EU digests Russia's South Stream announcement

He added that he is in talks with Ankara to build an equally big pipe to Turkey instead and to create a new gas storage and trading hub on the Turkish-Greek border.

The new pipeline is to ship 63 billion cubic metres of gas a year, 14 of which will be sold to Turkey at discount prices and the rest sold on to countries in south-east Europe.

Putin’s announcement came as a shock to South Stream host states and participating companies.

Bulgaria, Italy, Hungary, and Serbia said they received no prior notification of the decision, which is set to cost them hundreds of millions of euros a year in lost transit fees.

Shares also plunged in Italian and German construction firms, Saipem and Salzgitter, on news of the massive loss to their order books.

“The coming days will tell us if the announcement made yesterday by Putin is final or not," Italian foreign minister Paolo Gentiloni noted on Tuesday.

Bulgarian president Rosen Plevneliev said in Sofia that South Stream can still be saved if Russia falls in line with EU rules: "If Russia agrees to comply with European law, I do not imagine anybody having objections to this project".

“The West and the East play 'cat and mouse' and Serbia suffers from this," Serbian president Tomislav Nicolic added.

EU officials and diplomats are also unsure whether Putin is bluffing in order to increase pressure on the European Commission to back down on its anti-monopoly regime.

One senior EU diplomat told EUobserver the Turkey-Russia pipeline deal is at an early stage and may come to nothing.

"Russia has signed similar 'memorandums of understanding' on energy projects all over the place. But it doesn't mean they will all bear fruit".

But the contact added that if the Russia-Turkey pipe is built it will harm European energy security by increasing dependence on Russia on the South Stream model.

"Both the EU and the US have to exert diplomatic pressure on Turkey. They [the Turks] must decide whose ally they really are".

The EU contact predicted the Turkish leader, Recep Tayyip Erdogan, will use the Russian offer as leverage to get the EU to open new chapters in stalled accession talks.

"He will say to us: 'Look, you haven't even opened the energy chapter [in the accession negotiations] so, until you do that, we have nothing to talk about."

For his part, the EU commission's new energy chief, Slovakia's Maros Sefcovic, said on Tuesday he will hold talks with ex-South Stream states on 9 December.

"This new development will be an additional element that will be discussed in that meeting. The ever changing energy landscape in the EU is yet another reason for the EU to build a resilient Energy Union with a forward looking climate policy", he noted, referring to a new commission proposal on EU energy security, due in spring.

His spokeswoman, Anna-Kaisa Itkonen, said the same day that "pipelines in Europe must be built and operated in line with EU legislation".

She added there is "no legal basis" for EU compensation for lost income if South Stream never comes to be.