On the Economic Impact of the Pipeline Project between Russia and Germany Paper presented to SCORUS conference October 2008 in Shanghai / China by Helmut Maier, Germany, and Hanna Sherbich, White Russia

Nord Stream Pipeline Project Geographical situation Hanna Shcherbich: On the economic impact of the pipeline project between Russia and Germany. Master’s thesis for the Degree of a Master of Arts International Economics at Berlin School of Economics. Tutor and main examiner: Helmut Maier; assistant examiner: Siegbert Preuß, Berlin 2007

Nord Stream Facts and figures km off-shore pipeline connects directly Russia and Germany via the Baltic Sea - 2 parallel lines and a sea platform with total capacity of 55 billion cubic meters of natural gas per year to be built until on-shore connections will complete the project and link the Nord Stream to the existing gas supply and transmission systems - Nord Stream AG has been established for project’s administration by OAO Gazprom, Wintershall AG, E.On Ruhrgas AG - Nord Stream estimated off-shore pipeline construction at 5 billion Euro in 2007 Question What impact will the North European gas pipeline construction - which is focused only - have on the economies of Russia and Germany in terms of production output and employment? Approach Leontief’s Input-Output theory in combination with the Scenario technique of Future Research Statistical basis 1)German Input-Output table of the year commodities, harmonized -Source: German Federal Statistical Office 2)Russian Input-Output table of the year commodities, not harmonized -Source: Rosstat Problems - High degree of financial data discrepancy - Inconsistency of Russian employment data Remarks on the NORD STREAM One of the most discussed natural gas pipeline projects today

Platform Greifswald Vyborg Offshore 1200 kilometre Two parallel pipelines To be built until 2012 One platform in between Capacity of 55 billion cubic meter natural gas per year Importance confirmed by EU Managed by Nord Stream corporation OAO Gazprom, Russia, 51% Wintershall / BASF, Germany, 24,5%, E.ON Ruhrgas / E.ON, 24,5%

Input-output table Input der Produktionsbereiche 2) Erzg. v. Produkten der Land- wirtschaft und Jagd Erzg. v. Produkten der Forst- wirtschaft Erzg. v. Produkten der Fischerei und Fischzuch t Gew. v. Kohle und Torf Gew. v. Erdöl, Erdgas, Erbring. diesbez. DL Gew. v. Uran- und Thorium- erzen Gew. v. Erzen 3) Gew. v. Steinen und Erden, sonst. Bergbaue rz. 3) H.v. Nahrungs-, Futter- mitteln und Getränken H.v. Tabak- waren Verwendung Selected from German Input-Output table 1997 Domestic Production Aufkommen / Make Output nach Gütergruppen (Zeile 1 bis 59): Erzeugnisse der Landwirtschaft und Jagd Forstwirtschaftliche Erzeugnisse und DL Fische und Fischereierzeugnisse Kohle und Torf Erdöl, Erdgas, DL für Erdöl-, Erdgasgewinnung Uran- und Thoriumerze Erze Steine und Erden, sonstige Bergbauerzeugnisse Nahrungs- und Futtermittel, Getränke Tabakerzeugnisse Textilien Bekleidung Leder und Lederwaren Holz; Holz-, Kork-, Flechtwaren (ohne Möbel) Papier, Pappe und Waren daraus Verlags- und Druckerz., bespielte Ton-, Bild- und Datenträger Kokereierzeugnisse, Mineralölerzeugnisse, Spalt- und Brutstoffe Chemische Erzeugnisse Absolute values Million Euro

Input coefficients Erzg. v. Produkt en der Land- wirtsch aft und Jagd Erzg. v. Produkt en der Fischer ei und Fischzu cht Gew. v. Kohle und Torf Gew. v. Erzen 3) Gew. v. Steinen und Erden, sonst. Bergbau erz. 3) H.v. Nahrung s-, Futter- mitteln und Getränke n H.v. Tabak- waren H.v. Textilien H.v. Bekleidu ng Verwendung/UseErzg. v.Gew. v. ProduktenErdöl,Uran- In % derErdgas,und Forst-Erbring.Thorium- Aufkommen/ makewirtschaftdiesbez. DLerzen Output nach Gütergruppen (Zeile 1 bis 59): Erzeugnisse der Landwirtschaft und Jagd ,483341,201340,263160, ,330541,881590,362090,01847 Forstwirtschaftliche Erzeugnisse und DL ,117162, ,056530, , Fische und Fischereierzeugnisse , , Kohle und Torf ,142430, , ,710940,023550,025090,04370 Erdöl, Erdgas, DL für Erdöl-, Erdgasgewinnung , , ,074840,051980,025090,093640,01847 Uran- und Thoriumerze Erze Steine und Erden, sonstige Bergbauerzeugnisse ,436480,144160,789470, ,253510, , Nahrungs- und Futtermittel, Getränke ,925560, , ,634370,025090, Tabakerzeugnisse , Textilien ,036760,048053, , , ,49426 Bekleidung ,004590, , ,037420, ,012491,99483 Leder und Lederwaren ,027570, ,037690, , ,02771 Holz; Holz-, Kork-, Flechtwaren (ohne Möbel) ,112570,144160,263160,414550, ,112250,057660,326140,056190,03694 Papier, Pappe und Waren daraus ,048240,096110,263160,113060, ,039291,589386,924230,874020,67418 Verlags- und Druckerz., bespielte Ton-, Bild- und Datenträger ,114860,480540,526320,489920, ,355470,332170,978420,649271,24677 Kokereierzeugnisse, Mineralölerzeugnisse, Spalt- und Brutstoffe... 0,92581,585780,789470, ,654820,168110,075260,112370,08312 Chemische Erzeugnisse ,69240,672750,263160,301490, ,648270,273690,301058,296910,90506 Gummi- und Kunststoffwaren ,163110,432480,263160,320330, ,112250,926660,301050,480710,21241 Glas, Keramik, bearbeitete Steine und Erden ,054440, , ,20580, ,680480,02771

Leontief Inverse Input der Produktionsbereiche 2) Erzg. v. Produkten der Land- wirtschaft und Jagd Erzg. v. Produkten der Fischerei und Fischzucht Gew. v. Kohle und Torf Gew. v. Erzen 3) Gew. v. Steinen und Erden, sonst. Bergbauer z. 3) H.v. Nahrungs-, Futter- mitteln und Getränken H.v. Tabak- waren H.v. Textilien H.v. Bekleidung final demand changeErzg. v.Gew. v. ProduktenErdöl,Uran- derErdgas,und Forst-Erbring.Thorium- total production change wirtschaftdiesbez. DLerzen Output nach Gütergruppen (Zeile 1 bis 59): Erzeugnisse der Landwirtschaft und Jagd ,062630,021390,009010,008180,001160, ,001920,346110,172660,051700,02379 Forstwirtschaftliche Erzeugnisse und DL ,001911,059490,000630,001920,002900, ,003450,001340,002500,000860,00083 Fische und Fischereierzeugnisse ,000430,000031,088880,000040,000020, ,000020,004270,000090,000060,00004 Kohle und Torf ,005150,003450,003371,107040,001620, ,012600,004280,003000,006350,00408 Erdöl, Erdgas, DL für Erdöl-, Erdgasgewinnung ,013460,020550,015880,013281,038610, ,013480,012030,007520,017050,01094 Uran- und Thoriumerze ,00000 Erze ,000460,000510,000570,003140,001020, ,000710,000490,000330,000610,00048 Steine und Erden, sonstige Bergbauerzeugnisse ,008860,003860,009700,031700,000530, ,018400,005490,002060,002490,00145 Nahrungs- und Futtermittel, Getränke ,124550,007350,004670,006230,002460, ,003811,255560,023070,015700,00861 Tabakerzeugnisse , ,046470,00000 Textilien ,001860,002210,115440,002190,000520, ,001130,001930,000981,291480,49058 Bekleidung ,000210,000700,000110,001740,000090, ,000580,000360,000250,000441,23686 Leder und Lederwaren ,000880,001610,000120,001220,000590, ,001520,000350,000200,000130,00210 Holz; Holz-, Kork-, Flechtwaren (ohne Möbel) ,005140,005340,007610,018130,004200, ,007620,005260,010960,004750,00556 Papier, Pappe und Waren daraus ,010040,005470,010270,011600,004150, ,041090,038690,118600,032190,03158 Verlags- und Druckerz., bespielte Ton-, Bild- und Datenträger ,007580,010680,013210,017650,009460, ,012150,013890,024690,018710,03140 Kokereierzeugnisse, Mineralölerzeugnisse, Spalt- und Brutstoffe...0,020290,036240,026330,017580,007550, ,016560,014010,008740,016470,01146 Chemische Erzeugnisse ,091530,031840,035840,039010,017970, ,069860,051200,039390,267360,13308 Gummi- und Kunststoffwaren ,012450,012690,009310,024630,004670, ,012140,025780,012780,019170,01898 Glas, Keramik, bearbeitete Steine und Erden ,019000,017690,006070,022790,003510, ,013890,017360,005710,018730,00992

Approach Notations within an open ended and static Leontief model ∆xchange of final demand, vector, exogenous ∆X total change of total production output, vector ∆X direct change of direct fraction of intermediate production output, vector ∆X indirect change of indirect fraction of intermediate production output, vector ∆Echange of people employed, vector D reciprocal labour productivity coefficients, diagonal matrix Ainput coefficients, matrix (I-A) -1 Leontief Inverse, matrix

Approach Graphical clarification of direct and indirect effects Change of final demand for goods and services of a special commodity group j Production in commodity group j Production in other commodity groups Impact on production of any other commodity group i Flow of goods/services Flow of money ∆x j Directly to final demand from group j Direct intermediate output from group i to group j ∆X i direct ∆X i indirect Indirect intermediate output from group i to group j ∆X i total = ∆X i indirect + ∆X i direct + ∆x i Total production output of commodity group j

Approach Model equations for the changes induced by construction of the pipeline ∆x= estimated exogenous parameter ∆X total = (I-A) -1 ∆x ∆X direct = A ∆x ∆X indirect = ∆X total - ∆X direct - ∆x ∆E= D ∆X

Part of the project Construction costs Billion € % On-shore connection on the Russian territory Nord Stream (off-shore pipeline Vyborg-Greifswald) On-shore connection on the German territory Total Cursive red figures: based on sources Black figures of right column: included estimations in absolute values Execution Estimated costs for the gas pipeline construction

Compressed commodity groups* Final demand increase Mio. Euro Total production output, increase Mio. Euro Employment increase People Agriculture / forestry / fishery Mining / energy / water-supply Products of chemical / oil and gas industries06344,633 Metals and products of metal-working industry4961,11010,410 Machines and equipment1,9502,59721,404 Products of light / timber and pulp / paper industries02151,885 Products of food and beverages / tobacco industries0859 Building construction3,0603,18141,225 Trade and intermediation services / services of transport and communication 06458,656 Financial intermediation services / insurance / housing and communal services 01,3439,542 Health and social services / education Public services / defense / social insurance / private households 0871,538 Total5,50610,009100,649 Scenario 1: The impact of the Nord Stream investments on German economy Basis: Input-Output Table 1997 for domestic production * The original table contains 59 commodities

Scenario 1: Estimation of impact on German economy Input data The Nord Stream pipeline construction together with its on-shore connections on German territory increases the final demand for - Building construction by 3 billion Euro - Machines and equipment by 1.95 billion Euro - Metals and products of metal-working industry by 0.5 billion Euro Output data -Total production output increases by 10 billion Euro -Economic multiplier is equal to 1.8 -Up to 20,000 people employed per year, taking into consideration the timeframe of five years for construction, and the fact that labor productivity has apparently grown since 1997

Compressed commodity groups* Final demand increase Mio. Euro Total production output increase Mio. Euro Agriculture / forestry / fishery015 Mining / energy / water-supply0291 Products of chemical / oil and gas industries01,026 Metals and products of metal-working industry0647 Machines and equipment9961,495 Products of light / timber and pulp / paper- industries0185 Products of food and beverages / tobacco industries052 Building construction4,9104,415 Trade and intermediation services / services of transport and communication 01,263 Financial intermediation services / insurance / housing and communal services 0110 Health and social services / education057 Public services / defense / social insurance / private households 051 Total5,9069,607 Scenario 2: The impact of the Nord Stream investments on Russian economy Basis: Input-Output Table 2003 for domestic production * The original table contains 22 commodities

Scenario 2: Estimation of impact on Russian economy Input data The Nord Stream pipeline construction together with its on-shore connections on Russian territory increases the final demand for - Building construction by 4.9 billion Euro - Machines and equipment by 1 billion Euro Output data - Total production output increases by 9.6 billion Euro - Economic multiplier is equal to Effect on the employment market shows a very positive tendency, but the received figures seem to be too high and biased