At this point it is fair to say that much of the Ukraine crisis is rooted in oil and gas distribution. More specifically, controlling the European gas market and its transit routes.

Aside from the benefits of having NATO positioned right under Russia’s southwest borders, Ukraine was and remains a big geo-political win for Washington in terms of energy control. Having ownership of Ukraine’s transit gas pipelines means controlling and restricting Russian gas flow to west Europe. This has the potential of opening the European market to more U.S. ‘friendly’ suppliers and solutions. For Europe, having a stake in Ukraine means lessening the energy power levers that Russia now exerts on its western partners as well as appeasing Washington’s geo-political global agenda.

The one fly in the ointment of this high stakes game of energy control, has and remains the South Stream pipeline. Last week Austria and Russia sealed a deal that makes South Stream a reality. Austria (an EU ‘insider’ nation), in defiance of Washington and Brussels will fully commit to building out its end of the pipeline that will then send gas to the greater European continent. The cooperation is a slap in the face for Washington and Brussels, and goes against their current efforts to shelve the South Stream project and keep the focus on Ukraine transit routes, which the west has invested heavily on through internal destabilisation and IMF economic loan packages.

South Stream and Ukraine

The map below explains how South Stream can and will render the entire Ukraine power grab (in terms of energy) null and void. With South Stream, Ukraine is effectively bypassed as a west Europe gas transit conduit, greatly diminishing the country’s geo-political value.

The South Stream pipeline is an alternative pathway for Russian gas, bypassing Ukraine entirely as it crosses the Black Sea and enters Bulgaria before passing Serbia and Hungary on the way to its hub located in Baumgarten, Austria. As Itar-Tass reports, citing Gazprom CEO Alexei Miller,

“Russia’s gas giant Gazprom does not rule out gas transit via Ukraine may be stopped completely. What happened once is a tendency, nothing happens incidentally. In 2009, gas supplies were stopped completely — so, we know precedents.” Miller noted that Gazprom is not interested in participation in Ukraine’s gas transportation system (GTS). The Gazprom CEO said, “The train has already departed. It seems it departed yesterday. It belongs to no one. The GTS has no owner. The GTS of Ukraine does not belong to Naftogaz but to the Ukrainian government. Before discussing things with someone regarding modernization and cooperation, it should appear on the balance sheet of this or that economic entity.” “Property and legal issues should be resolved first,” Miller said.

‘The train has departed’…this is not encouraging news for Ukraine’s fragile economic and geo political future.

Zerohedge explains…

In fact, the civil war torn country may soon lose all leverage it had with both Europe and Russia as a transit hub for natural gas, which also means that it is quite likely that Ukraine is about to be abandoned by its western allies who will no longer have any practical use for it.

The Gazprom CEO confirmed what little leverage Ukraine had with Moscow is now effectively zero…

“As for the continuation of negotiations with Ukraine, today there is no subject for talks. First, they must repay their debts. The gas price for Ukraine is fair – this price is fixed in the contract.” “A dozen Ukrainian laws need to be changed to be able to do something with the GTS.”

And just like that Putin has altered the game. By cutting off Russian energy transit through Ukraine’s pipelines, the country will lose all strategic importance to Russia and eventually Europe, which will have to then focus its attention towards South Stream and its transit route.

Bulgaria, Serbia and South Stream

This brings us to Bulgaria and Serbia. One is an EU member nation (but not in the monetary union), and the latter is mulling over joining the EU. Recent banking and economic difficulties in both Eastern European countries cannot be simple coincidence, as Brussels mounts an aggressive campaign to stop the South Stream pipeline from being built in these countries.

Last week Bulgaria suddenly suffered a bank meltdown, while Serbia’s new Prime Minister warned his country could go bankrupt within a year and end up “in the position of Greece” unless he passes a deeply unpopular package of fiscal consolidation and economic reforms in the next few months. Not passing such economic measures would effectively dash Serbia’s hopes of entering the EU. When Serbia eventually calls for monetary assistance from the EU and IMF, we are sure Serbia’s close relations with Russia and the South Stream project will come up.

For his part Russian Ambassador in Belgrade, Alexander Chepurin told the Itar-Tass news agency that…

“Now Belgrade is holding talks and hopes to join the EU in 2020, Simultaneously, Belgrade stresses its willingness to preserve and develop good relations with its historical friend – the brotherly country of Russia.” “Today the message ‘never against Russia’ is very popular among the Serbian public. Unlike its neighbors, Serbia said it would not impose any sanctions against Russia. Serbian President Tomislav Nicolic and Prime Minister Aleksandar Vucic confirmed it. Serbia demonstrates itself as Russia’s real friend. And it refuses to come against its economic interests.”

Zerohedge also echoes the belief that Bulgaria and Serbia will undergo an economic punishment of sorts, in order to halt their South Stream ambitions:

…the main reason why none other than the poorest EU member country, Bulgaria, just suffered its worst bank run in 17 years, and one which has paved the way to early elections, is precisely that: to provide Europe with a government which will be more focused on Brussels’ interests, instead of the current socialist regime, whose allegiance to the Kremlin is said to take precedence. After all, now that Ukraine is yesterday’s news, pay close attention to how Europe treats all the South Stream countries, starting with Bulgaria, and going through Serbia, Hungary and of course, Austria.

Austria and South Stream

Austria has clearly opted to side with Russia, putting its own national self interest and economic prosperity ahead of Brussels and Washington. Closer cooperation with Gazporm and Austria is also in the cards, with a good chance that the already prosperous Austria, will soon become a major energy hub in the center of Europe.

Finally, and perhaps most notably, is last week’s announcement by Gazprom CEO Miller that Gazprom has good chance, and is interested in discussing buying a stake in the [Austrian] Baumgarten gas hub. In other words, as Europe and the US remains still focused on Ukraine, the one place which now matters most for Europe’s energy future is Austria: a country where Gazprom, and Putin of course, are quietly sowing the seeds of Russia’s energy dominance tomorrow. As for the feeder countries, especially Bulgaria, pay close attention as the US “foreign service” does all it can to destabilize the local government and financial system as a last ditch attempt to wrest Russia’s trump card out of its hand. Something tells us Putin will hardly let it go easily.

Italy, the EU Presidency and South Stream

With Italy set to take over the six-month rotating presidency of the Council of the European Union on July 1, the fissures in European-Russian relations and energy policy are starting to really show.

Itar-Tass reports that Italy’s state secretary for European affairs, Sandro Gozi said…

Italy has always regarded the South Stream project plans to pipe Russian gas across the floor of the Black Sea to Bulgaria and then ashore for onward transit to Greece, Italy and Austria as a strategic project for Europe and will facilitate its implementation during its presidency of the European Union. “The South Stream project has always been and remains most important for Italy, and we have a strong interest in implementing it, first of all, as it is one of those projects aimed to diversify transit routes. We assume that in order to strengthen a single European energy market, it is absolutely necessary to diversify infrastructure connecting it with various suppliers…and we believe that the same approach should be applied to everyone.”

And with regard to Ukraine, Russia, and the growing threat of sanctions being pushed by Brussels and Washington…

Italy supports further expansion of the European Union and consolidation of Europe, but it considers it possible only while developing partnership between Russia and the EU, said Gozi. “As Italy takes over the European Union presidency, we give absolute priority to establishing political and economic integration with Kiev while resuming strategic partnership between the EU and Russia. Relations with Moscow can be neither broken off nor suspended. On the contrary, we are convinced of the need to strengthen them further.”

So much for isolating Russia. It comes as no surprise that Ukraine has decided to end the cease-fire and resume attacks in East Ukraine. It is becoming clear that one of the last cards left to play before the complete Ukraine adventure becomes a waste of time, energy, and money is to bait Russia into a military quagmire, which could then halt South Stream construction and destabilise Russia’s efforts and standing with its European energy partners.

References:

http://www.telegraph.co.uk/finance/economics/10933132/Serbia-could-go-bankrupt-says-PM.html

http://www.euractiv.com/sections/elections/bulgarian-bank-run-paves-way-early-election-303148

http://www.zerohedge.com/news/2014-06-30/russia-reveals-plan-b-gazprom-says-gas-transit-ukraine-may-be-stopped-completely

http://en.itar-tass.com/economy/738370

http://en.itar-tass.com/economy/738060

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