Gerhard Schroeder's Birthday With Putin Frustrates Germany, Explains Why EU Fears Sanctions

Gerhard Schroeder, the former German Chancellor and current board member of Russia’s largest natural gas company, celebrated his 70th birthday party on Monday with President Vladimir Putin on the same day that the European Union announced it would impose a new round of sanctions against Russia for its role in the Ukraine crisis.

The EU announced its second round of sanctions on Tuesday, one day after the United States did the same, and it added 15 people to a list of individuals whose assets will be frozen and whose visas will be banned. In total, the EU has sanctioned 48 people. Its sanctions take a different tack compared with those the U.S. announced Monday, which target seven Russian officials and 17 companies with ties to Putin. The people targeted in the new round of U.S. sanctions include Igor Sechin, head of OAO Rosneft (MCX:ROSN), an oil company owned almost exclusively by the Russian government. But the EU did not include Sechin on its list, and Schroeder is part of why it didn’t.

Although it's frustrating for Germany's current administration -- German soldiers were among the international monitors taken hostage by pro-Russian militias in eastern Ukraine -- Schroeder’s birthday celebration with Putin is not surprising as the two have been friends since Schroeder took office in 1998. In the late 1990s, Germany’s economy was stagnating, and instead of looking inward for economic expansion, Schroeder looked outward, and especially to Russia. He developed what some consider Germany's most strategic partnerships in decades when he forged ties with Russia that would give Germany, Europe's biggest economy, cheap fuel from Russia.

In September 2004, Schroeder signed an agreement to build a $4.7 billion pipeline with Russia, known as Nord Stream, that would run on the Baltic Sea floor, bypassing many Eastern and Central European countries. In February 2005, Schroeder resigned as chancellor and gave up his seat in parliament.

One month later, in what David Kramer of Freedom House described as a strategic move by Russia to “buy up German politicians,” OAO Gazprom (MCX:GAZP), a Russian company that's the largest extractor of natural gas, hired Schroeder as chairman of the Nord Stream pipeline project.

“It’s disgraceful,” Kramer said. The managing director of Nord Stream AG, Matthias Warnig, is also has ties to Russia since he served as an East German secret police officer during the time when Putin was a KGB agent in East Germany.

Schroeder set up his position in Gazprom well before he resigned. Less than one month before stepping down, the chancellor facilitated a $1.4 billion loan for Gazprom, according to Foreign Policy. Today, in addition to serving as chairman of the board of Nord Stream AG, he is a member of the board at TNK-BP, a joint venture between British Petroleum and various Russian partners.

Schroeder’s position at Gazprom and TNK-BP is now causing problems for Germany and its relationship with the U.S. After choosing to gradually phase out nuclear power by 2022, Germany is more dependent on Russian oil and gas than ever. According to data from the German Mission to the U.S., Germany makes up roughly one fourth of the eurozone’s population, and it contributes almost 30 percent of its overall GDP to the economic union. And if the relationship between Germany and Russia were to falter, that could affect not only the German economy, but the world’s as well.

However, if a united Europe decided to sanction companies such as Gazprom, Russia would suffer, too. As the world’s biggest oil producer, whose economy depends largely on petrodollars, it would not be able to move oil overnight, Kramer said.

“They can’t just flip a switch and send it to China,” he said. “Plus China might not even want it.”

Experts say that it is unlikely Germany will impose harsher sanctions on Russia, as Germany cannot afford to forego access to the pipeline. Despite the economic implications of the Nord Stream agreement, the development of the relationship between the two countries -- which put Germany and Russia on their friendliest terms since Nazi Germany fought the Soviet Union in WWII -- began because of a diplomatic exchange that was initiated well before the pipeline agreement was signed.

Annual intergovernmental consultations between Russia and Germany began in 1998, after Schroeder was elected chancellor. By 2000, Russia and Germany had developed a high-level task force that dealt with discussions about the strategic issues of economic and financial cooperation in the energy, science and technology fields.

According to the French Institute of International Relations, in November 2004, a German television channel asked Schroeder if Putin was a ‘flawless democrat’. His response: ‘Yes, that is exactly what he is.’ It was clear from Schroeder’s remarks that his relationship with Putin and Russia had grown personal, as had the former chancellor’s fondness for Russia. That year, Schroeder and his wife adopted a 3-year-old Russian girl.

Also in 2004, trade between the two countries was at an all-time high of $24 billion, and Germany surpassed Belarus and Ukraine to become Russia’s number one trading partner. An agreement between the two countries in August stipulated that the two governments would work together with the aim of "minimizing non-commercial risk as much as possible and helping to remove obstacles to successful implementation of these projects on a European level." By 2005, the number of German firms with offices in Moscow climbed to 4,000.

By the numbers alone, the importance of Gerhard Schroeder to the Russo-German relationship is hard to overstate. But the former chancellor isn’t the only European politician to have cultivated ties with Putin.

Silvio Berlusconi, the former prime minister of Italy, is considered one of Putin’s closest friends among world leaders. In 2010, a U.S. diplomatic cable leaked by Wikileaks revealed that U.S. diplomats were concerned that Berlusconi could be profiting “personally and handsomely” from secret deals with Putin. According to the Wikileaks document, the U.S. ambassador to Rome, Ronald Spogli, had even gone so far as to call Berlusconi a “mouthpiece” for Putin.

While Berlusconi does not hold an official position with any Russian companies, unlike Putin, Italy has strong energy ties with Russia, too. ENI (BIT:ENI), an Italian multinational oil company, signed a memorandum of understanding with Gazprom in 2007 for the South Stream project implementation. The project is expected to extend 930 kilometers under the Black Sea to deliver gas to Italy. Construction on the project began in 2012.