Turkey: A New Face for South Stream?

President Vladimir Putin's surprise announcement to cancel the South Stream project came as a shock not only to Europe, but investors politicians in effected countries as well.  Meanwhile, Turkey may present an opportunity for Russia to bypass Ukraine and Belarus while still reaching the European market, but certain concessions may be necessary to entice Ankara.  The snap decision has not preceded concrete deals and leaves room for reversing plans yet again.

 

Background

After a back and forth battle between the European Commission and Russia over plans to build a gas pipeline in Europe’s southern corridor, Russian President Vladimir Putin finally announced Russia’s concession on the South Stream project because of disagreements over the EU’s Third Energy Package, which mandates that the same company may not have control over extraction, exportation, and sale of energy resources. However, a new plan has emerged. Almost immediately after canceling the South Stream project, President Putin traveled to Ankara to discuss building a pipeline through Turkey to its border with Greece. Russia’s new strategy is to allow Turkey to act as the trading platform for gas entering member states of the EU.

 

Same Deal, New Face?

Although it may seem that this new strategy is a concession on Russia’s part, the EU may not be much better off under this deal than it was with the South Stream.  Russia will lose very little because it will be able to salvage much of the pipeline that was already constructed for South Stream, while European investors will have nothing to salvage and ultimately lose their investments. The biggest threat may be to the success of the EU’s own southern corridor project, which aims to merge and create pipelines from Azerbaijan to Italy. Russian initiatives with Turkey, if realized, could crowd regional competitors out of the market.

Even though Russia’s Gazprom has been blocked from controlling distribution and sale on European soil, the gas being consumed will still be Russian, which does nothing to solve the EU’s energy diversification goals. The involvement of Turkish companies in the distribution and sale of gas may, however, provide the EU with some influence over prices.

Despite Brussels’ resolve to diversify energy suppliers, southern European states seem to place less of a priority on where the gas comes from. Hungary even passed legislation that allowed companies to begin construction on South Stream in violation of the EU’s Third Energy Package. 

 

Turkey as the Middle Man

Turkey has found itself in the center of the Europe and Russia’s energy dispute. Turkey has huge economic ties in the EU. With the EU as Turkey’s largest import and export partner, it has obvious reasons to back the EU’s agenda, which currently aims at upholding sanctions against Russia. It is also a candidate for EU membership. However, it occupies a strategic location between the energy consumers of Europe and the energy suppliers of Russia and the Middle East, and has now been presented with the opportunity to capitalize on its position. In any case, the deal is still in fledgling stages, with no official plans being made.

If the deal is to succeed, Turkey must be assured profits. Although Turkey has made numerous energy deals with Russia in the past, it has not been allowed to resell gas products, which limits profitability. Russian gas is also expensive alternative for Turkey compared to other gas sources in the Middle East. In 2011, Turkey refused to renew natural gas contracts with Russia because prices had risen too far. Russia may need to consider discounts to Turkish consumers to attract consumption there.

 

Dissenting Opinion

Many question the seriousness of the proposed deal between Turkey and Russia. President Putin’s cancelation of South Stream came as a surprise to most, and the European states involved in the project had not been officially informed. One of the more popular explanations for Putin’s new strategy suggests that the cancelation is a bluff aimed at causing southern European states to pressure Brussels into complying with South Stream. Official communication with the European states involved in South Stream and further negotiations with Turkish officials would indicate the legitimacy of Putin’s supposed deal with Turkey.