South Stream: Bypassing Ukraine and Dividing the EU

While Washington and Brussels are imposing more sanctions against Russia for destabilizing eastern Ukraine, the Kremlin is retaliating by deepening divisions within the European Union through the prospective South Stream natural gas pipeline. On April 17, the European parliament adopted a resolution stating that the South Stream pipeline should not be built and the EU should look for other sources of supply to reduce dependence on Russian gas. However, under pressure and enticement from Russia, several European countries are desperately trying to salvage the project, claiming that it is strategically important for Europe (europarl.europa.eu, BalkanInsight, April 25; Capital Weekly, April 26; Interfax, April 29).

On April 29, Austrian energy giant OMV’s CEO Gerhard Roiss and Gazprom CEO Alexei Miller signed in Moscow a memorandum of understanding on the construction of the Austrian section of the South Stream gas pipeline. The signing ceremony took place 24 hours after the United States and the EU separately announced new sanctions against Russian officials for the intervention in Ukraine. Nevertheless, Roiss, who has lobbied against imposing sanctions on Russia, bluntly admitted: “It is not about importing more gas, but about the fact that gas could be transported to Europe [by] bypassing Ukraine” (Wiener Zeitung, April 30).

Roiss further advised Ukraine to invest in developing its own gas supplies to free itself from the grip of Russia’s energy policy. Austria, however, does not seem eager to free itself from reliance on Gazprom. OMV expects up to 32 billion cubic meters of gas per year to be delivered to Austria’s Baumgarten gas terminal through South Stream (novinite.com, April 30).

The European Energy Commission has determined that all agreements signed between Russia and six EU members (Austria, Bulgaria, Croatia, Greece, Hungary and Italy) plus Serbia fail to comply with EU laws. Nevertheless, Miller concluded at the meeting with OMV that the inter-governmental agreement between Russia and Austria signed in April 2010 establishes “a solid international law basis for the implementation of this project.” This is the same agreement that the EU found illegal in December 2013. Remarkably, the OMV boss personally delivered a letter to Alexei Miller, in which Austria’s Economy Minister Reinhold Mitterlehner expresses support for the efforts of the parties on the implementation of the South Stream project on Austrian territory (OMV.com, April 29; novinite.com, April 30).

With the latest agreement signed with OMV, it is evident that Gazprom is shelving plans to build the second spur of the pipeline from Bulgaria through Greece to Italy. This outcome was obvious in June 2013 when the Shah Deniz Consortium selected the Trans-Adriatic Pipeline (TAP) instead of Nabucco to transfer Caspian gas to the Balkans and Italy.

The most ardent supporter of South Stream appears to be Bulgaria, which is heavily dependent on Russian energy and has extensive non-transparent ties with Russian energy corporations. Energy Minister Dragomir Stoynev repeats like a mantra how important the project is for Europe. Bulgaria is also in trouble with the EU after attempting to amend its Energy Act to save South Stream from EU energy regulations. The excessive efforts of the government to serve Moscow’s interests has prompted Aleks Aleksiev of the Center for Balkan and Black Sea Studies in Sofia to comment: “I am one of those who believe that the current government is doing everything possible to have Bulgaria expelled from the EU and NATO because we are regarded as ‘the Trojan Horse’ of Russia in Europe, as Russian Ambassador to the EU Vladimir Chizhov said in 2008. Now this thesis has been confirmed and there is a need to talk a lot about this danger” (Deutsche Welle, Apr 27).

On April 25, Gazprom stated in a press release that Bulgaria would soon sign contracts for materials and equipment procurement as well as for installation works, personnel training and commissioning of a pipeline section. But the Bulgarian government has not yet announced the winner of the bid to construct the pipeline—the rumored winner, Stroytransgaz, was included on the US sanctions list on April 28, together with another nine companies owned by Gennady Timchenko, who found himself on an earlier sanctions list (US Department of Treasury, April 28; Gazprom press release, April 25).

Serbia, the other staunch backer of South Stream, has failed to respond to repeated requests from Brussels to inspect the operations of Srbijagas and Yugorosgas, the transmission system operators in the South Stream section through Serbia. As a result, the EU Energy Community has asked the EU Council to examine the legality of bilateral agreements on the construction of the South Stream gas pipeline concluded between Serbia and Gazprom. Serbia is not a member of the EU, but participates in the European Energy Community, which considers the agreements between Serbia and Gazprom as not in compliance with EU rules on competition (BalkanInsight, April 25).

The new Serbian first deputy prime minister and minister for foreign affairs Ivica Dacic has also stated that his country “would never join any sanctions against Russia, because for us Russia is not just a friendly country, an economic and political partner, but also a country that has never imposed sanctions against Serbia” (Blic Online, May 2).

The Kremlin is fighting an uphill legal battle with the EU that is unlikely to be won even with the support of some EU members. Russia has now decided to take the dispute to the World Trade Organization (WTO), claiming that the South Stream project is international and that EU rules should not be applicable to it. “The Third Energy Package, in the opinion of Russia, contradicts the obligations of the EU in [the] WTO on basic principles of non-discrimination and market access,” said a spokesman of Russia’s economic development ministry. Russia has little chance of winning, but is hoping to secure a tactical compromise that would resolve Gazprom’s problems with South Stream, commented Kommersant on May 5.

The time for any compromise has passed, however, as the EU placed the South Stream project on hold not as a punishment for the annexation of Crimea, but because the Kremlin’s actions demonstrated Russia’s blatant disregard for international law.