Russian experts weigh in on whether or not Europe will keep working with Russia on the South Stream pipeline project.

An employee works on pipes made for the South Stream pipeline in the Nizhny Novgorod Region. Photo: Reuters

The future of one of Gazprom’s largest projects in history, the South Stream gas pipeline, has just been called into question. Earlier this week, Bulgarian Prime Minister Plamen Oresharski, whose country the pipeline is supposed to pass through, unexpectedly ordered that the pipeline’s construction be suspended.

This was allegedly due to the European Commission grievances as well as his attempts to extract political support from the opposition, which opposes the Russian project, at the early parliamentary elections scheduled for the fall.

However, this announcement was made following talks with three U.S. senators: Republicans John McCain and Ron Johnson, and Democrat Chris Murphy. The main topic of the meeting was the situation in Ukraine and Russia’s role in it. This caused Russian experts to say that the United States is not only exerting pressure on the countries involved in South Stream, but is also trying to influence European politics as a whole.

The EU has long been trying to block the completion of the project, indicating that it and the intergovernmental agreements signed as part of it are unlawful because they do not take into account the provisions of the Third Energy Package [According to the provisions of the Third Energy Package, the owners of long-distance pipelines that are situated on EU territory cannot be the companies that extract gas. They must either sell the assets in the EU or transfer the right to manage the pipelines to independent companies from the European Union—Editor’s note].

However, some of participating countries, which include Slovenia, Hungary, Croatia, Austria, Greece, and Bulgaria, are not rushing to reject the construction of South Stream. It is in Bulgaria that the gas pipeline from Russia to Europe via the Black Sea is supposed to emerge onto EU territory.

What lies behind the South Stream suspension?

It has been assumed that South Stream would start operating in late 2015 and would be able to supply up to 61 billion cubic meters of gas annually to Europe, bypassing Ukraine. However, the United States, which has imposed numerous sanctions on Russia, managed to change the position of Bulgaria, one of Russia’s main allies in Europe.

Russian Foreign Minister Sergey Lavrov says that the U.S. does not have any direct connection to the project or to gas supplies to Europe. He claims that it is, rather, interested in the discord between Russia and the EU from a political standpoint.

“Some countries that are not suspected of strong leanings for developing a partnership between Russia and the EU want to use this initiative in order to undermine the energy dialogue,” he said.

In addition, amidst the events in Ukraine, according to Russian experts, it might be important for Washington and Brussels to deprive Russia of possible allies and to find support for the new Ukrainian president, Petro Poroshenko.

Anna Kokoreva, an analyst at Alpari, assumes that there are practically no gains from stopping South Stream from a financial perspective, and such a halt is exceptionally political. She believes that gas supplies in the form of liquefied natural gas (LNG) from the United States to Europe are unlikely to start in the foreseeable future given the need for a developed infrastructure, which requires large-scale investments and time to be built.

However, saying that Bulgaria has definitively given in to pressure from Brussels and Washington would be premature, as the announcement by its Prime Minister Oresharski was denied by Dragomir Stoynev, Bulgaria’s minister of economy and energy. He said that Bulgaria is currently occupied with solving contentious issues with the European Commission and is not rejecting the project.

“If we consider the situation from a strategic point of view and without emotions, the South Stream project is irreversible and as important for Bulgaria as it is for all of Europe,” he said.

Deev Artem, an analyst at the AForex financial company, believes that the U.S. negotiators convinced the Bulgarian prime minister that U.S. financial and economic sanctions against a small government would be likely to simply demolish their national manufacturers.

Similar conflicts have come to a head in Serbia, which also participates in the project. First, Zorana Mijailović, deputy prime minister and minister of construction, transport and infrastructure, said in Brussels that until Bulgaria and Russia conclude talks on South Stream, work on the Serbian part of the project would be suspended. Then, Serbian prime minister Aleksandar Vučić said that the government had not made a decision on the suspension. Incidentally, there is not yet anything to suspend because work has not yet started.

The implications of the South Stream suspension for Europe

Profit from cooperating with Russia for countries that consume Gazprom gas is more important than avoiding possible sanctions from Washington and Brussels – even in the countries where Gazprom holds a monopoly on the gas supply. For EU countries, South Stream means large-scale investments, new jobs and stable contributions to a country’s budget in the form of a tariff for the transit of gas through the country.

In addition, Russia can always provide additional arguments in its favor in the form of discounts on future gas supplies, increased transit taxes and new investments. These are rather substantive issues for the Bulgarian and other European economies, which have not quite recovered from the 2008 crisis.

However, experts note that if South Stream is suspended, Russian gas supplies to Europe will still depend on the whims of the Ukrainian government, and this means that the risks that Gazprom is currently trying to eliminate also will not disappear. Moreover, the company will not be able to increase supply volumes to the region, and this will deprive the Russian budget of potential revenue.

Two scenarios: Together with Russia or with the U.S.? 

Vladislav Metnev, an asset manager at Concern General Invest, believes that, despite pressure from the United States, in the end Europe will need to make a decision in the energy sector. There are only two possible choices: Either accept the scenario proposed by the United States and decrease dependence on Russia, or resolve the issues jointly with Russia.

The first scenario assumes a rejection of South Stream and a search for alternatives to Russian energy resources. Its main problem is the fact that the United States cannot offer Europe this alternative. After all, the prospects for LNG supplies from the United States are foggy, taking into account the risks of a sharp drop in the production volume of shale gas in the United States in three to five years, and the high cost of LNG compared to pipeline gas.

In light of this, the scenario of developing a cooperation between Europe and Russia is much more rational. First, Russia has proven that it is a promising business partner when it comes to gas supplies; second, it can increase supply volumes if necessary; and third, pipeline gas will simply be cheaper.

“Europe’s rejection of this scenario will defy economic logic,” Metnev said. Furthermore, he is sure that Russia is apt to come to an agreement on South Stream not with Bulgaria, whose role in this issue is somewhat utilitarian, but with EU leaders Germany and France.

Metnev believes that if problems persist in building the southern corridor, Russia can consider a transit option through Turkey, which would be cheaper because of the Blue Stream construction. However, a path through the southern European countries is more useful for Russia because it strengthens Moscow’s range of influence in the EU through the addition of new transit countries, Metnev said.