Russia Puts the Brakes on South Stream

6 MINS READDec 2, 2014 | 00:05 GMT

In a move likely to send shockwaves throughout Europe and Eurasia, Russian President Vladimir Putin announced on Monday that Russia will no longer pursue the South Stream natural gas project. Putin cited the European Commission's "non-constructive" approach to the project, which was designed to send Russian natural gas under the Black Sea to Bulgaria and then to Hungary and Austria via Serbia. Putin declared that Russia would instead pursue the construction of a natural gas pipeline with a capacity of 63 billion cubic meters across the Black Sea to Turkey, with the possibility for a hub to be created on the Turkish-Greek border that could potentially send natural gas to Southern Europe.

Putin made the announcement during a state visit to Turkey — a fitting setting given the present geopolitical circumstances. Russia is currently engaged in a fierce competition with the West over the former Soviet periphery, most notably over Ukraine. The Western-backed uprising in Ukraine and Russia's reaction to it — including annexing Crimea and supporting the separatists in eastern Ukraine — have only raised the stakes in this contest, driving Russian-EU relations to their lowest point since the end of the Cold War and enhancing the Black Sea region's strategic value.

South Stream's Significance

Russia's pursuit of the South Stream pipeline was an important aspect of the competition between Russia and the West. The primary purpose of the project was to bypass Ukraine, depriving the country of the economic benefits and political leverage that come with transiting what was, at one point, more than 80 percent of Russian natural gas exports to Europe. The project had been discussed since 2007, but subsequent disruptions of energy flows from Russia to Ukraine — and especially the energy cutoff to Ukrainian consumers in light of the current crisis — gave the project greater impetus.

However, the crisis in Ukraine also intensified Europe's efforts to move away from Russian energy. This led to a more acute implementation of the European Union's Third Energy Package, which requires that pipelines and the natural gas they transport to be owned by separate companies. This was a thinly veiled swipe at Russia, which provides natural gas to — and owns pipeline infrastructure in — many Central and Eastern European countries. This was also a way to undermine the South Stream project, with the EU Commission blocking countries such as Bulgaria and Hungary from participating in the project until Russia revised its plans for the pipeline. These steps created a great deal of tension between Russia and the European Union, particularly since Moscow had already started constructing portions of the pipeline on its soil, but it was assumed that the two sides would settle their differences and eventually make the project happen.

Putin's announcement was thus a surprising about-face, though in many ways the move makes a lot of sense. For one thing, although Gazprom CEO Alexei Miller said that the project is closed, Putin did not abandon South Stream definitively, saying, "If Europe does not want to carry out (South Stream), then it will not be carried out." This places the onus on the Europeans to react and could exacerbate divisions within the bloc, especially because EU members Bulgaria and Hungary have previously spoken against the European Commission's policy for the project. These countries could face significant economic losses with the abandonment of South Stream and are likely to press the commission to revise its position.

Moreover, the projected cost of constructing South Stream had increased by nearly 50 percent to almost $30 billion. Because Russia is under significant economic strain due to the low price of oil and sanctions from the West, it would be difficult for Moscow to foot the bill — especially since major partners within the South Stream consortium such as Italian energy firm ENI had been hinting at leaving the project. Blaming the European Commission for the cancellation of South Stream gives Russia a convenient exit from the project without looking weak.

Turkey's Unique Role

Finally, there is the Turkish factor. The crisis in Ukraine has increased the Black Sea region's strategic importance to Russia. Moreover, Turkey is a key player in the Eurasia's energy politics, given its strategic trans-continental location and its massive energy consumption. Turkey is one of Russia's largest markets for energy exports, but it is also an important country for Europe's efforts to diversify its energy supply via the Southern Corridor and to reduce its reliance on Russia. Turkey already transports Azerbaijani oil to Europe and would be indispensable for the proposed Trans-Caspian pipeline, which is designed to bring natural gas from Turkmenistan across the Caspian Sea and from Azerbaijan to Europe.

This makes Turkey crucial for Russia and likely explains Putin's announcement that South Stream will be replaced with a major pipeline expansion to Turkey. Several months ago, Russian officials seemingly brushed off a suggestion from Turkish officials that South Stream's route be altered to go through Turkey. But it is exactly this plan that appears to have materialized, with Russia purchasing Turkish favor by redirecting its major energy project through Turkish soil.

Turkey is consciously increasing its energy reliance on Moscow as a way to avoid confrontation with an old competitor while maintaining a stable energy supply during rough economic times. However, Turkey will also see the need to maintain some balance through projects that bypass Russia, such as the Trans-Adriatic Pipeline, making it clear that Turkey will act as a bridge for multiple partners. Still, the country's close ties with Russia will make the West question how much it can rely on Turkey at a time when the United States is looking to Ankara as a strategic partner to counter Moscow — especially in undermining Russia's energy leverage over Europe and in carrying out Western military maneuvers in the Black Sea.

That said, there is nothing definitive in Putin's announcing the cancellation of South Stream. The project could be revived in the future, or the same EU countries could get linked to Russian supplies via the potential gas hub in Greece that Putin mentioned. However, as with South Stream, EU regulatory hurdles could hamper a significant expansion of Russia's capacity to export natural gas through Turkey to customers in EU states. But the announcement does indicate that Russia is willing to raise the stakes in the confrontation with the West and that there are other important partners willing to play ball with Moscow. 

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