Publication: Eurasia Daily Monitor Volume: 5 Issue: 12

Dmitry Medvedev (L) and Vladimir Putin (R)

Last week’s official visit to Bulgaria granted Russian President Vladimir Putin an opportunity to show that his power-transfer scheme worked impeccably, as the person standing next to him was Dmitry Medvedev, who had no business in Sofia in his official capacity as first deputy prime minister but was unofficially introduced as the next president. Aside from this demonstration of regime stability, the visit was hardly a walk in the park, as many details in two crucially important energy deals had to be hammered out in long hours of hard bargaining.

A breakthrough was achieved and agreements signed on constructing both the Burgas-Alexandroupolis oil pipelines bypassing the Bosporus and the South Stream gas pipeline across the Black Sea (RIA-Novosti, January 18; Kommersant, Rossiiskaya gazeta, January 19). Yet another agreement was reached on building two reactors for the Belene nuclear power station, which may be not that commercially beneficial for Rosatom but confirmed its ability to work on high safety standards inside the EU area. That arrangement also helped secure better terms in the oil and gas deals, which are by far more important for Moscow – and not without questions regarding their content and wider implications.

The potentially crucial question for the oil pipeline project is about Kazakhstan, which is going to supply the bulk of oil to be pumped toward the new terminal in Greece. President Nursultan Nazarbayev has successfully resolved the protracted conflict on developing the giant Kashagan oilfield with the ENI-led consortium of Western majors, so that KazMunayGaz’s share increased to 16.8% and early oil could start flowing in 2010 (Expert, January 14). Moscow expects this oil will be channeled through Russian territory, which would require a new line from the Tengiz-Novorossiysk pipeline, but the operating Caspian Pipeline Consortium (CPC) is unable to reach any decision on that. Besides, Nazarbayev wants to obtain a share in the Burgas-Alexandroupolis project, but he failed to secure Putin’s consent when visiting Moscow last December, since Russia insists on keeping its 51% controlling share (Nezavisimaya gazeta, December 20).

The South Stream pipeline is a hugely more complicated project in technical terms, but the most obvious question about it is where the gas would come from. Neither Russia nor Central Asia has the 30 billion cubic meters a year that would be needed in the next 5-7 years, so the only logical answer is that Moscow plans to reduce its gas transit through Ukraine. The same logic applies to the Nord Stream line to be built across the Baltic Sea, and these two pipelines would leave Ukraine with transporting only about a quarter of Russia’s export to Europe compared with the three-quarters flowing before the gas war of early 2006. The Ukrainian leadership is acutely aware that its leverage is going to shrink, so the government of Yulia Tymoshenko is now desperately trying to negotiate a better deal by cutting out the ignoble intermediary RosUkrEnergo (Nezavisimaya gazeta, January 18).

The brotherly Russian embrace of Bulgaria also invites the question about its relations with Turkey. In 2005 and early 2006 Ankara was Sofia’s key energy partner, with top-level meetings coming one after another, and a deal on doubling the capacity of the Blue Stream gas pipeline was nearly sealed. There has been no quarrel, but the estrangement is unmistakable, so that last June Putin used the Istanbul venue at the summit of the Black Sea Economic Cooperation organization only for a brief meeting with Greek Prime Minister Konstantinos Karamanlis. Putin has duly but briefly congratulated Turkish Prime Minister Recep Tayyip Erdogan on his party’s victory in parliamentary elections in July, but the telephone conversations, according to the Kremlin press service, were at the initiative of the Turkish side. It is possible to assume that the opening of the Baku-Erzurum pipeline and Turkey’s active involvement in the Nabucco project convinced Moscow that this energy “corridor” would run across its gas interests (Rossiiskaya gazeta, August 8, 2007).

Bulgarian President Georgy Parvanov proudly declared that South Stream would contribute to diversification of energy flows, which would probably puzzle some EU officials who use this term in the context of reducing the dependency upon Russia (Kommersant, January 19). This rhetorical trick shows that some European states are inclined to re-evaluate the risk of reliance on Russian energy deliveries – and that brings back the question about the so-called gas OPEC, which first emerged in a report by NATO economic experts (Financial Times, November 13, 2006). The design of a cartel of gas-producing states began to look real when Putin, immediately after delivering his infamous Munich speech last February, went to Qatar and then characterized a gas OPEC as an “interesting idea.” The mysterious disappearance of this idea since the forum in Doha last April can be only be partly explained by the break-down of Russia’s gas-and-weapons deal with Algeria (Nezavisimaya gazeta, December 11). Perhaps a more important reason is the lack of interest in Moscow in making Turkmenistan or Uzbekistan full members of any cartel, since the idea is to connect their gas production directly to the Russian gas networks.

The recent agreements on prices and technicalities of the Trans-Caspian pipeline appear to bring this idea close to fruition, but the question, perhaps the most fundamental one, about the health of the Russian energy complex still looms large (Vedomosti, January 16). The 25% increase in domestic gas prices has not yet been absorbed, and its impact on inflation – running high despite all the official promises to check it – is yet to be measured. The triumphs of gas diplomacy stand in sharp contrast with the series of deadly explosions in communal networks and limitations on gas supply in many regions (Gazeta, January 18; see EDM January 10). Many promises to expand energy supplies and address other urgent social needs have been made on the campaign trail, and the promotion of Medvedev as the new leader has brought the unexpected effect of “secularization” of the supreme power, so it now appears possible to demand delivery on these promises. The going is set to get tough in the energy sector, but the spoiled courtiers and corrupt bureaucrats in the Kremlin are not ready to get going.