consequently, increase of the share of value added in the value of goods), is presented in Tables 6 and 7.

Table 6. Structure of the goods of the German – Baltic trade in 2014, % of turnover between Germany and the Baltic States

Indicator/goods group (code, name)			Poland	Russia	Sweden	Norway	Denmark	Finland	Lithuania	Estonia	Latvia	Iceland	Turnover Germany – Baltic States, total
Export from Germany	1-4	Food	1,5	0,4	0,5	0,2	1,0	0,3	0,1	0,0	0,1	0,0	4,2
	5	Raw materials	0,2	0,0	0,1	0,0	0,3	0,0	0,0	0,0	0,0	0,0	0,6
	6	Semi-processed goods	1,6	0,2	0,3	0,1	0,3	0,2	0,0	0,1	0,0	0,0	2,8
	7-8	Finished products	14,1	10,4	7,0	2,9	4,5	2,8	0,8	0,5	0,5	0,1	43,6
Import into Germany	1-4	Food	1,7	0,1	0,1	0,2	1,2	0,0	0,1	0,0	0,0	0,0	3,5
	5	Raw materials	0,3	10,2	0,3	6,1	0,3	0,0	0,0	0,0	0,0	0,0	17,3
	6	Semi-processed goods	1,2	3,7	0,8	0,6	0,2	0,6	0,1	0,0	0,0	0,1	7,3
	7-8	Finished products	10,8	0,7	3,8	0,4	2,3	2,0	0,3	0,1	0,1	0,0	20,7
Turnover Germany – Baltic States, total*			31,4	25,7	12,9	10,5	10,2	5,9	1,5	0,8	0,8	0,3	100,0

* excluding returned, replaced and not allocated by commodity groups goods.

Note. The Baltic countries are presented in descending order of their turnover with Germany in 2014.

Table 7. Structure of the goods of the German – Baltic trade and the overall German foreign trade in 2014, % of export/import/turnover of certain countries, Baltic States and the whole world.

Indicator/goods group (code, name)			Poland	Russia	Sweden		Norway		Denmark			Finland			Lithuania	Estonia	Latvia	Iceland	Baltic States, total	Whole world
Export from Germany	1-4	Food	8,4	4,0	6,8		7,4		16,4		8,4			11,6		7,7	10,2	12,1	8,2	6,0
	5	Raw materials	1,2	0,3	0,9		0,4		4,4		0,4			0,4		0,5	0,9	0,2	1,2	1,6
	6	Semi-processed goods	9,0	1,7	4,4		3,2		5,1		6,1			3,5		10,1	4,3	2,3	5,5	5,6
	7-8	Finished products	81,4	94,0	88,0		89,1		74,1		85,1			84,5		81,7	84,6	85,4	85,1	86,9
	Export from Germany, total		100,0	100,0	100,0	100,0		100,0			100,0			100,0		100,0	100,0	100,0	100,0	100,0
Import into Germany	1-4	Food	11,9	0,6	2,8	2,8		28,6		1,1			21,2			6,0	14,8	17,2	7,1	8,5
	5	Raw materials	2,4	69,6	5,8	83,6		7,7		0,6			2,5			9,8	9,1	2,7	35,6	11,6
	6	Semi-processed goods	8,7	25,2	16,0	7,8		5,9		21,0			16,1			14,0	11,0	68,4	15,1	8,7
	7-8	Finished products	77,0	4,6	75,4	5,8		57,8		77,3			60,2			70,2	65,1	11,7	42,2	71,2
	Import to Germany, total		100,0	100,0	100,0	100,0		100,0		100,0			100,0			100,0	100,0	100,0	100,0	100,0
Turnover of Germany	1-4	Food	10,0	2,0	5,3	4,2		21,2		5,1			15,1			7,4	11,5	15,2	7,6	7,1
	5	Raw materials	1,7	39,7	2,8	58,1		5,7		0,5			1,1			2,5	3,2	1,7	18,0	6,0
	6	Semi-processed goods	8,9	15,1	8,8	6,4		5,4		12,8			8,1			11,0	6,2	42,4	10,2	7,0
	7-8	Finished products	79,4	43,2	83,1	31,3		67,6		81,6			75,6			79,1	79,1	40,8	64,2	79,9
	Turnover Germany – Baltic States, total*		100,0	100,0	100,0	100,0		100,0		100,0			100,0			100,0	100,0	100,0	100,0	100,0

* excluding returned, replaced and not allocated by commodity groups goods.

Note. The Baltic countries are presented in descending order of their turnover with Germany in 2014.

The main part of the German-Baltic trade (52.6% of the turnover) is in:

- German exports of finished products into Poland (14.1%), Russia (10.4%) and Sweden (7.0%),

- Import of finished products from Poland (10.8%) and raw materials from Russia (10.2%).

A substantial component is also import of raw materials from Norway (6.1%). In other cases, the share of product groups by country does not exceed 5%. Germany has a positive balance in the German-Baltic trade of food and finished products, and a negative balance – in the trade in raw materials and semi-processed goods. The total surplus for Germany consists mainly of excess surplus in finished products (Poland and Sweden) over the deficit of raw material (Norway and Russia).

The structure of German exports to the Baltic States and the overall German exports are very similar: the maximum difference (the share of food) is only slightly more than two percentage points. German imports from the Baltic States, by contrast, strongly deviates from the overall German import: on the one hand, by the shares of raw materials and semi-finished goods (the German import from the Baltic States has, respectively, 24 and 6 percentage points more than the overall German import); on the other hand, by the share of finished products (the German import from the Baltic States has 29 percentage points less than the overall German import). As a result, the basis of turnover of Germany with the world and with the Baltic States is the same – products with a higher degree of processing, namely finished products (64 and 80%, respectively), but the value of the goods with a low and medium degree of processing – raw materials and semi-finished products – in the German – Baltic trade is much larger (28%) than in the foreign trade of Germany as a whole (13%).

The structure of German exports in each of the Baltic countries is characterized by a common main feature – a strong dominance of finished products (ranging from 74.1% in Denmark to 94.0% in Russia; average Baltic and average world indicators are, respectively, 85.1 and 86.9%). At the same time, six countries have an additional focus: on food – Denmark (16.4%), Iceland (12.1%), Lithuania (11.6%), Latvia (10.2%) with the average Baltic and average world level of, respectively, 8.2 and 6.0%; semi-processed goods – Estonia (10.1%) and Poland (9.0%) with the average Baltic and average world level of, respectively, 5.5 and 5.6%. In four countries (Norway, Sweden, Finland, Russia) there are no such focuses.

As sources of the German import certain Baltic countries show considerable specificity. The most striking peculiarity is that of these three importers with an extremely low share of finished products (Russia – 4.6%, Norway – 5.8%, Iceland – 11.7%). For the rest of the Baltic countries this figure ranges from 57.8 to 77.3%, the average Baltic value is 42.2%, the world average is 71.2%. The above mentioned three countries are specialized in: Norway and Russia – raw materials (83.6 and 69.6%, respectively), Iceland – semi-processed goods (68.4%). Russia has an additional emphasis on semi-processed products (25.2%), Norway and Iceland do not have it. Since the absolute volume of imports of semi-processed products from Iceland is very small, the above-noted important role of the Baltic States for Germany as a source of raw materials and semi-processed products is concentrated in only two of the ten countries – Russia (raw materials and semi-processed products) and Norway (raw materials).

Among the other seven importers, who are leaders in finished products, two groups with additional focuses can be distinguished:

• focus on food – Denmark (28.6%), Lithuania (21.2%), Latvia (14.8%), Poland (11.9%) with the world average of 8.5%;

• on semi-processed products – Finland (21.0%), Lithuania (16.1%), Sweden (16.0%), Estonia (14.0%) with the world average of 8.7%.

The concretization of these features in the context of three-digit product classification is presented in Tables 8 and 9.

Table 8. Main goods of the German export in the Baltic States in 2014.

Country	Main goods of export from Germany to a country				Main goods of the additional export focus of the country
Country	Goods (code, name)	Share in the export from Germany to a country, %	Share of a country in the overall German export of these goods, %	Position of the country in the overall German export of the goods	Goods position (code, name)	Share in the export of Germany to a country, %
Norway	885. Passenger cars	19,2	1,3	18
Latvia	885. Passenger cars	12,4	0,1	48	423. Strong alcohol beverages	1,2
Sweden	885. Passenger cars	11,6	2,0	14
Iceland	885. Passenger cars	9,9	0,0	78	206. Fish, shellfish, mussels	2,1
Estonia	861. Equipment for production and distribution of electricity	9,2	0,3	44	669. Oil products	4,3
Finland	885. Passenger cars	8,4	0,6	27
Russia	884. Automobile components	8,3	3,3	10
Poland	884. Automobile components	8,2	5,1	6	669. Oil products	3,7
Denmark	861. Machinery for production and distribution of energy	5,3	1,7	18	204. Meat and meat products	3,9
Lithuania	834. Pharmaceutical products	5,0	0,2	49	395. Other foods of plant origin	1,6

Note: The Baltic countries are presented in descending order of the proportion of the main export commodity in the exports from Germany in 2014.

Table 9. Main goods of the German import from the Baltic States in 2014.

Country	Main goods of the import into Germany from a country				Main goods of the additional import focus
Country	Goods (code, name)	Share in the import into Germany from a country, %	Share of a country in the overall German import of these goods, %	Position of a country in the overall German imports of the goods	Position of the goods (code, name)	Share in the import into Germany from a country, %
Norway	518. Oil and natural gas	82,0	18,9	2
Russia	518. Oil and natural gas	66,6	30,8	1	669. Oil products	16,3
Iceland	645. Aluminum and aluminum alloys, including waste and scrap	64,3	5,6	8
Finland	708. Paperandcardboard	20,4	19,0	2	608. Semi-finished products of cellulose fiber	5,5
Poland	884. Automobile components	13,2	10,6	3	Fish, shell fish, mussels	2,0
Sweden	708. Paper and cardboard	12,1	21,3	1	608. Semi-finished products of cellulose fiber	4,2
Estonia	815. Items made of wood (apart from furniture)	11,6	2,2	10	607. Lumber	5,7
Lithuania	875. Furniture	10,0	1,3	18	206. Fish, shell fish, mussels	7,1
Latvia	709. Plywood and plywood sheets, chipboards	8,2	2,6	11	383. Oil cake	5,2
Denmark	834. Pharmaceutical products	6,9	2,1	11	204. Meat and meat products	6,7

Note. The Baltic countries are presented in descending order of the share of the main imported goods in the imports of Germany in 2014.

Passenger cars belonging to the product group “finished products” are the main commodity items of the overall German exports (0.9%), German exports to the Baltic States (6.9%) and German exports into five Baltic countries (Norway, Latvia, Sweden, Iceland , Finland). “Automotive components”, which are close to the group of passenger cars, are the leader in exports from Germany to Russia and Poland. Only in three cases, the leading role is played by other products, also belonging to the group of “finished products”- equipment for the production and distribution of electricity (Estonia and Denmark) and pharmaceutical products (Lithuania). Five countries (Poland, Russia, Sweden, Norway, Denmark) are in the top twenty of the German consumers for the corresponding main goods, with the highest position – the sixth in export of automobile components from Germany –is held by Poland. Two countries (Estonia and Poland) have the same additional export emphasis on semi-finished products (oil products), and there is no unity for countries with a focus on food.

Oil and natural gas belonging to the commodity group “raw material” are the main position of the overall German imports (9.5%), German imports from the Baltic States (32.9%) and German imports from Norway and Russia. Imports from Iceland to Germany are focused on aluminum (group “semi-finished products”). Specialization on the group “finished products” is characteristic of German imports from the other seven Baltic countries, including: specialization on products related to the processing of wood – from Finland, Sweden (paper and cardboard), Estonia (wood products except furniture), Lithuania (furniture), Latvia (plywood); on automotive components – from Poland, for pharmaceutical products – from Denmark. All Baltic countries are in the top twenty of the German suppliers of the relevant main products, with the highest – the first – positions held by Russia (oil/gas) and Sweden (paper/cardboard). Semi-finished products as an additional import emphasis are closely related to the main item: in Russia – oil products (to oil/gas), in Finland and Sweden – semi-finished products made of cellulose (paper/cardboard), Estonia – lumber (with woodwork).

Norway offers the highest shares in the main goods both in the export from Germany, and in the imports to Germany, but if for passenger cars, the figure is 19.2% of German exports, for oil/gas it is extremely high – 82.0% of German imports. Concentration of German imports on a single goods group is also characteristic of Russia (oil/gas – 66.6%) and Iceland (aluminum/aluminum alloys – 64.3%), while in other countries the figure is in the range of 6, 9 to 20.4%. In fact, German import from Norway, Russia and Iceland is monocultural, and monocultural are items of low-grade processing. Before the crisis, which began in autumn 2008, this one-sidedness did not prevent active growth of imports from these countries, but in 2008-2014 the cumulative decline in German imports from the Baltic States in the context of the four commodity groups appeared to be by about 3/5 due to the reduction of imports of oil/gas from Norway and Russia: Norway had more than ⅓, and Russia – about ¼ of this recession. As a result, imports from Norway in 2008-2014 decreased by 13.8%, while imports from Russia increased by 3.5%. However, this happened only because reduction of Russian imports of oil/gas was more than offset by a rise in imports of Russian oil products.

In the first quarter of 2015 this compensation was no longer valid. Trade turnover between Germany and Russia showed the most negative dynamics among the Baltic countries. Changes in the German-Baltic trade in the first quarter of 2015 compared to the same period in 2014 are presented in Tables 10 and 11.

Table 10. Trade between Germany and Baltic States in 2014-2015.

Country/Group of countries	Turnover			Export from Germany			Import into Germany			Balance for Germany
	January – March 2014	January – March 2015	Change, 2015/2014	January – March, 2014	January – March, 2015	Change, 2015/2014	January – March 2014	January – March 2015	Change, 2015/2014	January – March, 2014	January – March 2015
	Bln euros		%	Bln euros		%	Bln euros		%	Bln euros
Poland	20,9	23,3	111,2	11,4	12,4	109,5	9,6	10,8	113,2	1,8	1,6
Russia	18,1	12,4	68,4	7,5	5,0	66,1	10,5	7,4	70,1	-3,0	-2,4
Sweden	8,9	9,1	101,8	5,3	5,6	105,4	3,6	3,4	96,5	1,8	2,2
Denmark	7,1	7,1	99,8	4,0	4,4	108,5	3,0	2,7	88,3	1,0	1,7
Norway	7,3	6,5	89,7	1,9	2,1	106,5	5,3	4,4	83,5	-3,4	-2,4
Finland	3,9	4,2	107,5	2,2	2,3	101,1	1,7	2,0	116,0	0,5	0,3
Lithuania	1,0	1,0	104,7	0,6	0,6	104,9	0,4	0,4	104,3	0,2	0,2
Estonia	0,6	0,5	85,8	0,5	0,4	81,0	0,1	0,1	103,6	0,3	0,2
Latvia	0,5	0,5	94,0	0,4	0,3	92,5	0,2	0,1	97,7	0,2	0,2
Iceland	0,2	0,2	100,3	0,1	0,1	126,4	0,2	0,1	88,2	-0,1	0,0
Baltic countries, total	68,5	64,8	94,6	34,0	33,2	97,7	34,5	31,6	91,4	-0,6	1,6

World, total	508,9	528,1	103,8	278,3	293,3	105,4	230,6	234,8	101,8	47,6	58,5

Table 11. Factors of growth/recession in trade between Germany and the Baltic States in 2014-2015.

Country/group of countries

Turnover Germany – Baltic States, 2015/2014

Export from Germany into the Baltic States, 2015/2014

Import into Germany from the Baltic States, 2015/2014

Growth

Recession

Share in growth

Share in recession

Growth

Recession

Share in growth

Share in recession

Growth

Recession

Share in growth

Share in recession

Bln euros

Poland

+2,3

+82,3

+1,1

+56,6

+1,3

+81,2

Russia

-5,7

-86,7

-2,6

-95,7

-3,1

-69,5

Sweden

+0,2

+5,7

+0,3

+15,0

-0,1

-2,8

Denmark

-0,0

-0,2

+0,3

+18,0

-0,4

-7,9

Norway

-0,8

-11,4

+0,1

+6,7

-0,9

-19,4

Finland

+0,3

+10,4

+0,0

+1,3

+0,3

+17,4

Lithuania

+0,0

+1,6

+0,0

+1,5

+0,0

+1,1

Estonia

-0,1

-1,3

-0,1

-3,3

+0,0

+0,3

Latvia

-0,0

-0,5

-0,0

-1,0

-0,0

-0,1

Iceland

+0,0

+1,0

-0,0

-0,4

Baltic countries, total

+2,8

-6,6

+100,0

-100,0

+1,9

-2,7

100,0

-100,0

+1,6

-4,5

+100,0

-100,0

Note. The Baltic countries are presented in Tables 10 and 11 in descending order of their turnover with Germany in January-March 2015.

Russia accounted for more than 80% of decline of the German-Baltic trade, including more than 90% reduction in German exports and almost 70% reduction in German imports. The extent of the fall was 31.6% of turnover (including 33.9% for exports from Germany and 29.9% for imports into Germany). Noticeable, but not as dramatic, contraction of trade with Germany happened also in Estonia (-14.2% in turnover due to the decrease of exports from Germany by 19.0%) and in Norway (-10.3% in turnover due to 16.5% decline of imports in Germany). Two other countries – Denmark and Latvia – showed a moderate reduction in trade with Germany. The other five countries had a positive balance, with the biggest step forward made by Poland (it provided more than 80% of the growth of the German-Baltic turnover, including more than 50% of the growth of German exports and over 80% in increase in German imports). As a result, Poland, that was lagging behind Russia in turnover with Germany by 7.4% in 2012, surpassed Russia two-fold on this indicator in the first quarter of 2015.

The main products that led to a sharp collapse of the German-Russian trade:

for exports from Germany – eight positions from the commodity group “finished products” (50.1% decline in the context of three-digit classification), namely: automotive components (13.7%), passenger cars (9.3%), aerial vehicles (6.8%), trucks (4.9%), machines without sectoral specialization (4.0%), office and computing equipment (3.9%), pharmaceutical products (3.8%), machinery for mining and construction (3.6%);
for imports into Germany – one position from the commodity group “raw material”, namely: oil/gas (84.4% decline in the context of three-digit classification); the negative trend was reinforced by reduction of imports of semi-finished products, namely oil products (10.7%), which is Russia’s second most important import goods, that previously performed the role of a shock absorber.

The value of Russia as a trading company for Germany decreased markedly. The share of Russia in the export of goods from Germany declined from 2.6% in 2014 to 1.7% in 2015 (only three years ago, in 2012, it was 3.5%). As a German consumer the Russian Federation moved from the 12th place in 2014 to the 15th place in 2015. Russia’s best result was the 11th place in 2011-2012, and the worst – the 20th place in 1999. Russian automotive components descended from the 10th place in 2014 to the 18th place in 2015; Russia’s passenger cars – from the 15th to the 17th. If this trend persists, Russia can find itself already in two years in the third ten export partners of Germany, as it will cease to represent any serious business interest for Germany.

The share of Russia in the import of goods to Germany fell from 4.2% in 2014 to 3.1% in 2015 (the highest level of this indicator was recorded in 2012 – 4.7%). As a German supplier, Russia dropped from the 10th place in 2014 to the 12th place in 2015. In 2011-2013, the country kept the 7th place, in 1999 it was on the 16th place. In 2015, the Russian Federation retained the 1st place for the group “oil/gas” (its share in German imports amounted to 29.1%), but in the context of four-digit classification it kept the championship only for oil with a share of 28.2%, whereas for gas it moved to the 2nd place (with a share of 30.0%), losing to Norway (34.2%). Russia’s role in the import of oil/gas in Germany peaked in 2011 (36.8%); since then it has been steadily weakening, and since 2015 this trend has not been blocked, as before, by the increasing role of Russia in the German imports of oil products (2010 – 10.0%, 2014 – 23.3%, 2015 – 18.9%), and the other Russian products are not comparable with those main products in terms of imports in Germany. In the second ten import partners of Germany Russia will stay longer than in the same weight category for exports from Germany, but the probability of a significant reduction in the influence of Russian business on the German market is very high.

International trade, as well as the nature, abhors a vacuum. Collapsing trade relations with Russia will strengthen Germany’s orientation to other counterparties. Regarding the Baltic States, this would be beneficial, first of all, for Poland, Sweden and Norway: Poland will strengthen its leadership, Sweden will push Russia to the third place in terms of turnover, Norway will close the gap from Russia in terms of imports into Germany.

List of references

Statistisches Bundesamt. Genesis-Online Datenbank. Statistik 51000. Außenhandel. URL: https://www-genesis.destatis.de/genesis/online

[1] Here and elsewhere – calculated according to the Federal Statistical Office of Germany (Statistisches Bundesamt. Genesis-Online Datenbank. Statistik 51000. Außenhandel. URL: https://www-genesis.destatis.de/genesis/online). Dataareperiodicallyupdated. The Baltic countries are understood as countries that along with Germany are included in the Council of the Baltic Sea States (Denmark, Iceland, Latvia, Lithuania, Norway, Poland, Russia, Finland, Sweden, Estonia).

Boundary extension in the Arctic continental shelf: the positions of the claimant states

Admin — Wed, 18 Mar 2015 19:16:55 +0000

Valeriya Ruzakova, 3rd term student of the International Institute of Energy Policy and Diplomacy (MIEP), Moscow State Institute of International Relations, Russia (SPIN-code: 4074-1760)
Research supervisor: L. Voronkov, Ph. D., Professor, Moscow State Institute of International Relations

In December 2014 Denmark filed a claim with the United Nations to expand the boundaries of its continental shelf in the Arctic, and Russia is going to present its new claim in 2015. It seems impossible to elicit the meaning of the ongoing process of the Arctic continental shelf delimitation without specifying its legal and geopolitical aspects. This article is intended to systematize the international legal mechanism of the continental shelf delimitation and to highlight the actual positions of the claimant states as well as the prospects of the boundary delimitation in the Arctic continental shelf.

In December 2014 Denmark filed an application to the United Nations for extension of its continental shelf in the Arctic to 350 nautical miles, which caused numerous comments in official circles of various countries, politicians, experts and observers. Some of them saw in this step the desire of Denmark to implement its geopolitical ambitions, achieve some political goals, join the battle for resources in the Arctic, or provoke military confrontation in the region and a new “cold war”[1].

Some experts, on the basis of the thesis of economic hopelessness of central areas of the continental shelf in the Arctic (according to the US Geological Survey (USGS) «Circum-Arctic Resource Appraisal: Estimates of Undiscovered Oil and Gas North of the Arctic Circle», about 84% of the hydrocarbon resources of the continental shelf is already within the areas of national jurisdiction of the Arctic coastal states), tend to see in the actions of Denmark the logic of the “big geopolitical game”. How justified are these estimates and what actually is it all about?

The international legal regime of the Arctic shelf is governed by the 1982 United Nations Convention on the Law of the Sea. According to Article 76, the continental shelf of a coastal state “includes the seabed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines… where the outer edge of the continental margin does not extend up to that distance”. It is important to note that the baselines – borders of inland seas – are often a subject of controversy. Due to the fact that the United States are not currently a member of the Convention, they are guided by the 1958 Convention on the Continental Shelf, according to which the continental shelf is defined as “the seabed and subsoil of the submarine areas adjacent to the coast but outside the area of the territorial sea, to a depth of 200 meters or, beyond that limit, to where the depth of the superjacent waters admits of the exploitation of the natural resources of the said areas”[2].

Figure 1. Scheme of the international legal status of the continental margin and its superjacent waters in accordance with the 1982 United Nations Convention on the Law of the Sea.

The illustration is made based on the US Navy materials: The Commander’s Handbook on the Law of Naval Operations. Digital resource. URL: https://www.usnwc.edu/getattachment/a9b8e92d-2c8d-4779-9925-0defea93325c/.

Five countries have a continental shelf in the Arctic: Russia, Canada, USA, Denmark (Greenland) and Norway. Activity on the Arctic shelf, over which sovereignty has not been recognized by any of the states, is regulated by the International Seabed Authority located in Kingston, Jamaica^{^[3]}.

In accordance with Article 4 of Annex II of the 1982 United Nations Convention on the Law of the Sea, a coastal State intending to establish the outer limits of its continental shelf beyond 200 nautical miles must submit an application (presentation) to the UN Commission on the Limits of the Continental Shelf (CLCS) within 10 years after the ratification of the Convention. Therefore, the application made by Denmark for extension of its Arctic shelf is in full compliance with the provisions of the Convention. This application was expected, and it is not dramatic and cannot give evidence about any “secret geopolitical intentions” of the Kingdom of Denmark. Russia, claiming expansion of its Arctic shelf up to 350 nautical miles, also exercises its rights granted by the 1982 Convention.

When applying for extension of a continental shelf applicant countries have the right to go by various reasons, including political arguments, but their consideration by the UN Commission on the Limits of the Continental Shelf must completely rule out political motives. The Commission’s decisions must be based on objective and independent scientific assessment of the structure of the seabed.

The United Nations Commission on the Limits of the Continental Shelf is a purely technical body composed of 21 experts in the field of marine geology, geophysics and hydrography who serve in their personal capacities (Article 2.1 of Annex II of the Convention). Members of the Commission shall be elected for a term of 5 years, and can be re-elected at the meetings of States Parties of the 1982 Convention, which shall be convened by the United Nations Secretary General, as necessary, in accordance with Paragraph 2 (e) of Article 319 of the 1982 Convention.

The main requirement for the composition of the Commission is to ensure equitable geographical representation: at least three members shall be elected from each geographical region. Quorum for a meeting is 2/3 of the total number of participants in the 1982 Convention. 2/3 votes of the states that are present and participate in the voting process is needed for the election of members of the Commission. It is important to note that, as the first Chairman Yu. B. Kazmin pointed out, the Commission remains an independent body, officially non-accountable to the Meeting[4]. The fourth and the latest Commission waselectedatthe 22^nd Meetingin 2012. ThisCommission hastheauthorityuntilJune 15, 2017.

Inaccordance with Article 76of the 1982 ConventionandArticles3and 6of Annex IIthereto, the Commission shall perform the followingfunctions:

1) to consider the data and other material submitted by coastal States concerning the outer limits of the continental shelf in areas where those limits extend beyond 200 nautical miles;

2) to provide scientific and technical advice, if requested by the coastal State concerned during the preparation of the data referred to in subparagraph (1);

3) to provide recommendations to the coastal States on the demarcation of the outer limits of their continental shelf.

At the same time, we should note that the Commission’s recommendations are not a final and binding decision. First, according to Article 8 of Annex II of the 1982 Convention, “in the case of disagreement by the coastal State with the recommendations of the Commission, the coastal State shall, within a reasonable time, make a revised or new submission to the Commission”[5]. Second, already here we shall draw attention to the fact that international negotiations obligatorily have the decision function in the process of delimitation of the shelf.

The key criterion in determining the outer limit of the continental margin of the coastal state beyond the 200-mile zone is natural prolongation of the continental shelf. The application submitted to the Commission should contain relevant scientific evidence. Bathymetry (i.e. maps of the seabed with depth marks) and geological criteria are used to determine whether the underwater structures comply with the specified criterion.

The bathymetric criterion (i.e. associated with the assessment of the depth of the sea) involves determining the position of the foot of the continental slope (see Fig. 1) by the maximum change in the gradient, taking into account the 2,500 meter isobath (i.e. an imaginary line connecting all points along the coast where the depth is equal to 2500 meters). The assessment process for the compliance with the geological criteria is even more complex. These criteria include information on the structure and thickness of the sedimentary cover (deposits covering the shelf), the nature of the crust on the continental shelf and geological and geophysical evidence of the location of the continental foot. Sedimentary layers within the outer edge of the continental margin should be 1% (or more) of the shortest distance from the foot of the continental slope. If the data is not available on the sedimentary cover, the limit of the shelf can be marked along a line separated from the foot of the slope by no more than 60 miles.

The restrictive edge of the outer limit of the shelf is a line of 350 miles from the coast of the mainland or islands, and 100 miles from the isobath of 2500 m. However, these restrictions do not apply to submarine elevations that are natural components of the continental margin. These crustal blocks in the Arctic, with the nature of a mainland and almost inseparable from the continents, go deep into the ocean (i.e. the Mendeleev Elevation) or cross it from Eurasia to the Greenland-Ellesmerian Depression (the Lomonosov Ridge), separating the Arctic Ocean into two different structures – Eurasian (in which, for example, Svalbard and Franz Josef Land are located) and Amerasian (the Canadian Arctic Archipelagoes and Wrangel Island are located here). It is these circumstances that cause the mutual territorial “overlapping” of a number of applications.

Some experts – especially non-Arctic states – see some provocations in the applications for extension of the Arctic continental shelf by Arctic coastal states. For example, the analysts of the British newspaper “Financial Times” explain the desire of the Arctic coastal countries to justify their right to expand the boundaries of the continental shelf in the Arctic by the logic of the “geopolitical game”. The main prize of this game would be the North Pole, the control of which, supposedly, is a symbol of the “geopolitical victory” and leadership in the Arctic region and control over it^{^[6]}. A number of researchers even argue that the areas claimed by Denmark, Canada and Russia, are economically future-less, as well pointing at the thickness and consistency of the ice cover over the central part of the shelf, the “minor” share of hydrocarbon resources in the Arctic, concentrated in this part of the shelf .

Meanwhile, according to the research by the United States Geological Survey (USGS) «Circum-Arctic Resource Appraisal: Estimates of Undiscovered Oil and Gas North of the Arctic Circle», the Arctic contains about 22% of the world’s conventional oil and gas reserves (or about 29.9 billion tons of oil equivalent), with about 84% of the hydrocarbon resources of the continental shelf located at depths up to 500 m^{^[7]}. According to some representatives of the Arctic coastal states, from 94 to 97% of offshore hydrocarbon resources in the Arctic is already within the exclusive economic zones of the coastal states. These data were presented, for example, by the Russian Foreign Minister Sergei Lavrov. These figures are also indicated in the Arctic strategy of Denmark for the period of 2011 – 2020[8]. The same estimates have been given by the experts of the University of the Arctic in Rovaniemi (Finland)[9].

However, we should bear in mind the very low level of exploration of the Arctic shelf, especially in high latitudes, and current prediction-like estimates of oil and gas. There is a good chance that the Arctic shelf hydrocarbon deposits outside of the 200-mile border can be much richer than expected. According to the Russian Ministry of Natural Resources and Environment, potential hydrocarbon reserves of the central areas of the continental shelf in the Arctic are about 5 billion tons of oil equivalent, whereas the Minister S.E. Donskoy considers these estimates to be minimal[10].

If we consider that the forecast figure in exports of fuel and energy resources of the Russian Federation in 2020, according to the Energy Strategy of Russia for the period up to 2030, should reach 0.8 billion tons of oil equivalent[11], then fossil fuel resources of the central parts of the Arctic shelf may be comparable with the volume of five years of the Russian oil and gas exports at the current level. Speaking about the resource potential of the central areas of the continental shelf, it is important to stress the probability of detection of mineral resources in the central part of the Arctic shelf.

In addition, the sovereignty over the shelf gives a country the right to monitor any activity on it, including, for example, the construction of pipelines. It also assumes responsibility for the country’s environmental protection in the territory. Uncontrolled economic activity outside the areas of national jurisdiction in the area of the “common heritage of mankind” may pose a threat to the environment at the regional and global scale. Therefore, expansion of monitoring of the human activities in the Arctic shelf by the Arctic coastal States, as well as responsibility of those countries for the consequences of such actions can significantly contribute to sustainable development. Under the current circumstances of the non-alignment of the United States to the 1982 United Nations Convention on the Law of the Sea, the zone of the “common heritage of mankind” in the Arctic is not feasible^{^[12]}. However, this leaves the question of the legal status of a number of sections of the shelf unresolved, and therefore it defines only a transient, temporary state of affairs.

Given these considerations, identification of the outer limits of the jurisdiction of the coastal states of the Arctic continental shelf is a priority task of the Russian foreign policy, as defined in the Foreign Policy Concept of the Russian Federation on February 12, 2013[13].

Let’s consider the claims of the Arctic coastal countries for the continental shelf in the Arctic:

Russia ratified the 1982 Convention on the Law of the Sea by the Federal Law #30-FZ dated February 26, 1998. Russia filed its first application in 2001. However, the Commission considered the data provided insufficient and decided that for unambiguous classification of each of the deep-water bottom uplifts in the Amerasian sub-basin (see Fig. 2), Russia should submit experiment-backed evidence of their continental nature and their structural belonging to the continental margin of the north-eastern Eurasia, as well as develop a consistent model of the evolution of the Arctic, which explains the geological nature of these bottom uplifts[14].

In the absence of these data, the outer limit of the continental shelf in the Amerasian sub-basin cannot be farther than 350 nautical miles from the baselines, i.e. the area, which Russia can claim in the region, will not exceed 400000 km². At the same time, the use of the second criterion of the limitation of the legal shelf (100 nautical miles from the isobath of 2500 m), which applies only to submarine elevations that are natural components of the continental margin, will allow to extend the jurisdiction of the Russian Federation in the Amerasian subbasin much farther. In this case,the acquired areaof theextended continental shelfof Russia will be1.2 millionsquare km^{^[15]}. To date, according to the Ministry of Natural Resources and Environment of the Russian Federation, a new version of the application to be submitted, according to the plan, in 2015, is at the final stage of the preparation^{^[16]}.

The maximumUS claimsin the Arctic Ocean are the Chukchi Cap and the seabed areas adjacent to it to the north andeast, not reachingthe North Pole^{^[17]}. In the US a Specialinteragencycoordinating bodyhas been created to substantiate the outer limit ofthe continental shelf- The US Extended Continental Shelf Task Force.More than a dozenAmericanministries,services and agencies take part in its work^{^[18]}.

Denmark ratified the 1982 Convention on the Law of the Sea on November 16, 2004. The claims by Denmark apply to a part of the Lomonosov Ridge, which lies to the right of an imaginary line of the equidistance with Canada and further to the north up to the North Pole, and further, to the Russian side of the Arctic, which thus overlaps with the claims of the Russian application of 2001. Denmark submitted its application for extension of its shelf in December 2014. It also claims for the western part of the Western Nansen Basin and in the place of the East Greenland Ridge^{^[19]}. It is important to note that in the field of shelf delimitation Denmark has close research collaboration with Canada. In 2005, these two states announced plans to jointly explore water areas of the Arctic Ocean adjacent to their territories and process the received data, which resulted in the signing of a memorandum on cooperation in Ottawa. Denmark has scientific cooperation with all the Arctic coastal states, including Russia.

Canada ratified the 1982 Convention on the Law of the Sea on November 7, 2003. So far, the country has not applied for extension of its continental shelf. In the “preliminary information”, delivered by Canada to the United Nations on December 6, 2013, only some vague scope of potential Canadian claims is specified: the continental margin of the continental shelf in the Canadian basin, Amundsen basin, on the Lomonosov Ridge and the Alpha Ridge. It is specified that on the Alpha and Lomonosov Ridges Canadian claims concern areas that are located farther than 350 nautical miles from the baselines. It is expected that Canada may acquire approximately 1.5 million km² of the continental shelf beyond 200 nautical miles from the baselines. In the “preliminary information” it is indicated that Canada is going to submit a partial application, the timeline is indicated vaguely[20].

Norway ratified the 1982 Convention on the Law of the Sea on June 24, 1996. It submitted its application in November 2006, claiming for the shelf of the Western part of the Nansen Basin – the same site, which is also claimed by Denmark in its application in 2014[21].

Thus, underwater elevations, which are natural components of the continental margin, belong to the shelf that is claimed in applications of several countries at the same time. The largest of these elevations is the Lomonosov Ridge (in the scientific community there is almost no dispute that the Lomonosov Ridge and other disputed areas of the shelf have a continental origin; scientists’ opinions differ on where exactly these elevations join the mainland^{^[22]}). There is a chance that the United Nations Commission on the Law of the Sea recognizes the controversial underwater elevations as a natural component of several continental margins, and, therefore, the right to sovereignty over them by two or three Arctic coastal states at the same time. However, even in this scenario, there is no potential for conflict.

Figure 2. Location of the maingeological structuresandsections of the bottom of theArctic Ocean^{^[23]}^..

Information note: The Lomonosov Ridge was discovered by Soviet scientists in 1948. It stretches over 1500 – 1700 km and connects the Eurasian continent in the area of the New Siberian Islands (Russia) with the North American continent in the area of Ellesmere Island (Canada) and Greenland (Denmark), effectively dividing the Arctic Ocean into 2 parts – the Pacific and Atlantic (see Fig. 2). In the Pacific part there is the Mendeleev Ridge (Ellesmere – Wrangel Islands). In the central part of the ridge there was found a break. Another name for the ridge is “Alpha”. Also in the Pacific part there is the Chukchi Cap. In the Atlantic part there is the Gakkel Ridge, which is an extension of the Mid-Atlantic Ridge. The Lomonosov Ridge and the Gakkel Ridge form two basins in the Atlantic part: the Amundsen basin and the Nansen basin.

From the above it follows that the so-called “control” over the North Pole by an Arctic country with the shelf in the Arctic Ocean may be solely the result of consideration of applications of the countries concerned by the Commission on the Limits of the Continental Shelf based on scientific evidence that these countries will collect and present in support of their applications. And the “prize” will be “awarded” to the country that will perform this task in the most compelling and scientific way – unless otherwise stipulated in mutual agreements by scientifically recognized claimant countries.

With regard to the thesis of the “militarization” of the Arctic region, the reason for making such estimates is attributed to the overlapping of applications, that is, due to the intersection of shelf territories claimed by coastal Arctic states (see Fig. 3). If the Commission on the Limits of the Continental Shelf recognizes that such claims are justified, these countries will have to hold diplomatic negotiations on the delimitation of the shelf on the basis of existing norms of the international maritime law. It is impossible to militarily impose a particular solution to the problem. This is the only possible approach and the only possible vision of the claimant states for resolving disputes, which is reflected in the Ilulissat Declaration of May 28, 2008^{^[24]}.

It is important to note that in the 2013 Kiruna Declaration of the Arctic Council all the Arctic countries (including the US) have committed themselves to act in accordance with the international law, including the law of the sea^{^[25]}^. It is significant that it was the potential for the use of international legal mechanisms of delimitation of the disputed territories of the Arctic shelf that the Russian Foreign Ministry stressed in its official commentary published in connection with the Danish application for the continental shelf in 2014^{^[26]}^.

Figure 3. Scheme of the Arctic shelf: 200-mile zone and the territorial claims of countries, including the application of Denmark in 2014.

Source: Denmark challenges Russia and Canada over the North Pole // BBC News Europe. Digital resource. URL: http://www.bbc.com/news/world-europe-30481309

2,000 km

1,000 miles

Alaska (USA), Russia, Norway, Greenland (Denmark), Canada

The North Pole, the Lomonosov Ridge

Applications/claims:

Danish application: 2014.

Russia

Canada

USA

200-miles line

It should be noted that there are two main principles of possible delimitation of maritime areas and the Arctic shelf between states. According to the “median line method”, delimitation is done based on the principle of the equidistance of the boundary line from the shoreline (or base points of the coastline) of the neighboring states. According to another method – “sectoral” – the pole is seen as a point from which straight lines are drawn along longitudes. The specific method of drawing dividing lines between the neighboring countries is not specified by the Convention on the Law of the Sea, except for referring to the principle of mutual consent and justice^{^[27]}^.

Currently, the Russian Federation already has positive experience in the field of contractual delimitation of the continental shelf in the Arctic (namely in the eastern part of the Western Nansen Basin). On 15 September 2010, Russia signed an agreement with Norway “On Maritime Delimitation and Cooperation in the Barents Sea and the Arctic Ocean”.

Summarizing the above, it should be emphasized that allegations of futility, politicization and high conflict potential of the international process of delimitation of the continental shelf in the Arctic are incorrect and unfounded. On the contrary, we should talk about the strategic importance of this issue for all Arctic coastal countries, as well as about the effective mechanism for its solution embedded in the international law which is based on objective and impartial scientific assessment of the seabed, as well as openness of the Arctic coastal countries for a dialogue, their willingness to cooperate and find mutually beneficial solutions. The Minister of Foreign Affairs of Denmark (Martin Lidegaard) in connection with the Danish application to the United Nations Commission on the Limits of the Continental Shelf, said: “This is not an act of aggression. This is an attempt to fairly and accurately provide data of the geological expertise. We hope for constructive cooperation with experts from the United Nations and the subsequent bilateral negotiations with neighboring countries”[28].

The delimitation of the continental shelf in the Arctic is quite complicated and can take a long time. However, objectively and fairly established boundaries may for centuries provide the basis for efficient studying and development of the region, as well as for strengthening of the close partnership among the Arctic coastal states.

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[2]1958 Convention on the Continental Shelf. Digital resource. URL: [http://www.conventions.ru/view_base.php?id=34]. (Accessed 19.12.2014).

[3] Konyshev, V.N., A.A. Sergunin. The Arctic in the international politics: cooperation or competition? The Russian Institute for Strategic Studies. Moscow, 2011. URL: [http://www.hse.ru/data/2011/11/01/1269302651/%D0%90%D0%A0%D0%9A%D0%A2%D0%98%D0%9A%D0%90_%D0%A0%D0%98%D0%A1%D0%98.pdf]. (Accessed 19.12.2014). P. 42.

[4]Doc. SPLOS/73. 14 June 2001. P.10. Para. 61.

[5] Gudev P.A. Challenges and threats to oil and gas production in the Arctic. // Ecologichesky vestnik Rossii, #2 (15). Pp. 34-35.

[6] “Denmark lays formal claim to North Pole” // Financial Times. URL: [http://www.ft.com/intl/cms/s/0/b7e66b1c-8442-11e4-8cc5-00144feabdc0.html#axzz3QCY2ciY1]. (Accessed 15.01.2015).

[7]Circum-Arctic Resource Appraisal: Estimates of Undiscovered Oil and Gas North of the Arctic Circle. Digital resource. URL: [http://pubs.usgs.gov/fs/2008/3049/fs2008-3049.pdf].

^{^[8]} Kongeriget Danmarks Strategi for Arktis 2011–2020. // Danish Embassy in Canada, official website. [Digital resource]. URL:[http://canada.um.dk/da/~/media/Canada/Documents/Other/Arktis_Rapport_DA.pdf] P. 24. (Accessed 15.12.2014).

[9] Canada claimed for the Lomonosov Ridge. Article. Digital resource. URL: [http://pro-arctic.ru/06/12/2013/press/6010]. (Accessed: 15.12.2014).

[10]“The Ministry of Natural Resources and Environment: the Russian Federation will submit an application to the United Nations for expansion of the limits of the Arctic shelf in spring 2015” // ITAR-TASS. Digital resource. URL: [http://itar-tass.com/politika/1540165]. (Accessed 15.01.2015).

[11]The energy strategy of Russia till 2030. The Ministry of Energy of the Russian Federation, official website. Digital resource. URL: [http://www.minenergo.gov.ru/activity/energostrategy/]. (Accessed 15.01.2015).

[12] Vylegzhanin A.N. Non-participation in the Convention on the Law of the Sea gives advantages to the USA. // RIA Novosti. Digital resource. URL: [http://ria.ru/arctic_news/20120719/704132667-print.html]. (Accessed: 15.01.2015).

[13] The Foreign Policy Concept of the Russian Federation. Approved by the President of the Russian Federation V.V. Putin on February 12, 2013. Subparagraphs 31, 38, 73. The official website of the President of the Russian Federation. URL: [http://news.kremlin.ru/media/events/files/41d447a0ce9f5a96bdc3.pdf]. Accessed: [15.12.2014].

[14] Konyshev, V.N., A.A. Sergunin. The Arctic in the international politics: cooperation or competition? The Russian Institute for Strategic Studies. Moscow, 2011. URL: http://www.hse.ru/data/2011/11/01/1269302651/%D0%90%D0%A0%D0%9A%D0%A2%D0%98%D0%9A%D0%90_%D0%A0%D0%98%D0%A1%D0%98.pdf. (Accessed: 19.12.2014). P. 44.

[15]Same. Pp. 44-45.

[16] «The Russian application for the Arctic shelf will be ready by the end of the year». // Rossiyskaya gazeta. URL: http://www.rg.ru/2014/06/30/reg-szfo/arktika.html. (Accessed: 19.12.2014). P. 44.

[17] Gubanov A.I. Delimitation of the Arctic continental shelf: international law problems and perspectives. Monograph. – M.: IKD “Zerzalo-M”, 2015. P 244.

[18]The Extended Continental Shelf Project. Information from the website: www.continentalshelf.gov URL: http://continentalshelf.gov/about.html. (Accessed: 19.12.2014).

[19] Gubanov A.I. Delimitation of the Arctic continental shelf: international law problems and perspectives. Monograph. – M.: IKD “Zerzalo-M”, 2015. PP. 244-247.

[20]Same. PP. 247-248.

[21]Same, PP. 248 – 249.

[22] Evdokimov Yu. Hot Arctic //Battle on the Ice: the Arctic shelf in the world politics and economics of the 21^st century / Eds: V. Andrianov, N. Vasiliev, B.M. Golkin, 2009. P. 37.

[23] Gubanov A.I. Delimitation of the Arctic continental shelf: international law problems and perspectives. Monograph. – M.: IKD “Zerzalo-M”, 2015. P. 308.

[24]The Ilulissat Declaration. Digital resource. URL: [http://www.oceanlaw.org/downloads/arctic/Ilulissat_Declaration.pdf]. (Accessed: 15.01.2015).

[25] Voronkov L.S. The Arctic for 8. Evolution of the role of the NATO in the Arctic. // Russia in global politics. Digital resource. URL: [http://globalaffairs.ru/number/Arktika-na-vosmerykh-16045]. (Accessed: 15.01.2015).

[26] The commentary by the Information and Press Department of the MFA on the Danish application for the Arctic continental shelf. MFA of the Russian Federation, official website. Digital resource. URL: [http://www.mid.ru/brp_4.nsf/newsline/C4533848E85A09A0C3257DB00053569C]. (Accessed: 15.01.2015).

[27] Konyshev, V.N., A.A. Sergunin. The Arctic in the international politics: cooperation or competition? The Russian Institute for Strategic Studies. Moscow, 2011. URL: [http://www.hse.ru/data/2011/11/01/1269302651/%D0%90%D0%A0%D0%9A%D0%A2%D0%98%D0%9A%D0%90_%D0%A0%D0%98%D0%A1%D0%98.pdf]. (Accessed: 19.12.2014). P. 43.

[28] Regeringen og Grønlands selvstyre indgiver i dag krav på kontinentalsoklen nord for Grønland. The Danish Ministry of Foreign Affairs, official website. Digital resource. URL: [http://um.dk/da/udenrigspolitik/udenrigspolitiske-nyheder/newsdisplaypage/?newsid=7d92317d-823e-4412-8bd4-5cbcadccb45e]. (Accessed: 15.01.2015).