Publication: Eurasia Daily Monitor Volume: 5 Issue: 146

On July 29, the Russian government made public a hefty increase in its cost estimate of Gazprom’s South Stream pipeline project. Russian Energy Minister Sergei Shmatko reevaluated the cost at $20 billion, and stated that even this figure is an interim one, pending another financial assessment by the end of this year (Interfax, RosBusinessConsulting, July 30).

This new interim estimate exceeds by $5 billion the figure that Moscow was using in January and February of this year when inviting countries to join the project. Countries that signed up at that juncture did so without real confidence in South Stream and for lack of timely alternatives, which Brussels and Washington could not offer. Moscow’s abrupt, massive increase of the cost estimate for South Stream means forcing those countries to borrow even more heavily to finance their portions of the project, and subsequently to pay exorbitant prices for putative Russian gas. This may give those countries pause, as well as a chance to refocus on the Western-backed Nabucco project.

Shmatko made that announcement while conferring with Italian Economic Development Minister Claudio Scaloja in Moscow. Italy’s state-controlled ENI company is Gazprom’s main partner in the South Stream project, offering its unmatched technology to lay the ultra-depth pipeline on the seabed of the Black Sea. The Russian monopoly, however, will control the entire South Stream system, segment by segment, dealing with every participant country on a bilateral basis.

Moscow delayed the cost-increase announcement to manipulate the Bulgarian parliament’s debate on ratifying the Russian-Bulgarian intergovernmental agreement South Stream. The parliament in Sofia ratified the agreement on July 25, with 140 votes in favor in the 240-seat parliament, after intense debates, and unaware of the massive increase in the project’s cost. On July 28, Prime Minister Vladimir Putin and the Russian government’s presidium (including Shmatko) officially congratulated Bulgaria (Rossiiskaya Gazeta, July 29). The next day, Moscow slapped Bulgaria as well as the other participant countries with the hefty cost increase.

The Russian-Bulgarian intergovernmental agreement on South Stream follows the same pattern as those signed earlier this year by the Greek, Serbian, and Hungarian governments and those in an advanced stage of preparation by Austria and Slovenia. The Bulgarian section of South Stream shall be built and operated by a parity joint venture of Gazprom and a local state-controlled company, in this case the state-owned BulgarGaz. The agreement shall be valid for 30 years and can be prolonged afterward. The Bulgarian section’s cost was supposed to be $2.2 billion when the parliament voted to ratify the agreement. Bulgaria shall finance half of the cost through bank loans (BTA, SEENews, Itar-Tass, July 25).

Presenting the case for ratification, Bulgarian Economics Minister Petar Stoianov contended that South Stream is not a rival to Nabucco—in which BulgarGaz is a also a partner—and that both projects can be pursued simultaneously. This argument is often invoked by governments and politicians hedging their bets. It is an untenable argument because South Stream and Nabucco compete against each other for Turkmen gas, for European markets overlapping with one another’s, and for bank loans to finance the pipelines along overlapping routes.

The minister also rationalized South Stream as intended by Gazprom to bypass Ukraine for political reasons, and predicted that it would turn Bulgaria into a “strategic center for gas transmission in Europe.” Gazprom has tempted many European countries with this illusory promise. Facing its own supply shortfalls, Russia is in no position to fulfill such promises to the would-be “hub countries” in the years ahead.

Bulgarian critics argue that participation in South Stream contravenes the European Union’s goals of demonopolization of markets, would cement Bulgaria’s energy dependence on Russia, and does not entail any proven economic advantages. These arguments would prevail in almost all the countries that signed up for South Stream, if they see evidence of more serious Western backing for Nabucco.

Meanwhile, Slovenia capped its presidency of the EU by agreeing to join South Stream in late June, without awaiting the expiry of Slovenia’s presidential term and despite the project’s incompatibility with the EU’s declared energy policy goals. The Russian-Slovene intergovernmental agreement has yet to be finalized.

Greece seems firmly on board the South Stream project, but Russia nevertheless proposes to create a joint working group with Greece for “monitoring the project’s implementation” (RIA-Novosti, July 30). Greek Minister of Development Christos Folias agreed on this with Shmatko in Moscow during a visit coinciding with Scaloja’s.

The Italian minister was handed a Russian proposal to create a joint Russian-Italian working group on energy and other investment projects (Quotidiano Energia, July 30) and “actively promote South Stream at the political level.” The political goal, according to Shmatko, is to “confer to South Stream the status of a priority project in the framework of the Russia-EU energy dialogue” (Interfax, July 30). Apparently this would entail lobbying by the Italian government and ENI with European institutions and capitals for political and financial support to South Stream. A pattern is already emerging with Russian-driven lobbying for the parallel project, Nord Stream, in Brussels by interested parties on Gazprom’s behalf.