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Russian Prime Minister Vladimir Putin’s interview with German Television’s Channel One ARD

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Question: (as translated) Mr Prime Minister, he who has energy has power. Russia has a lot of energy. How much power does it have?

Vladimir Putin: He who has brains has power. You can have anything, but yet be unable to make good use of it. You are right, though, that energy of course means a great deal in the modern world. We would like Russian energy to be an inseparable and organic part of the world energy, to function according to common rules, to make due profits, and secure the interests of its partners.

Question: But it so happened that Russia sustained a blow by turning down the gas tap in Ukraine.

Vladimir Putin: We are not interested in suspending deliveries to our consumers. Just ask yourself, why would we do it? We have long-term contracts with our European consumers. These European consumers duly pay us. Why would we act against our own best interests and stop shipping our gas there? It is Ukraine that has effectively engineered a gas blockade of Europe. Why? In order to get below-market prices for the gas it buys from us.

Since the disintegration of the Soviet Union, new transit countries have appeared that are trying to use their transit monopoly to gain preferences. To have cheap gas prices, above all below market prices.

In regards to Gazprom, it only suffers losses by undersupplying product to its partners. During the time that supplies to Ukraine were on hold, Gazprom lost $800 million. Gazprom had to suspend the operation of 100 wells, though without the danger of technological consequences. Its image is suffering, as you have rightly noted.

What we are doing is not only in Russian interests, but is also in the interests of the European consumers. I want the European consumers, the people in European countries, to know about it and to understand it. The European consumer is interested in reliable supplies. They can only be reliable if all the parties involved in the process - gas producers, the transit countries, and the consumers - proceed in the framework of civilised market instruments, rules, and mechanisms.

In addition to everything else, gas is a key, a basic instrument in shaping market prices for other goods in the European and world markets. If, say, some of our Western neighbours, for example the Ukrainian partners, get gas at low prices and the European Union countries get it at high prices, then their products - chemicals, metals, and some other goods - become uncompetitive in international and European markets, while the Ukrainian partners gain huge advantages of a non-market character.

Question: But the Ukrainian economy is not going to change in the foreseeable future, and how then will gas get to Germany?

Vladimir Putin: First of all, gas is flowing to Germany. Thankfully, there is more than one channel for delivering Russian gas to Germany. Second, Europe, including Germany, has gas storage facilities into which Gazprom has pumped its gas.

In regards to changes in the economies of the former Soviet countries - and that applies not only to the Ukrainian economy, but also to that of Belarus, Kazakhstan, and all the others - if there are no clear market signals regarding prices for primary energy, then these economies will never try to save energy. No administrative measures would be able to introduce energy saving.

Regarding Ukraine, the current situation has been superimposed, unfortunately, on the wish to exploit its transit position and also on the internal political crisis. That's all.

During the "orange revolution" many people thought that they would live better, hoped to get rid of corruption, and hoped that their country would adopt normal, transparent market relations and would strengthen the institutions of democracy. Today many people are disappointed. The former leaders of the "orange revolution" have not lived up to people's expectations; indeed they have abused their confidence. The political struggle is degenerating into a squabble between clans. These clans seek not to strengthen democracy and build a market economy, but to fulfill their personal ambitions and gain access to financial flows, one of which, of course, is trade in Russian gas, both inside and outside Ukraine.

To put an end to this situation, regardless of what is happening inside Ukraine, it is necessary to diversify the flows and transportation facilities from the Russian producer to the European consumer. The transit countries should be made to shed their illusions. The maidens should be disabused of their illusions because the bridegrooms have a choice, so to speak.

Question: Unfortunately, the fact remains that so far gas has to go through Ukraine if you want it to get to Europe. What is the solution?

Vladimir Putin: The answer is there. Ukraine has signed the Energy Charter. It wants to look like a civilised European state. It must not block its transit to the European countries, no matter how eager it may be to get European gas at prices that are below the world prices. Europe must give a clear and understandable signal - not a signal to Russia to give away our commodity for next to nothing - but a signal to Ukraine that it must behave in a civilised way.

There is yet another option. An example is the way we deal with Belarus. For things to be stable, we must proceed to market relations, market prices, and market transit. If it is short of resources for the moment - the economy is not ready, is very energy-intensive, and other systems are not ready - give them a loan.

We have lent Belarus $2 billion, but we wrote in the contract with Belarus that we would pass on to European prices within three years. We raise the price every year, though our Belarusian partners do not like it: we have a lot of arguments there too. Even so, Belarus is paying up.

There is still a third option, which we proposed several years ago. Russia and Germany formulated the proposal and at the moment it was effectively accepted by Ukraine. We signed a joint memorandum - Russia, Ukraine and Germany - to the effect that we would create an international consortium involving other European partners - from Italy, France, and perhaps other European countries - that would rent the Ukrainian gas transportation system. We may take part in privatisation if Ukraine wants it, but it tends to make a fetish out of the gas transportation system, considering it to be its national heritage, almost God-given and not subject to privatisation. We can take part in privatisation if Ukraine eventually agrees. We proposed a long-term lease of the gas transportation system with the system still being owned by Ukraine. I think everyone would stand to gain from it - but privatisation is also an option. Why not?

We have often been criticised - sometimes rightly - for not going far enough in liberalising energy and the gas market, but the same can be said about our Ukrainian friends.

Question: One cannot speak about Russian gas without mentioning Gazprom. It is a state-owned enterprise and can be seen as a success story. In the turbulent 1990s, when many seized state property in Russia, Gazprom remained the property of the state. Would it be true to say that you have learned from the experience of the 1990s that it is good for the state to have its own resources?

Vladimir Putin: Your information is not quite accurate. Gazprom is not a state-owned organisation. It is a joint stock company. Until recently the state had a 38% stake in Gazprom. Now, using only market methods, we have increased the stake to a little over 50%, but Gazprom operates as a joint stock company in the framework of a market economy and according to market laws. More than 49% of its shares belong to private owners, many of whom are foreigners.

Of course, in such a pivotal sector as energy the influence of the state is still very important, at least for the Russian economy. There are several reasons for that. One of them I have already mentioned when I spoke about Ukrainian, Kazakh, Belarusian, or Russian economies. I am referring to the high energy consumption that we have inherited from the Soviet Union, but this is not to say that we are going to freeze the current state of affairs. We are going to switch domestic consumers in the Russian Federation to European gas prices. This is not economic masochism; rather, we are doing it consciously, aware that only market methods can impel the economy to adopt new technologies, including energy saving. That is the only way to make it competitive.

But that is not all. Although this is a process that takes time and we expect to reach the European price only by 2011, we already set the task of providing more liberal access to Gazprom's pipeline system for our independent gas producers.

Question: While on the subject of infrastructure projects, one cannot help mentioning Nord Stream. The project costs over 7 billion euros, and will take gas from Russia to Germany. Could I ask you why you are so fond of Germany and so preferential towards it?

Vladimir Putin: It is not about fondness, but about mutual interests. The European gas supply system was born between Russia and Germany in connection with the plans to supply the German economy with Soviet gas. Russia and Germany were thus the founding fathers of the system. It is clear to the European consumers, especially Germany, and to us that additional threats have emerged with the appearance of transit countries. This is borne out by the current crisis. Note that today, in the times of crisis, Germany is helping some of the worst-hit countries. Germany is one of the European Union's leaders and the potential of Nord Stream enhances Germany's leading position in the European Union.

Nord Stream is no longer a bilateral project. Taking part in it are two German, a Russian, and a Dutch firms. The system will be fed also from the Shtokman field where Gazprom, the French Total, and the Norwegian Statoil are working. Not only Germany but other European countries will get the gas, so we have every reason to say that it is not a bilateral, but a multilateral European project. Still, the project was initiated by Russia and Germany for reasons that are also clear, since Germany is the main consumer of our gas. And likewise, we sell about 149 billion cubic metres of gas to Europe, 40-odd billion of which goes to Germany.

Question: Was that the reason that you invited two German representatives, Mr Schroeder and Mr Varnig, to head up Nord Stream?

Vladimir Putin: No, that was not the reason. They were invited to the project not because they are Germans, but because of their business and personal traits. I think Mr Varnig and Mr Schroeder are very well aware of the importance of the project for Europe and for Russia, and they have the professional background to enable them to perform the functions with which they have been charged.

Question: The project is under way and pipes are being made for it, with 75% of these pipes being made in Germany and 25% in Russia. Still, the project does not seem to have full approval because many European countries are against it. Some demand increased gas supplies and some have to settle their accounts with the former Soviet Union. What will happen if the project does not get off the ground?

Vladimir Putin: I think all the talk about the past and undersupply is groundless. Our partners are guided by their pragmatic interests. Look what the transit countries do if they understand that they are monopoly transit countries. They demand prices to be cut below market for the gas they get from us. For some European countries this additional transit potential may enhance their status in the European Union, but I would like to repeat: in implementing this project, we are not harming anyone, we are not taking anything away from anyone. The routes have already been laid through the transit countries. We are not shutting them down.

Moreover, all the countries that sign long-term contracts with us receive the full amount of gas on market terms. Russia has never defaulted on its obligations. I stress, not once. We will work with the countries that have not yet agreed to the project. I hope that those European states that are potential recipients of gas via that system will also exert efforts towards that end.

Now regarding your question as to what will happen if the project is not implemented. Europe will of course get gas, though less of it and at a higher price. Why? Because the transit countries will constantly create problems in order to charge more for pumping gas through their territories and get cheaper gas for themselves, which means that other consumers will have to pay a higher price. Finally, because we will have to transport our product to other markets - the United States, the East - we will pay more attention to delivering liquefied gas, which is a very costly process.

We will first have to build the berths and gas liquefaction plants, then build a fleet of tankers to carry LNG, then build berths in the countries that receive the tanker fleets, then build plants to deliquefy the gas and turn it into gas. All this will hit the pockets of the ordinary consumer.

Question: The energy discussion of course has many political factors, including the "enemy image". Russia has been criticised for buying gas from Central Asia, and not only gas, but also the gas pipeline systems there. Russia is also building Nord Stream, which will carry gas to Germany and Europe. Russia will thus dictate its terms to European consumers. This is the bogey with which Russia's enemies scare the Europeans. Can you explain why Russia has such a consistently adverse reputation?

Vladimir Putin: It's all because of their fear of Russia. It stems from past phobias. I think there are still people who do not want to see a rapprochement between Russia and Europe and are creating the "enemy image". Not a single of the theses you have laid out now has any grounds; each of them is false.

Take the key one of pricing. I too watch foreign TV, not very often, but sometimes, including German television. I often hear that gas is expensive and yet we have to buy it at such a price from Russia. It is expensive not because it is bought from Russia. Few people know that while they buy our gas at $300-400 per 1,000 cubic metres, they sell it in Europe at a much higher price. It depends on the policy of the governments and the financial and tax policies of the states.

The most important thing is that we do not impose any prices. Few people in Europe, including in Federal Germany, know that these prices are shaped and depend directly on the market prices of oil and its products. These prices do not depend on us. If the oil price is high, so is the price of gas. If the prices of oil and its products fall, so do the gas prices. True, it happens with a lag of about 5-6 months, because the average price for a certain period of time is calculated. It is sure to fall during this year given that oil prices fell at the end of the previous year. So, if one has to be angry at anyone it should be the oil speculators, who sell not the real product but paper. Regardless, we have not created it: it has been done in other regions of the world and not at Moscow exchanges.

Question: You once told journalists ironically, "Whatever happens, to you I will always remain a former KGB agent." Yet the fact that George Bush Sr. is known to have been the head of the CIA did not loom large in public debate. Why is it different in your case? Does it not have something to do with the fear of Russia to which you have referred?

Vladimir Putin: I think that is indeed the case. This is because some people would hate to see closer relations between Russia and Europe. I think this is a very incorrect stance to take. It ignores the world development trend. That tradition has its roots in the past, and what is more, the darkest pages of the past. Our past did not only have dark times, but also much that was good. The main thing, however, is that Europe and Russia undoubtedly have a common future. We should recognize that natural interdependence, build our relations for the long term on understandable principles, and respect each other's interests. If we do so, all of Greater Europe will be prosperous and competitive in today's complicated world. I can imagine that somebody does not want Greater Europe to become more competitive, so they are poking about trying to rekindle the fears of the past. That is really how I can explain it.

Question: One more question about Gazprom, just for clarification. We are in the midst of a crisis and energy prices are growing. How important is the revenue Gazprom brings to the Russian budget?

Vladimir Putin: Gazprom is one of the biggest Russian companies. That alone means we will give it every support. It is a major employer, with a workforce of 300,000.

As for its contribution to the tax chest, it is considerable, though not as big as you might think at first glance. The oil sector accounts for 40% of the budget revenue, and Gazprom for 5-6%, but Gazprom has big social obligations. First, gas is still sold at a below market price in the domestic market. Even after 2011, when we plan to introduce European prices for industrial consumers, we will keep the prices for households at a fairly low level. By the way, contracts with industrial consumers are already being signed for 2011 proceeding from the European price formula. Let me repeat, Gazprom's tax contribution is about 5-6%.

Gazprom has another major area of activity that is intimately connected with social tasks. I am referring to the expansion of the household gas supply network. Unfortunately, not all the communities in Russia receive natural gas from Gazprom. We adopted a gasification programme in 2005. At the time, 54% of Russian communities had gas, and now, three and a half years later, the figure is 62%. That is effectively a social burden that Gazprom shoulders. So, let me repeat: Gazprom does not contribute as much to the budget as the oil industry because the latter operates completely in market conditions and sells its products at market prices inside the country, but carries a bigger tax load.

Question: I have another question. We all remember the events of 1970 when Willy Brandt and Leonid Brezhnev signed the "pipes for gas" agreement. This leads me to the following question: You are known to be friends with Mr Schroeder. At what moment do you think Mr Schroeder became aware of Russia's potential to supply gas to Europe and started to work to expand that potential?

Vladimir Putin: You should ask Mr Schroeder himself. I cannot answer for him about what he became aware of and when, but I think there has long been a sense in German political and intellectual circles that Europe and Germany cannot develop effectively without cooperation with Russia.

You have recalled my past with the foreign intelligence. As an intelligence officer I was under the influence of certain ideological clichés, but then I worked at the St Petersburg city administration, and I remember one of my first visits to Federal Germany.

The then Chancellor, Helmut Kohl, had invited the Mayor of St Petersburg for a visit and I was a member of the delegation. We had a long talk at the Federal Chancellor's office, which was still located in Bonn. For the most part I was listening.

You know, to say that I was surprised would be an understatement. I was greatly impressed by what Mr Kohl said about the future of Russian-German and Russian-European relations, and furthermore, how he said it. He spoke with such conviction and professionalism that I was stunned. I looked at the problem from a totally different angle, with different eyes.

The political relationship between Mr Schroeder and Mr Kohl has been spotty, but the fact that the former head of the German Government and the former head of the Social Democratic Party of Germany, Mr Schroeder, took a similarly pragmatic position on the issue of relations with Russia speaks volumes. It shows above all that there are some fundamental mutual interests that necessitate the development of relations between our states. It means that the relations between Russia and Germany do not, after all, depend on the taste of individual political leaders or on their party political orientation. There are common national interests and the national interests dictate the development of relations between Russia and Germany with a plus sign. They dictate the development of these relations not only in energy, but also in other fields. It applies to high technologies and the humanitarian sphere: education and health. It applies to politics, including the coordination of our actions in the world.

I think I will have a chance to discuss all these topics with Federal Chancellor Angela Merkel. She has invited me to come to Berlin in the middle of January, and I am sure it will be a productive and constructive dialogue.

Question: Do I understand you correctly that you will be in Berlin on January 16?

Vladimir Putin: That is correct.

Question: A small question. You spoke about your time in St Petersburg. Was that when you first met Mr Varnig?

Vladimir Putin: Yes, that was around 1993 or 1994. I headed up the Foreign Relations Committee and it was part of my job to register the offices of foreign companies. Mr Varnig came to seek registration for a branch of Dresdner Bank, a Dresdner Bank representative office. We did not register branches, but representative offices. It later developed into a Dresdner Bank subsidiary in Russia.

Thank you for your questions.