Russia's EU Trojan horse makes a change

Like its cousin, the North Stream, the South Stream's purpose is to by-pass transit countries like Ukraine and strengthen the monopoly Russia has over gas exports to many EU countries. While there is a lot of talk about diversification of sources and routes (including the Caspian) Russia's strategic objective is to prevent just that.

With the Bulgarian side heavily preoccupied with the formalities of the summit (gathering Putin, Berlusconi, Barroso and around 10 more heads of state in Sofia), Brussels and Moscow were sparring over its content. Moscow pushed hard to turn the conference into a South Stream Summit, with attempts to sign bilateral agreements with Bulgaria on using its national transmission system for the project.

The EU meanwhile suggested that a discussion with Russia and others (such as Turkey) on the rules applying to energy security would be preferable than a discussion on pipelines. If pipelines were to be discussed, the argument was that this should include the Southern Corridor, allowing talk of non-Russian projects including Nabucco. After several weeks of negotiating the final declaration, the situation on the eve of the conference was fragile.

With the declining financial results of Gazrom since the beginning of the year and lower energy consumption in Europe due to the financial crisis, Russia was trying hard to diminish the costs of the South Stream project. Using existing infrastructure along the route is seen in Moscow as a means for reducing the costs (and hence make South Stream more competitive relative to Nabucco). So the (unexpectedly) firm response from Sofia against granting its national pipeline system for South Stream was a setback for Russia's energy expansion – and triggered a decision by Putin not to participate in the summit.

The forum in Sofia turned out to be a European event with Commission's President Barroso 'stealing the show' from the Russians, as widely commented by the local press. As the Europeans had suggested, the talks developed more around rules and principles than concrete projects. The final declaration managed to mention the need for transparency of the contacts and the prices of gas deliveries.

The deliberately opaque nature of contracts has long been a major instrument for bilateral blackmail by Gazprom. The declaration also referred to the European Energy Charter, despite last-minute Russian attempts to have that reference removed in view of the recent proposal by President Medvedev for new rules on global energy co-operation. While Russia has signed the Energy Charter, it has not ratified it, meaning that European companies cannot operate freely in the Russian market nor have their investments protected.

For the EU, the substantive points it secured in the declaration means that it is a good starting point for further discussions with Russia (for instance in the post-PCA negotiations) as well as with other energy players. The weakness of the declaration is that there are no provisions or mechanisms to ensure monitoring an implementation of the rules that everyone signed up for.

The energy conference was, on the whole, an unspectacular event on the European political scene. But it did offer an interesting chapter in Russian-Bulgarian relations. Obviously irritated by Gazprom's failure to sign the desired deal on

South Stream, Russian President Medvedev made Bulgarian Prime Minister Stanishev wait for 36 hours in Moscow for a meeting that had been agreed months in advance.

In the end, representatives of Gazprom and the Bulgarian energy holding signed a preliminary agreement that envisages building a new, separate pipeline for South Stream rather than giving Gazprom a 50% stake in the whole of Bulgaria's transit system. This marked a shift in Russia's position. With Turkmenistan on cooler terms with Moscow these days, Russia clearly calculated that the risk has increased that Nabucco could be built first. Accordingly, paying a higher price for South Stream would still bring higher strategic returns.

After the January gas crisis, Bulgaria has clearly drawn the lesson that close ties with the Kremlin do not automatically translate into actual gas flowing in pipelines. Nobody has paid any compensation for the losses of the cold weeks in January.

In recent months, Russia has been pushing Bulgaria on three different energy fronts: on gas (South Stream); on nuclear (with Russia rumoured to offer finance for a €3.8 billion new power plant in Belene, in return for state guarantees); and on oil (the Burgas-Alexandroupolis pipeline is being planned).

Hopefully, the government in Sofia has realised that 'europeanising' its energy policies is the only way. In this respect the Sofia Summit was a success. As one senior EU official noted, the Bulgarians are learning to say no to Russia – politely but firmly. Trojan horses have the chance to change.

Vessela Tcherneva is a Senior Policy Fellow at the European Council on Foreign Relations and Head of its Sofia office