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South Stream Ends As West, Russia Clash Over Values

  • Charles Recknagel

Visitors and investors attend the launch ceremony of part of the South Stream pipeline in Anapa, in Russia's Krasnodarsk region.

Visitors and investors attend the launch ceremony of part of the South Stream pipeline in Anapa, in Russia's Krasnodarsk region.

Moscow's surprise announcement it is dropping the South Stream natural-gas pipeline project is yet another sign of the deepening conflict of values between the West and Moscow.

When Russian President Vladimir Putin announced the end to South Stream on December 1 in Ankara, he said he was doing so because of opposition to the project from the European Union.

But what he did not mention is that at the heart of the dispute is a clash over how Russian state companies will do business in Europe and whether it will be on Western or Moscow-set terms.

At issue is not the EU's opposition to South Stream -- Brussels has long accepted Moscow's plans to build the pipeline -- but whether the operator, Russia's state-controlled gas company Gazprom, will agree to comply with EU standards of free-market competition.

Now, as the crisis over Ukraine drives relations between the EU and Moscow to post Cold War lows, Moscow appears to have decided that it prefers to abandon the project rather than give ground.

End Of South Stream: Winners & Losers

Howard Rogers, director of the Natural Gas Research Program at Oxford University's Institute for Energy Studies, sees two reasons why.

"The political climate, which has obviously soured as a consequence of events in Ukraine, has meant that no real progress has been made in trying to find a solution for South Stream and so the project had become bogged down," he says.

"And the impact on Russian state budget revenues from the lower oil prices plus the impact of the sanctions probably had something to do with it as well, so I think there is a little bit of expediency around this, as well as [Putin] making a big political gesture."

For years, Moscow had been trying to push ahead with South Stream while following its own post-Soviet business model, which the EU considers monopolistic.

The two sides deadlocked over EU demands that Gazprom adhere to the rules of the European Commission's Third Energy Package, which went into force in 2009. Those rules aim to guarantee third-party access to pipelines, something Gazprom refuses for the pipelines it controls. The rules also require energy giants operating within the EU to "unbundle" into separately owned energy-producing and energy-transporting companies.

Representatives of both sides regularly negotiated in Brussels over the EU demands but with little sign of compromise. The European Commission held firmly to its position while Moscow sought to sign bilateral agreements with the states whose cooperation it would need to pipe gas from Russia under the Black Sea to Bulgaria and from there through the Balkans and on to Austria and Italy.

Wavering Support

But Moscow's apparent hopes of one day presenting Brussels with a fait-accompli were dealt a setback by Bulgaria's parliamentary elections in October, which brought into power a new government unwilling to sign a bilateral deal before the dispute between the European Commission and Gazprom was resolved.

"Russia has a lot of influence in Bulgaria, Serbia, Croatia, Slovenia, and Austria but it didn't have perhaps quite enough to get those countries to defy the EU Commission head on," notes Edward Lucas, a senior editor of the British weekly "The Economist" and a longtime Kremlin-watcher.

He adds that Moscow seems to have finally realized that "in the end if you build a pipeline which is illegal under EU law then it is going to be very hard to do real business with it."

But if Putin now appears ready to abandon South Stream, he appears far from ready to abandon his strategic goal for the pipeline, which was to bypass Ukraine entirely for Russia's future gas deliveries to Europe.

Instead, he announced in Ankara that Russia and Turkey may build a gas hub near the Turkish border with Greece, another EU member state. That would presumably allow Gazprom to deliver gas into southeastern Europe through existing European pipelines rather than require Russia to build a new network as it envisioned for South Stream.

Still, even a new front is not likely to spell the end to the larger dispute over whether Gazprom will be able to operate in the EU under its own terms or eventually have to bend to rules of the European Commission.

"I guess Russia believes that by landing the gas in a non-EU territory [Turkey] and expanding existing infrastructure from Turkey into Southeast Europe that somehow the dictates of the Third Energy Package are sidestepped, but I think that probably is a little bit optimistic," says Rogers. "But as soon as you start expanding capacity into EU territory, you will have to comply with whatever Third Energy Package measure applies to that."

Gazprom for decades flaunted the European Commission's rules with impunity due to the EU's dependence on Russian energy.

A European Commission probe into Gazprom's business practices continues, with the possibility that, if the two sides cannot negotiate a solution, the commission could levy fines on the company. A finding that Gazprom has engaged in monopolistic practices would also open the opportunity for European companies which claim to have been overcharged for gas to file lawsuits against the Russian gas giant.

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