South Stream fell to political crises and tough Brussels stance Analytic

24 December 2014. PenzaNews. International energy community, politicians and experts continue the debate over the reasons and possible consequences of the decision to shut down the South Stream gas pipeline. The project cancelled by the President of Russia Vladimir Putin was to supply up to 63 billion cubic meters of gas to Southern and Central Europe through a Black Sea route with the aim to diversify export routes and eliminate transit risks.

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In his speech after talks with his Turkish colleague Recep Tayyip Erdogan on December 1, the Russian President made it clear that if Europe does not want South Stream to be built, it will not be built.

“We will redirect the flow of our energy resources to other regions of the world, including by advanced and fast realization of liquefied natural gas projects. We will advance to the other markets,” Vladimir Putin described, adding that special emphasis will be placed on expanding gas supply to Turkey at more favorable prices.

Meanwhile, Alexey Miller, head of “Gazprom,” noted that the decision to cancel South Stream marked the beginning of drastic changes in originally buyer-oriented supply policy to European countries. According to him, in the future Europe will be able to buy Russian gas through a transit hub on Turkish-Greek border.

The speech given by the Russian President was a very unexpected hit for several European countries that planned to profit from South Stream, Bulgaria and Serbia first and foremost. Western politicians voiced an opinion the decision to stop the South Stream construction was an attempt to coerce Europe into submission, and a sign that sanctions proved to be effective. Several political figures believe this step to be a bluff, and the project possible to restart.

The event caused mixed reaction in foreign media. Several European sources, such as BBC, German “Frankfurter Allgemeine Zeitung” and Italian “La Repubblica,” called the South Stream halt a “defeat for Putin” and said it was caused by altered energy market.

However, some sources mention great losses for Southern and Eastern European countries. According to OilPrice.com, the decision to cancel the pipeline puts those states at great disadvantage in comparison to their bigger and stronger neighbors.

“Countries like Bulgaria and Serbia remember well the winter of 2009, when achingly cold temperatures coincided with Russia’s punitive shutoff of gas to Ukraine. Germany used the lesson to press forward with the Nord Stream pipeline, guaranteeing a direct gas supply. But the EU has repeatedly blocked its southern counterpart, citing antimonopoly policies but possibly fearing even greater Russian influence within the bloc. The South Stream countries not only lose energy guarantees, they lose lucrative transit fees, new jobs, and the potential for better trade with Russia,” they stress, pointing out that discontent caused by this decision may further contribute to political instability inside the EU.

“Reuters” says Europe has not too many possibilities to diversify their gas suppliers: among potential alternatives are resuming construction of the Nabucco pipeline through the Caspian Sea, building a liquefied natural gas terminal in Croatia, and increasing import from Azerbaijan.

At the same time, several analysts claim that Vladimir Putin’s decision to cancel South Stream is an attempt to show the West he will not submit, even in tough economic, trade and political circumstances.

“By abandoning this project, Putin has sent a message that he has had enough of Europe’s continued complaints and critiques about its role in Ukraine. […] With these actions, Putin is attempting to stay ahead of his adversaries, though his country is increasingly being backed into a tough corner,” suggests Tim Boersma of Brookings Institution.

International experts had mixed opinions over the role of Bulgaria in the South Stream issue. One of them, Kiril Avramov, faculty member of the Center for Social Practices at the New Bulgarian University, said the decisions made by authorities as

“You should understand that it is not ill will of the European countries to severe ties with Russia. It was only the requirement for Russia to comply with international law,” he added.

According to him, the issue was further exacerbated by the fact that talks between Sofia and Moscow were not sufficiently transparent.

The expert also highlighted the fact that several high-ranking officials do not always agree to the course taken Boyko Borisov. In particular, according to him, Kristian Vigenin, the foreign minister of Bulgaria, expressed his disagreement with the former’s decisions.

“He was giving an official lecture at our university. Part of the questions that were given to him were precisely about South Stream,” Kiril Avramov explained.

At the same time, the analyst struggled to evaluate possible losses from the decision because of lack of transparency during the talks and difficult economic situation in Russia. However, he expressed his belief that both parties see the situation as unacceptable and inconvenient.

In his turn, Mark Harrison, Professor of Economics at the University of Warwick, England, call the decision to stop South Stream an unusual decision for Kremlin, because it might have been made on economic grounds.

“For several years the Russian administration has given political objectives priority over financial considerations in the energy market,” he explained.

In the expert’s opinion, the EU obstructed the pipeline construction mainly due to demands from Brussels to follow its competition laws.

“The European objections arose because European competition rules do not allow the same corporation to control both the gas and the pipeline,” Mark Harrison said.

From his point of view, several Bulgarian politicians were trapped because of the stance taken by Brussels and the decision to abandon the project made by Moscow.

“They tried to satisfy Russia’s aims for South Stream and then found themselves isolated by the Russian withdrawal,” stressed the Professor of Economics at the University of Warwick.

According to Andras Deak, senior fellow at the Institute of World Economies of the Hungarian Academy of Sciences, the current situation made it impossible for affected countries to influence the decision on their own.

“Bulgaria and all the transit states became the hostages of an ex lex situation between the EC and Russia,” the expert explained.

He pointed out that Europe anticipated much less severe measures, such as postponement and stalemate, but not the decision to cancel the project.

“The EC set its final position in December 2013, and Gazprom did not react in this manner [back then],” Andras Deak said.

Now, in his opinion, repercussions of this decision will affect all involved parties.

“Russia gets stuck in Ukraine or increases its Turkish exposure – another big transit story starts. Europe gets a lot of transit headache, esp. in Ukraine. It is the EU-Russia energy relations that suffer the most,” he stressed.

However, the expert mentioned that both parties may possibly return to the project idea in middle-term perspective if Russia and the EU are left without any alternatives in gas transit issue.

At the same time, Jonathan Stern, chairman of the Natural Gas Research Program at the Oxford Institute for Energy Studies, called the decision to abandon the South Stream project so late exceptionally surprising and impossible to anticipate.

“If it was going to be stopped, I thought it would have been stopped two years ago, not once the pipes have been delivered in the barge that’s ready to lay,” he said.

According to the expert, Sofia became a highly convenient scapegoat, because construction would be impossible without the Bulgarian section: however, the real reasons for the stalemate are the Third Energy Package requirements. He also suggested that the European Commission might have been influenced by the overall EU tendency to look for new suppliers, and decreasing gas demand.

“This was not all Bulgaria’s fault. But the Bulgarians did not move quickly enough after the EU presented them with the statement of objections. The Bulgarians should have done a lot more since June to do something about resolving this situation if indeed they wanted to resolve it,” Jonathan Stern speculated.

From his opinion, the future situation will highly depend on Russian-Turkish cooperation.

“The Turks [and the Russians] need to agree on the new [South Stream] landfill very quickly – probably in the next six months. If it takes longer than that, than that’s going to delay the project quite significantly,” the expert pointed out, adding that negotiating the sea section of the pipeline would be the most important task.

Meanwhile, Pepe Escobar, Brazillian roving correspondent for several news agencies, speculated that the European Union might lose more than Russia.

“I’ve been listening to people carping in Brussels about the EU being ‘hostage’ to Gazprom at least since 2002. And yet they mess up in all negotiations, don't have a united energy policy, don't even know how to approach other nations for securing gas deals. It’s a mess. The only thing they do well is to shoot themselves in their feet,” he said.

In his opinion, several members of the European Union, such as Britain, Poland and the Baltic countries, are only aggravating both parties. Because of this and the circumstances, he says, it was only a matter of time before South Stream would be abandoned.

“The decision was foreseeable taking into account the enormous pressure by the US on weak link Bulgaria, and frankly the ‘ideological’ stupidity that reigns supreme at the EC in Brussels,” Pepe Escobar stressed.

Still, he expressed his hope that top politicians in Europe and in Germany in particular would soon change their stance towards Moscow.

“Meanwhile, Russia is absolutely right in pursuing more energy deals with East Asia,” the journalist concluded.

At the same time, Stefan Meister, head of the program on Eastern Europe, Russia and Central Asia at the Robert Bosch center of the German Council on Foreign Affairs, recalled that South Steam was one of the key Moscow projects and dwelled on its political and economic importance.

According to him, the decision to stop the pipeline was expected due to current difficult situation.

“With the sanctions from the EU side, all the discussion about energy supply, with increasing critic on South Stream and the Bulgarian government which less and less supported the project, I think the Russian side had to make its decision,” the political analyst explained, adding that financial troubles of “Gazprom” might have also been one of the reasons behind this step.

He highlighted the fact that Russian side tried to persuade Bulgaria via political and economic means to sign a bilateral agreement, bypassing the EU.

“The European Union had a discussion that Russian side – Gazprom and the government – informally try to influence this project and push Bulgaria against the EU legacy. This is seen more as an intrigue from the Russian side than it is from the European Union side,” Stefan Meister pointed out.

In his opinion, in the end it was the stance taken by the EU that put a end to South Stream.

“I think because of this increasing pressure on the government in Bulgaria [from Brussels], in the end they decided against it. The discussion was very transparent, very public, so I don’t see any intrigue: I just see the European Commission being very tough in terms of their own legacy, of their own policy, and, surprisingly, they succeeded to some extent, from their perspective,” said the political analyst.

However, he struggled to calculate the damages caused by this decision to Bulgaria, Serbia, Hungary and other involved countries, and stressed the fact there will be no compensation for a cancelled business project.

The expert also speculated that Russia-Europe energy ties will weaken over the next few years.

“Russia has an interest to develop its energy relations with Asia. European market might be less important for the Russian energy companies, and the European Union is developing more energy efficiency, renewable energy, and is looking for other energy sources,” Stefan Meister explained.

He also said the relations were and will be affected by current international crises, such as the Ukrainian conflict.

At the same time, the German analyst highlighted the potential of Moscow, Ankara and Baku to cooperate in gas supply area.

“I’m most skeptical about this, but I think there could be links with Azerbaijan and Turkey, especially in the Southern energy corridor. There are possibilities for cooperation,”

The South Stream pipeline project was planned to go from the Anapa region of Russia to Varnu, Bulgaria, through an underwater pipeline in the Black Sea, with two branches connecting the Balkan Peninsula with Italy and Austria. However, no definitive plans on pipeline routes were maid.

Construction works began on December 7, 2012, and the pipeline was to be competed in 2015.

South Stream, with a total planned cost of €16 billion would supply up to 63 billion cubic meters of gas a year. The project aimed to diversify the European supply routes for Russian gas and reduce dependency on transit states for suppliers and customers.