The crisis in Ukraine has exacerbated many problematic aspects of the relationship between Russia and the European Union. In June, the South Stream, one of Gazprom’s most ambitious geopolitical projects, took center stage in this standoff. IMR analysts Tatiana Stanovaya and Olga Khvostunova comment on the latest conflict.

 

 

According to a number of policy experts, Gazprom’s South Stream is a political rather than a commercial project. Officially, the construction of the new pipeline is justified by the company’s plans to diversify its exports to Europe. The real reason for this project, however, is Gazprom’s need to reduce its dependence on problematic transit countries—above all, on Ukraine, which became especially pressing after the 2004 Orange Revolution. Furthermore, the South Stream was intended as a competitor to the Nabucco pipeline, a project supported by the European Union and the United States that will deliver natural gas to Europe from Iran, Azerbaijan, and Turkmenistan, bypassing Russia. Needless to say, this idea is not popular with Gazprom.

From the moment the South Stream was introduced in 2007, European politicians had differing attitudes toward it. Many saw the planned pipeline as a threat to Europe’s energy security—a feeling substantiated by Gazprom’s rigid price policy and the “gas wars” between Russia and Ukraine. One of the ways that the EU tried to address this problem was by adopting the “Third Energy Package”—a series of legislative acts aimed at de-monopolizing the energy market, including a provision that prohibited natural gas producers from owning the primary gas pipelines. This measure was directed first and foremost against Gazprom. In an effort to challenge this legislation, the Russian authorities declared that the agreements regarding the South Stream had been signed in 2008—a year before the Third Energy Package came into force. In April 2014, Russia even filed a claim with the World Trade Organization alleging discrimination in market access.

The South Stream once again found itself at the center of political events at the height of the Ukrainian crisis. On April 17, 2014, the European Parliament adopted a nonbinding resolution calling for the tightening of sanctions against Russia over Moscow’s support for “separatists and militias” in Ukraine. According to some EU lawmakers, the suspension of the construction of the South Stream should have been part of these sanctions. Companies involved in the project include Stroigazmontazh, owned by Arkady Rotenberg, and Stroitransgaz, owned by Gennady Timchenko—both of whom are close friends of Vladimir Putin who have already been sanctioned by the United States. The European Commission, however, officially stated that a proposal to freeze the project is not, for now, on the table.

Yet the Commission continues to insist that countries participating in the South Stream project—Bulgaria, Serbia, Hungary, Slovenia, Croatia, Austria, and Greece—bring their agreements with Gazprom in line with the Third Energy Package. Bulgaria turned out to be the weakest link among Gazprom’s EU partners, primarily because it is impossible for Gazprom to build a European pipeline that bypasses Bulgaria. Talks between Moscow and Sofia have been complicated by Bulgaria’s domestic political troubles and by increasing external pressure from the EU and the United States. On June 6, U.S. ambassador to Bulgaria Marcie Ries expressed “deep concern” over Sofia’s decision to award the tender to build the Bulgarian part of the South Stream to a consortium of Bulgarian companies headed by Timchenko’s Stroitransgaz. Soon after meeting a delegation of U.S. senators that included prominent Kremlin critics John McCain (R-AZ) and Chris Murphy (D-CT), Bulgarian Prime Minister Plamen Oresharski announced the suspension of work on the South Stream. The following day, the Serbian government announced a similar decision. However, after visits by Russian Foreign Minister Sergei Lavrov, both countries unexpectedly reconfirmed their commitment to the South Stream project.

 

South Stream pipeline route options. Source: gazprom.com

 

In late June, Gazprom managed to strengthen its lobbying position regarding the South Stream thanks to Austria. On June 17, Gerhard Roiss, CEO of the Austrian energy company OMV, declared that the EU not only should refrain from halting talks over the construction of the South Stream, but should instead speed up the project. One week later, during Vladimir Putin’s visit to Vienna, Gazprom and OMV signed an agreement creating a new joint company, South Stream Austria, to oversee the construction of the pipeline on Austrian territory. This move was condemned by EU Energy Commissioner Gunther Oettinger, who said that the project should be suspended until it could be brought into accord with the requirements of the Third Energy Package.

Despite the events in Ukraine, Moscow is still able to skillfully use the existing disagreements within the EU and the lack of a unified response to Russia’s aggressive foreign policy for its own ends. In the long term, the EU and the United States intend to address this problem through a “third wave” of sanctions that, according to press reports, they are currently preparing jointly. These new sanctions are supposed to be directed at Russia’s financial and military sectors and could include targeted measures against the energy sector, including a ban on the sale of key energy technologies to Russia. For now, the European Union has said that it will move forward with the sanctions if Russia continues to provoke violence in eastern and southern Ukraine. However, the EU’s position should not be overlooked. As Fyodor Lukyanov, editor-in-chief of Russia in Global Affairs, recently noted, the EU is preoccupied with its own survival, and “internal disagreements caused by the conflict over Russia constitute no less of a risk than the losses Europe will suffer as a result of downgrading its ties with Moscow. The question of which risk is more dangerous will be answered by the EU in due course”.

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