Croatia Can Call Gazprom’s Bluff on South Stream

Moscow is “pressuring” Croatia to join Gazprom’s South Stream project urgently, before Croatia’s accession to the European Union takes legal effect in 2013. An internal analysis, prepared by Croatian government officials for senior decision-makers and leaked to the press, warns that yielding to Gazprom’s demands would compromise the country’s accession to the EU.

According to that classified document, Moscow is instigating Croatia to act “literally behind the European Commission’s back.” Moscow wants the Croatian government and the state-owned Plinacro pipeline company to sign an inter-governmental agreement and a project agreement, respectively, with the Russian government and Gazprom, concerning the South Stream project on Croatia’s territory. The Russian side claims that agreements signed before Croatia’s accession to the EU takes legal effect can no longer be challenged after that date, even if such agreements contravene EU law.

Moscow claims that the EU’s Third Energy Package comes into force in 2013, and that South Stream agreements signed prior to that date would remain as faits accomplis. This is misleading, however. According to the classified analysis in Zagreb, the government must realize that any agreements with Russia on South Stream cannot take precedence over EU law. The document recommends “extreme caution” in Zagreb’s talks with Moscow, and full cooperation by Zagreb with Brussels. Moreover, the government must amend any existing inter-state agreements that are not in accordance with EU legislation. Such agreements include that signed by Croatia’s previous government in 2010 with the Russian government on South Stream (see below) (Jutarnji List, August 12).

A South Stream pipeline jointly built, owned and operated by Gazprom in Croatia would violate the EU’s Third Energy Package, anti-monopoly legislation requiring the separation of gas supply from gas transportation. Russia on the contrary insists on combining both functions in vertically integrated structures on EU territory, so as to create and exploit captive markets. The EU’s Third Energy Package entered into force in September 2009, and gave the member countries 18 months (until March 2011) to start transposing it into national law. Thus, it will apply also in Croatia with the entire acquis communautaire, and cannot be overridden by documents signed in the interim by Croatia with non-EU parties (https://ec.europa.eu/energy/ gas_electricity/legislation/legislation_en.htm).

Apart from the legal issue, however, the government apparently needs to clarify the question of Croatia’s national interest regarding the South Stream project. If Moscow is “pressuring” the Croatian government into joining South Stream, what then is Gazprom’s pressure leverage, and where is Croatia’s vulnerability? Croatia’s position seems relatively comfortable, with 60 percent of natural gas consumption being covered from internal production, and the remainder (mostly of Russian provenance) being imported from EU companies across the border. Croatia may need South Stream less than Gazprom needs to pull Croatia, at least on paper, into this project, as part of playing off the region’s countries against each other and against the EU. Moreover, the Kremlin’s own November and December 2012 deadlines (see below) generate pressures on Gazprom itself while Zagreb can sit back and watch.

South Stream’s general parameters, at 63 billion cubic meters of gas annually and nearly $30 billion in construction costs (unrevised since 2009), are not credible. Russia has never identified the sources of gas or financing for this project. There is no feasibility study, and no choice of pipeline routes from among multiple options.

Nevertheless the Kremlin wants a final investment decision by November 2012, with a start to construction work as a media event by December 2012. Consequently, Moscow wants to sign agreements with Croatia and other countries as quickly as possible before those deadlines. Against this backdrop, Moscow is playing multiple games on the map with the South Stream’s optional routes.

Gazprom’s vice-president and Gazexport CEO, Aleksandr Medvedev, announced merely the latest (certainly not the final) set of route options on June 20. All of these are overland continuations of South Stream’s Black Sea offshore section, from Bulgaria into Europe. The options, barely mentioning Croatia, are: 1) Bulgaria-Greece-southern Italy (an option now reinstated after being dropped in 2010-2011); 2) Bulgaria-Serbia-Hungary-Austria; 3) Bulgaria-Serbia-Hungary-Slovenia-northern Italy (still dropping Greece and southern Italy, and “threatening” to exclude Austria); 4) Adding non-transit branch-offs to Austria and to Croatia from the second or the third trunkline (presumably, entering Croatia from Serbia as a non-transit branchoff in either case) (see EDM, July 27).

According to information in Zagreb, not confirmed publicly from the Russian side (possibly, informal hints to Croatian representatives), Gazprom might also consider including Croatia into a Bulgaria-Serbia-Croatia-Slovenia-Austria route (i.e., bypassing Hungary); or into a Bulgaria-Serbia-Croatia-Italy route (i.e., bypassing Slovenia) (Jutarnji List, August 12). Whether Croatia’s role would be that of a transit country or merely an importer country under these two additional options is not clear. The only quasi-certainty is that Moscow hopes to whet appetites and competition among countries and companies by juggling with all these offers.

Russia and Croatia signed an inter-governmental agreement in 2010 to design, build, and operate a pipeline section of the South Stream project on Croatia’s territory. Signed by then-Energy Minister Sergei Shmatko and then-Economy Minister Duro Popijac, in the presence of then-prime ministers Vladimir Putin and Jadranka Kosor in Moscow, the agreement envisaged creating a parity joint venture in Croatia with a 30-year lifetime. To the Croats’ chagrin, Gazprom has conceived that pipeline as a branch-off, terminating in Croatia, in contradistinction to a transit pipeline en route to one or more countries. During that year, Croatia’s Plinacro state pipeline company drafted a feasibility study, but it remains a unilateral document. Gazprom has not done a feasibility study for a Croatian South Stream pipeline. Following the change of government in Croatia, First Deputy Prime Minister Radimir Cacic went to Moscow in March 2012, with a grandiose initiative for Russian investments in Croatia’s energy sector and industry. Cacic hoped to change South Stream in Croatia from a branch-off into a transit pipeline, but failed on that and other items (see EDM, March 5, 2010; March 30, 2012).

The two consecutive Croatian governments did not seem to question whether Russia actually had the resources to support South Stream, nor the legal implications for Croatia’s EU candidacy and, now, impending membership. Instead, a myth of Russia’s inexhaustible gas reserves and investment prowess has pervaded Croatia’s debates on energy policy in the last few years. An accompanying myth is that of Croatia’s missed opportunities to profit from a Russian energy bonanza. Fed partly by Russian propaganda and partly by Croatia’s inexperience in dealing with Russia’s big energy companies (these have almost no presence in Croatia thus far), that mythology has prompted some Croatian officials to act over-eagerly, sometimes appearing to supplicate for Russian investments in the energy sector, unwittingly giving leverage to the Russian side. Those Croatian officials seemed, along with Serbia and the Bosnian Serbs, to be the last South Stream believers.

Croatia’s impending EU accession brings the opportunity to change this pattern. According to Deputy Prime Minister Neven Mimica (Social-Democrat), the coalition government rules out any step that would jeopardize accession to the EU; and “any agreement with Russia [on] a South Stream pipeline through Croatia must be in accordance with the EU’s legal framework and EU’s energy policy” (Jutarnji List, August 13). This being a coalition government, it remains to be proven that this view reflects a cross-party consensus.