Chancellor Gerhard Schröder and president Vladimir Putin have signed an agreement in Berlin to build a 1,200km undersea pipeline to carry natural gas from Russia to Germany.
The €4 billion pipeline will be built in a partnership between Russian gas monopoly Gazprom, holding 51 per cent, German energy utility Eon and a division of chemicals giant BASF.
It is expected to open in 2010 and may be extended to the Netherlands and Britain at a later date.
Mr Schröder described the deal as an important contribution to German and European energy security and a "breathtaking development" in Germany's economic relationship with Russia.
"Trade has already topped €15 billion in the first half of this year," said Mr Putin, adding that this was an increase of 50 per cent on last year.
The deal has angered the countries' neighbours as the new pipeline will bypass existing pipelines in Poland, Belarus and Ukraine.
"It is not a good development if one of the EU's states, an important state - Germany - conducts this kind of policy, both above our head and the heads of the EU, because in essence this is a Russian-German project which is not part of a common European concept," said Polish president Aleksander Kwasniewski.
But Mr Schröder said there was no cause for concern. "The Baltic Sea pipeline is a European scale project that is not directed against anybody and that should be open to later participation by third parties," he wrote in a newspaper article today.
