Saturday

16th Feb 2019

Column / Crude World

Empty Gazpromises

  • The Kremlin knows that in order to undermine Brussels’ attempts at reining in Gazprom’s dominance the best strategy is to let the EU’s own member states do Russia’s bidding. (Photo: gazprom.ru)

Much of the debate concerning the Nord Stream II pipeline centres on whether the project should be seen as a commercial undertaking, or as an effort to lock in Gazprom’s dominance in Europe and deal a blow to Ukraine.

The semantics of this discussion are interesting insofar as they touch at the heart of the Kremlin’s “divide and rule” strategy towards the EU.

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  • The prospects of realising Gazprom's projects are often unclear (Photo: Nord Stream AG)

Over the years, Gazprom has perfected a strategy whereby it whets the appetite of Europe’s political and business elite with potentially lucrative pipeline deals, even though the prospects of realising these projects are often unclear.

How does Gazprom do it? By tempting different countries with promises of turning each of them into a “gas hub”, which creates confusion and division between those who expect billions in transit fees and those who see contradictions between the pipeline project and the policies agreed at EU level.

Crucially, such a strategy impedes the development of a common European energy policy since every country will throw its weight behind this or the other pipeline. The fact that the majority of these projects will never be built becomes a moot point.

How South Stream went south

The best known example of this strategy was South Stream, a pipeline that would ship Russian gas via the Black Sea to Bulgaria and through Serbia, Hungary and Slovenia to Austria.

At the time of its inception the project was seen as a rival to the EU-backed Nabucco pipeline that aimed to bring gas from the Caspian Sea to Europe.

Although Nabucco ultimately failed due to a lack of available gas supplies in the region, the fact that Russia managed to sign up several EU states to South Stream surely did not help in gathering the necessary political backing for Nabucco.

South Stream was controversial given that it would cement Gazprom’s dominance in south-eastern Europe even though EU leaders had agreed to try to reduce dependence on Russian gas.

However, this did not deter several European countries and companies from backing the project. Austria, for example, was keen to see another pipeline flow to its gas hub at Baumgarten. Bulgaria had its eyes fixed on possible transit revenues and Italy saw a potentially lucrative project for its energy firm ENI.

A crucial problem however was that the bilateral agreements struck between Russia and the countries along the pipeline’s route were all in breach of EU competition and energy legislation.

Given that it was public knowledge that Gazprom never had the slightest intention of allowing different producers to operate on South Stream, the countries involved had to have been fully aware that the pipeline was never legal in its proposed form, yet still they persisted.

Unsurprisingly, Russian president Vladimir Putin cancelled South Stream in December 2014 leaving many EU countries and companies chasing a pipe dream.

From Russia with gas

Soon afterwards, Putin launched an alternative project called Turkish Stream. The pipeline would transport Russian gas across the Black Sea to Turkey, and from there to a hub at the Turkish-Greek border, thus circumventing the EU’s competition legislation.

In June 2015, at the height of the Greek debt crisis, Greek prime minister Alexis Tsipras travelled to St Petersburg to meet Vladimir Putin.

Desperate for cash and leverage, Tsipras signed a memorandum of understanding with Gazprom on the construction of an extension to Turkish Stream that would carry Russian gas further into Europe.

Under the agreement, Russia would commit to pay hundreds of millions of dollars in transit fees. However, Tsipras should have known that Gazprom would never build a pipeline into Europe where it would be forced to share capacity in accordance with EU law.

Moreover, Greece was in no position to provide funding for the project itself and the case for private financing was weak. Essentially, Putin knew he could use Tsipras to drive a wedge between Brussels and Greece at a time that the Union was buckling under the weight of the Greek crisis.

Tsipras happily obliged. And the pipeline? That was never built. With Turkey driving a hard bargain, negotiations were protracted from the outset and the downing of a Russian fighter jet by Turkey in November 2015 proved to be the nail in Turkish Stream’s coffin.

Memorandum of not understanding

On 24 February this year, Gazprom signed a memorandum of understanding with Italian energy company Edison and Greek public gas corporation DEPA for the delivery of Russian gas via the Black Sea, and unnamed third countries, to Italy and Greece.

The agreement revived the old Italy-Turkey-Greece Interconnector (ITGI), a small gas pipeline that was scrapped in 2012 after it failed to win a bid for Azeri gas.

Why revive this project? At this point it should be mentioned that Italian energy company ENI was a major shareholder in South Stream. Matteo Renzi, Italy’s prime minister, has criticised German support for Nord Stream II explaining that he views it as a double standard having to support sanctions against Russia at a time when Berlin has few qualms about backing a pipeline deal involving Gazprom.

Renzi of course has a point when he claims that EU law should apply equally to all pipeline projects. The revived version of ITGI, although much smaller and easier to build than Nord Stream II, should therefore be seen as compensation to neutralise Italian criticism.

But again it is unclear how the pipeline will actually bring Russian gas to this part of Europe. Interesting also is the claim by Italian government officials that they were not consulted about the memorandum. By not informing Rome, Gazprom deliberately created the impression that the Italian government was behind the plans.

Lastly, by not specifying which countries serve as transit countries, this opens up competition between Turkey and Bulgaria – two other nations that saw earlier pipeline projects fail – to vie for the final shape of the pipeline route; precisely the kind of competition that keeps European elites busy and away from a concerted effort at forging an actual Energy Union.

The Kremlin knows that the best strategy to undermine EU attempts to rein in Gazprom’s dominance is to let member states do Russia’s bidding.

As long as Europe’s political and business elites continue to believe Gazprom’s empty promises, thwarting the Energy Union will be all too easy for Vladimir Putin.

The Crude World monthly column on Eurasian (energy) security and power politics in Europe’s eastern neighbourhood is written by Sijbren de Jong, a strategic analyst with The Hague Centre for Strategic Studies (HCSS), specialised in Eurasian (energy) security and the EU’s relations with Russia and the former Soviet Union.

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