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Apr 29, 2014 | 09:46 GMT

6 mins read

South Stream Support Could Further Fragment the EU

Workers weld together sections of the South Stream pipeline in Serbia in November 2013.
(ANDREJ ISAKOVIC/AFP/Getty Images)
Summary

EU institutions and some countries in Central and Eastern Europe keep moving in their own directions regarding relations with Russia. In recent months, the South Stream pipeline — which could bring Russian natural gas to countries in the Balkans and Central Europe, bypassing Ukraine — has become a source of friction between Brussels and Moscow as well as between the European Union and the member states involved in the project. Bulgaria has been pushing for the construction of the pipeline despite warnings by the EU Commission that it could go against European norms. Austria recently also regained interest in the project. 

The Ukraine crisis is deepening existing divisions within the European Union, and the debate over South Stream — where some member states are putting their national interests ahead of Brussels' policies — is a perfect illustration. From a broader perspective, the South Stream issue also shows the extent to which members are willing to challenge the authority of EU institutions. These episodes will become more frequent as Europe's political fragmentation deepens.

Between 2008 and 2010, Gazprom signed memorandums of understanding with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria for the construction of South Stream. The European Union has always resisted the pipeline, which it says violates European legislation that splits energy production and transmission. In late 2013, the EU Commission said member states should renegotiate their agreements with Russia to ensure that they comply with EU norms. The crisis in Ukraine severely deteriorated the European Union's relationship with Russia, however, and suddenly South Stream became an even more contentious issue. As a direct threat to Russia, the EU Commission said it would delay negotiations with Moscow over the future of the pipeline.

Bulgarian and Austrian Support

This generated a variety of reactions from the countries involved. While most remained cautious, Bulgaria came out in defense of South Stream. Bulgarian Foreign Minister Kristian Vigenin said April 23 that Sofia remains committed to South Stream and that his government will do everything possible to ensure that the pipeline is built. According to the company South Stream Bulgaria, the construction of the Bulgarian part of the South Stream pipeline will start in May or June.

As the poorest member of the European Union, Bulgaria has to deal with conflicting interests. Like most EU members, Sofia is interested in reducing its dependence on Russian natural gas. It also, however, sees South Stream as a source of investment and job creation. In addition, South Stream could help Bulgaria reduce the risk of being cut off from natural gas supplies coming through Ukraine at a time when Bulgaria is going through prolonged political instability.

More important, Sofia sees support for South Stream as a way to get lower natural gas prices from Gazprom. High energy prices were one of the biggest complaints in the protests that brought down the government of Boyko Borisov in early 2013.

It now appears that the Austrian government is making way for South Stream again. Austria imports roughly 80 percent of its natural gas needs, and more than half of these imports come from Russia. Vienna originally supported South Stream and signed a memorandum of understanding with Gazprom in 2010 before switching its support to Nabucco West, a pipeline that would bring Azerbaijani natural gas from the Turkey-Bulgaria border up to Austria. The project was appealing because it would enable Austria to reduce its imports from Russia.

When the Trans-Adriatic Pipeline was chosen over Nabucco West, however, Vienna again became interested in South Stream. Gazprom CEO Alexei Miller and Gerhard Roiss, the CEO of Austrian energy company OMV, met in February. After the meeting, OMV said its relations with the Russian giant had not been affected by the ongoing negotiations in Brussels over the future of South Stream. Miller and Roiss met again April 22 to discuss the possibility of building an extension of the South Stream pipeline to Austria. There was no official reaction from Vienna to the meeting, but since the Austrian state is the largest shareholder in OMV, the company probably acted with Vienna's consent. Miller also met with Reinhold Mitterlehner, Austria's federal minister of economy, to discuss energy issues.

A Sensitive Issue

These moves by EU members run counter to recent actions by EU institutions. In addition to the European Commission's statements regarding South Stream, the European Parliament on April 18 approved a nonbinding resolution saying the pipeline should not be built.

South Stream is a sensitive issue for both camps. EU institutions are worried that the construction of another pipeline for Russian natural gas would conflict with the goal of reducing Europe's dependence on Russian energy. The EU Commission also thinks that the threat to block South Stream is significant leverage in its negotiations with Moscow over the future of Ukraine. However, South Stream is equally important for its potential members. It would bring significant investment and jobs in some of the European Union's poorest countries and would avoid the politically unstable Ukraine as a transit country. 

In addition, South Stream offers participants a concrete way to secure access to natural gas at a time when the alternatives are distant and uncertain. In the long term, EU members could reduce their dependence on Russian natural gas by switching energy consumption to other fuels and reducing natural gas consumption. Since this process would be difficult and slow, however, these countries have focused on looking for alternative suppliers. Alternatives include the construction of liquefied natural gas terminals, the development of additional natural gas interconnections within the region and significant infrastructure projects such as the Trans-Adriatic Pipeline to get natural gas from Azerbaijan.

Even if all the alternative initiatives are realized — which is unlikely — the initial volumes will probably not be enough to significantly alter Europe's dependence on Russian natural gas before the end of this decade. Germany and Italy, the largest importers of Russian natural gas, have negotiated long-term deals with Russia to lock in future natural gas supplies. And bilateral deals with Russia are not limited to the major energy consumers; Bulgaria, Romania, Hungary, Greece and others have also entered into long-term energy agreements with Gazprom over the past several years.

But South Stream has some problems of its own. First there is the European Commission, which alternates between threatening Gazprom and offering negotiations. Then there was a comment in March by the CEO of Italian energy firm ENI — one of the largest companies involved in the project — warning that South Stream could be abandoned because of the crisis in Ukraine. If Italy abandoned the project, Russia's interest in the pipeline would decrease substantially. Finally, the South Stream debate comes on top of an anti-monopoly probe by the European Union.

The case of South Stream is also noteworthy because it puts the EU Commission in a delicate situation. Brussels is interested in defending its efforts to reduce European dependence on Russian natural gas and enforcing EU legislation on energy issues, but at the same time it has to ensure that the Ukraine crisis does not contribute to the long-term fragmentation of the bloc.

The European crisis was already dividing Europe, both between eurozone and non-eurozone members and within each group. Some EU members were challenging Brussels' authority while questioning its ability to deliver on the promise of economic prosperity. For countries such as Bulgaria, South Stream is a vital project. There is a risk that a strong anti-South Stream position could make the countries involved in the project deepen their resentment toward Brussels. Still, neither side is interested in an escalation; in fact, on April 24, Bulgarian Energy Minister Dragomir Stoynev met with EU Energy Commissioner Gunther Oettinger in Brussels to discuss South Stream. They agreed to meet again in May.

Independent of the future of South Stream, the crisis in Ukraine is highlighting the political divisions in Europe. EU members were divided on the issue of sanctions against Russia. Some, such as Poland and the Baltics, were pushing for a harder line on Russia while others in Central and Eastern Europe, including Hungary and Slovakia, but also heavyweights such as Germany and Italy, encouraged a cautious approach. With most European economies so deeply intertwined with Russia's economy, it will be hard for the European Union to reach a consensus on an escalation of measures against Moscow.

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