Tuesday, July 22, 2014


Russia

Explainer: Is South Stream The Latest Victim Of the Ukraine Crisis?

Welders work during the ceremonial start of the Bulgarian section of the South Stream pipeline in October last year.
Welders work during the ceremonial start of the Bulgarian section of the South Stream pipeline in October last year.
By Charles Recknagel
The Ukraine crisis keeps having unintended consequences. The latest is a setback for South Stream, Russia's planned pipeline to bypass Ukraine when exporting gas to Europe. Here are five things to know about the story.
 
What has happened with South Stream?
 
Work at the European landfall point for Russia's South Stream pipeline beneath the Black Sea has been put on hold by Bulgaria's announcement that it will suspend the process of awarding tenders for the project.
 
Until Bulgarian Prime Minister Plamen Oresharski's surprise announcement on June 8, Moscow had been going ahead unimpeded with South Stream, which is designed to deliver 63 billion cubic meters of Russian gas to Europe.
 
The pipeline, funded by Russia's state gas monopoly Gazprom and costing some $45 billion, is to run from Beregovaya on Russia's Black Sea coast to Burgas in Bulgaria. There it is to connect to additional planned pipelines through the Balkans to deliver the gas both regionally and to Italy and Austria.
 
Now, Sofia's announcement leaves Moscow's pipeline with nowhere to come ashore and throws the future of the South Stream project in doubt.
 
What motivated Bulgaria's decision?
 
Bulgaria announced its decision to halt construction during a visit on June 8 by three U.S. senators to Sofia. But it also had already been under pressure from Brussels for months to do so.
 
The delegation of senators, composed of Arizona Republican John McCain, Connecticut Democrat Christopher Murphy, and Wisconsin Republican Ron Johnson, reportedly raised concerns about the likelihood that Bulgaria would award a tender for the project to a consortium led by the Russian pipeline construction firm Strojtransgaz.
 
That company is controlled by Gennady Timchenko, a Russian businessman close to President Vladimir Putin. Timchenko is on the list of individuals sanctioned by Washington over Russia's interference in Ukraine. He is, however, not on the list of people sanctioned by the European Union.
 
Washington has previously warned Sofia that, if it chooses Strojtransgaz,  then Bulgarian companies participating in the consortium might also be sanctioned.
The planned route for Gazprom's South Stream pipeline (click to enlarge)
The planned route for Gazprom's South Stream pipeline (click to enlarge)
Separately, the EU has pressed Bulgaria to stop cooperation on the project because the European Commission is locked in a dispute with Moscow over the business practices of Gazprom, which holds a 50 percent stake in the Bulgarian portion of the South Stream project.
 
Specifically, the European Commission has criticized Sofia, which joined the EU in 2007, for signing an intergovernmental agreement in 2008 with Moscow that has allowed South Stream to go ahead in Bulgaria even before Brussels' issues with Gazprom are resolved.
 
Brussels accuses Gazprom of monopoly business practices and wants the company to follow the rules of the European Commission's Third Energy Package which went into force in 2009 and aims to guarantee third-party access to pipelines by requiring energy giants to "unbundle" into separately owned energy-producing and energy-transporting companies.
 
Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies in Britain, says Bulgaria for months has turned a deaf ear to Brussels Gazprom concerns.
 
"The EU claims that the intergovernmental agreements signed for the South Stream pipeline are incompatible with the [EU Commission's] Third Package and, in particular, that they are incompatible with principles like third-party access, so that was the basis on which the EU was trying to persuade the Bulgarians to stop construction," Stern says.  "That does not seem to have been successful but the visit of the senators does appear to have been successful."
 
However, Stern adds, there may be one remaining item of unfinished business. He says the Bulgarians have previously warned the European Commission that they would seek compensation from it through the courts if they were forced to give up the pipeline project. Bulgaria, the EU's poorest state, claims it has already invested a substantial amount of money into the project and would stand to lose several billion dollars if it does not go ahead.
 
"It will be interesting to learn whether the Bulgarians told the visiting U.S. senators they would claim compensation," Stern observes.
 
How directly does South Stream relate to the Ukraine crisis?
 
Moscow today delivers almost half of the gas it sells to Europe through pipelines through Ukraine. It has been counting on South Stream, begun in 2012 and due to be completed by 2015, to allow it to bypass Ukraine completely. The Bulgarian decision means it will now have to postpone those plans indefinitely.
 
The impact on the current Ukraine crisis is significant. Kyiv enjoys some bargaining power with Moscow today largely because Russia needs Ukraine's cooperation to deliver so much of its gas to the European market. 
 
"If South Stream is complete, it will make Ukraine much weaker with regard to Russia," Sergei Pikin, director of Energy Development Fund, a Moscow-based energy consultancy and engineering firm, told "The Moscow Times" on June 9. "Neither the United States nor the European Union want this to happen."
 
If Ukraine were to cease being a transit route, Kyiv's relations with Moscow would become simply those of a local gas consumer with little leverage, be it in bargaining over gas prices or discouraging Russia from further interfering in its domestic affairs.
 
That would severely set back Western efforts to stabilize Ukraine and help it achieve its European aspirations.
 
What comes next?
 
The halt to Bulgaria's part of the South Stream has been met with furious criticism from Moscow.
 
On June 9, Russian Foreign Minister Sergei Lavrov directly accused the European Union of putting pressure on Sofia, saying "sometimes Brussels is guided by a desire to punish, a desire to take revenge." 
 
Speaking to reporters during a visit to Finland, he added: "Recently the EU authorities announced that the negotiations [on the South Stream project] would be frozen until Russia recognizes the government in Kyiv. Is that constructive, do you think?"
 
Longtime Kremlin-watcher Edward Lucas, a senior editor of the British weekly "The Economist," says the angry words are a measure of how determined Moscow is to not lose South Stream.
 
"Russia has great assets in Bulgaria, both political and economic and it won't hesitate to use them," says Lucas, author of the book "Deception" Spies, Lies, and How Russia Dupes the West."
 
"Behind this crisis in Ukraine is a big Russian objective of trying to [obstruct] the EU's ability to set the rules in the energy market and this is one of the battles in that war and Russia won't concede defeat lightly."
 
Moscow could have a window of opportunity for action in Bulgaria almost immediately.
 
Just hours after the Bulgarian prime minister's surprise announcement, his Socialist Party and its junior coalition partner said they were ending cooperation. Then, on June 10, the head of the Socialist Party, Sergei Stanishev, announced that the government would step down in the next several days and called for new elections as early as July.
 
Vesela Tcherneva, a researcher in Sofia for the London-based European Council on Foreign Relations, says that the Socialist Party had to give up power after the prime minister's announcement because until now it had been the primary champion of South Stream among Bulgaria's political parties.
 
"The final decision [to halt cooperation]on South Stream made this a government practically without a cause," she notes.
 
Tcherneva says that a caretaker government that will lead the country to elections is highly unlikely to now reverse the outgoing prime minister's announcement and challenge the European Commission again over South Stream.
 
But it remains to be seen what positions the parties which will compete in the coming vote might take, and that could give Moscow some room to try to regain some of the ground it lost this week.
 
Is South Stream Dead?
 

Nobody is ready to contemplate that yet. The official position of Brussels is that the EU is ready to cooperate on South Stream once Gazprom is in compliance with the European Commission's rules.
 
At the same time, South Stream is economically important to multiple EU member states, including Austria, Hungary, Slovenia, Italy, and Bulgaria, as well as would-be members like Serbia.
 
But as the Ukrainian crisis continues to sour EU-Russian relations, the mutual dependencies between Brussels and Moscow are being severely tested. Today, the EU gets one-third of its gas from Russia, and Moscow gets 14 percent of its entire export earnings from the gas it sells to Europe.
 
Neither side has immediate alternatives but Brussels has said it would like to decrease the amount it depends upon Russian energy in the future.

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