Russia’s Pipe Dreams Are Europe’s Nightmare

In the ongoing showdown between Russia and the West, Russia has a trump card: natural gas exports. Despite chilly relations, in 2018, gas shipments from Russia to Europe and Turkey hit an all-time high of 201.8 billion cubic meters (bcm). And even as the EU sticks to its guns on Russia sanctions, many of its members happily press ahead with their pet energy projects. Germany, for example, continues to back the Nord Stream 2 pipeline, which will bring natural gas from Russia to the north German coast.

Now Russia may be using another major project—TurkStream—to deepen its influence in Europe’s backyard. The pipeline, which traverses the Black Sea between Russia and Turkey, was inaugurated last year, and the first shipments of gas are expected toward the end of this year.

TurkStream is a commercial and geopolitical coup for the Russians. On the commercial front, the pipeline helps cement Gazprom’s position in Turkey, its second-largest customer after Germany. From a geopolitical perspective, the pipeline bypasses Ukraine and deepens Russia’s strategic partnership with Turkey at a time when Ankara’s ties to long-standing allies on both sides of the Atlantic are fraying.

TurkStream may strengthen Russian President Vladimir Putin’s hand in the Balkans too. In its second phase, if Putin gets his way, the pipeline will transport 15.75 bcm of gas through Bulgaria and then on to Serbia, Hungary, and Austria.

It is no secret that the Kremlin has been throwing its weight around in the EU’s backyard. But its frequently discussed methods—propaganda, disinformation, and intelligence ops—pale in comparison to its activities in the energy sector. The Kremlin has failed spectacularly in its efforts to stop countries like Montenegro and newly renamed North Macedonia from joining NATO. But its ability to co-opt politicians and businesspeople by dangling lucrative infrastructure contracts and hydrocarbon profits in front of them is unparalleled.

Europe is fighting back hard. Because TurkStream will terminate in the EU, Gazprom needs to bring it into conformity with European anti-monopoly rules. These rules, largely crafted after Russia shut off gas shipments to Ukraine in 2009, are geared toward diversifying energy supplies to avoid dependence on Russia. One such rule—that energy companies can’t simultaneously own transit infrastructure and sell gas through it—presents a particular challenge for Moscow, which would otherwise allow Gazprom to both build the pipeline and then supply it.

That’s why Putin has been out courting partners for Gazprom in the Balkans. During a visit to Serbia in January, Putin sealed the deal for a joint venture between Gazprom and Srbijagas, Serbia’s state gas company, to lay 250 miles of pipe. And in March, Russian Prime Minister Dmitry Medvedev made his way to Bulgaria to negotiate another 300-mile stretch. There, the state-owned firm Bulgartransgaz has stepped up to build and operate TurkStream. But Bulgartransgaz would need to raise an estimated $1.6 billion to make that happen. Russia won’t provide the cash (it argues that Bulgaria will get enough profit from transport fees and sales of Gazprom gas to make the project worthwhile). The Bulgarian government has said that it might get some of the money from Brussels instead, but that is unlikely to happen either.

The EU may be willing to allow Berlin to break the anti-monopoly rules for Nord Stream 2—Russia will own those pipelines and the gas in them, but Berlin has argued that the project would be private—but it appears ready to be much more stringent in enforcing its law in the Balkans. It could, for instance, take Serbia to task for striking a deal in which Gazprom would control 51 percent of TurkStream. Although Serbia is not yet a member of the EU, it is negotiating its accession. The Energy Community, a Vienna-based watchdog tasked with bringing candidate countries’ legislation in line with European rules, has already warned that the TurkStream plans break EU rules. Serbia may thus risk a slowdown in membership talks.

To smooth things over with Europe, Bulgarian Prime Minister Boyko Borissov has suggested that TurkStream will be only one pipeline coming into a new Balkan Gas Hub that will also be fed by supplies from Azerbaijan and offshore fields in the Black Sea. In that way, his argument goes, the Balkan Gas Hub will, in fact, help diversify energy supply. Unfortunately for him, Medvedev and Gazprom CEO Alexey Miller have nixed his idea. They don’t want Bulgaria to be able to mix and resell gas through an EU-backed trading platform. As a result, it will be hard for Borissov to expect either regulatory exemptions or financial aid from the European Commission. In other words, it will be the Bulgarian taxpayer underwriting the venture.

Sofia does hold one trump card in its negotiations with Russia. Under Gazprom’s current contract with Bulgaria, it is obliged to pay Bulgaria transit fees for shipping gas through the country until 2030. When that deal was struck, most gas came through the so-called Trans-Balkan Pipeline, which is connected to Ukraine. TurkStream renders that route, which has operated since the 1980s, redundant. The Bulgarian government can sue Gazprom for compensation over lost revenue from transit fees. To avoid paying hundreds of millions, Putin would have to offer some concessions to Borissov, including a guarantee that Russia will help make TurkStream’s prospective extension to Europe economically viable.

Serbia and Hungary should be able to join with Bulgaria to pressure Russia. This, of course, is easier said than done. Borissov, worried about the Kremlin’s penchant for stirring up trouble in domestic politics, has been averse to taking risks in relations with Moscow. Serbia has its own special relationship with Putin, a critical international ally on top-priority issues such as Kosovo. Hungary’s Viktor Orban is similarly keen to nurture his own political and economic ties to Russia. In sum, Putin has plenty of opportunities to divide and conquer.

Whether Bulgaria, Serbia, and others cling on will be a litmus test of the nature and depth of their ties with Russia. For now, they believe they can find a way to work with Russia without running afoul of the European Commission and EU law. Who can blame them? They have seen big EU countries, like Germany, play that game too. But unlike Germany, they do not have the power to tweak the rules or craft political compromises in Brussels. Further, Russia is in no mood to offer Eastern European countries, which it sees as subordinates, perks. The financial and political risk will thus land squarely on countries like Bulgaria and Hungary. And unless they play their cards well, they will be expending scarce resources on mammoth ventures with doubtful profitability for everyone except Russia.