Putin to give up South Stream ...Not!

By Kostis Geropoulos

As Russian and EU leaders met on 9-10 June in Nizhny Novgorod for the twice-yearly summit, avoiding the risk for another winter gas dispute with Ukraine was likely to be discussed between Brussels and Moscow. It’s no secret that Kiev wants to re-negotiate the terms of the gas formula agreed by Ukraine’s previous administration. However, earlier last week, Russian Prime Minister Vladimir Putin said that Moscow will not change the gas agreement it has with Kiev. The problem for Ukraine is that the deal linked the gas price to the oil market and, based on the current oil price trend, it’s facing a possible price of $500 per 1,000 cubic meters in the fourth quarter, said Chris Weafer, chief strategist at Moscow’s Uralsib bank. The first quarter average price was $264.30.

Ukraine also hopes that Russia would abandon its plans to build the South Stream gas pipeline, which bypasses Ukraine, and instead opt for upgrading the country’s transit pipeline with EU help.

Well, nice try. While refurbishing the Ukraine pipeline actually makes more economic and engineering sense since it is possible to boost the capacity by taking the gas flow planned for South Stream and also to take a link from Azerbaijan, Putin will not drop his pet project simply to please Kiev - even though relations have improved under Ukrainian President Victor Yanukovych. “I don’t see Putin giving up his ambition to build the South Stream network. That is because it is as much a political and trade conduit as it is an energy pipeline,” Weafer told New Europe.

There are three problems with the proposal to upgrade the Ukraine pipeline from Russia’s point of view, Weafer said.

Firstly, it would increase Ukraine and EU influence over Russian gas flows as Ukraine would have physical control of the network.

> South Stream On The Map Of Europe
Specifications of the South Stream Project
Secondly, it would remove the possibility for Moscow to extend its economic interest across the Balkans and into other countries that are either planning to host part of the pipeline or be a beneficiary of the gas output, Weafer said. For example, Azerbaijan's President Ilham Aliyev and his Serbian counterpart Boris Tadic on 8 June discussed Serbia’s plan to join the AGRI project, under which gas will be exported from Azerbaijan to Georgia, where it will be liquefied and shipped across the Black Sea to Romania and shipped onward to Hungary. But Serbia also has expressed its willingness to be part of Russia’s South Stream pipeline, which will solidify Moscow’s influence on the Balkan country.

Thirdly, it would create a very viable option to take central Asian gas into Europe, Weafer said.

South Stream would greatly expand Russia’s influence in those countries that stand to benefit from it - some will get gas at a favorable price, some will earn transit fees and others will host major infrastructure such as storage facilities, Weafer told New Europe, adding that South Stream “will help Moscow to create a mutually beneficial link with those countries and, from that, to expand other trade and investment links and to sustain political dialogue at a higher level than might otherwise be possible.”
New Europe