Gas Deal to Benefit Russia, Turkey

Opinion Articles

 

Russia’s natural gas industry has long been focused on Europe, its main export market. Now, though, it appears to be shifting its attention to Turkey, which is eager to position itself as a gateway to energy markets in the European Union.

A recent deal between the two countries demonstrates that Ankara could indeed become a major player in regional gas markets.

Ready for Prime Time?

Turkey has long been keen on the idea of transforming itself into an energy hub to serve the European market.

In line with this goal, its government has already discussed proposals for the construction of pipelines that would deliver gas from Azerbaijan, Turkmenistan, Iraq and Iran to Europe via its territory. It is now closer than ever to achieving this goal, in view of the collapse of Russia-EU relations over Ukraine and Russia’s decision to cancel the South Stream project in favor of a new link across the Black Sea to Turkey.

If the new Russian plan succeeds, Turkey will become a gas bridge between East and West. However, it will also confront a number of potentially thorny problems.

South Stream, Turkish Stream

Because of tensions stemming from the Ukrainian crisis, Moscow signaled earlier this year that it might consider an alternative route for South Stream if the EU continued to block that pipeline. On May 24, Russian president Vladimir Putin accused the EU of “constantly throwing a spanner in the works of this project” and threatened to look at other [routing] options via non-EU countries.” This means that Brussels must consider the possibility that South Stream will pump gas to Europe via “another transit country,” Putin said.

Then on December 1, Putin announced during a visit to Ankara that Russia was abandoning the South Stream project and would instead build a new subsea link to Turkey. He declared that South Stream had reached a dead end because of opposition from the EU, which has said that the Russian-backed scheme may violate the provisions of the Third Energy Package. Rather than continuing to argue with Brussels about compliance with antimonopoly regulations, he said, state-controlled Gazprom will reroute the 63 billion cubic meters (bcm) per year South Stream pipeline through Turkey.

Putin called the new pipeline Turkish Stream. According to a statement posted on Gazprom’s website, the new link will deliver 14 bcm per year to the Turkish market and another 49 bcm per year to Europe via a new hub on the Turkish-Greek border. The statement also said that Gazprom had signed a memorandum of understanding (MoU) with Botas, Turkey’s state pipeline operator.

“Both sides are working on turning the preliminary deal into a definite, finalized deal as soon as possible,” Reuters quoted Turkish president Recep Tayyip Erdogan as saying during a joint news conference with Putin in Ankara. “These steps will include us benefitting from [the project] to meet our natural gas needs and forming a distribution hub on our Greek border to meet the demand from there,” Erdogan said.

New Direction

This unexpected turn in Russian-Turkish energy cooperation raises many new questions about the future development of the EU energy market, as well as the evolution of the geopolitical situation in the region.

By cancelling South Stream and redirecting the same volumes of gas to Turkey, Russia has weakened the EU’s negotiating position with respect to gas deliveries via Ukraine. At the same time, it has empowered Turkey.

In other words, Moscow has prevented Brussels from exercising its veto over South Stream, which was designed to reduce Gazprom’s dependence on Ukrainian transit routes. The Russian company can now work with Turkey to diminish or even eliminate Ukraine’s role in gas shipments to Europe, thereby leaving Kyiv with little or no income from transit fees and much less leverage over Russia.

Gazprom head Alexei Miller stressed this point last week, declaring that Ukraine’s role as a natural gas transit route between Russia and the European Union would be “nullified” as soon as the new pipeline to Turkey was completed. Ironically, Miller was speaking after Ukrainian prime minister Arseny Yatsenyuk told members of the country’s parliament that Kyiv was calling on Brussels “to block South Stream because the pipeline was designed to bypass Ukrainian territory.” It looks like Yatsenyuk got what he wished for, but he may not be happy with the new situation.

Ankara has already made clear it that it will not bow to pressure to scale back future cooperation with Russia. As Turkish energy minister Taner Yildiz told reporters in Ankara last week, “Turkey will not make a choice between the European Union and Russia. We are developing projects based on our own and mutual interests.”

So far, despite political disagreements over Syria, Cyprus, and Armenian-Azeri tensions, Moscow and Ankara have managed their differences. Rather than quarreling, they have taken a pragmatic approach in order to build strong economic and energy cooperation. But the gas pipeline deal has even wider implications for the current geopolitical configuration of the region. It could be a signal that Turkey could be moving away from Europe and toward Russia.

Stumbling Blocks

The Turkish Stream project cannot be implemented successfully unless both sides invest a significant amount of time, money, and political will. They will face a number of potential stumbling blocks, including questions about gas prices and how to manage shipments to the European market.

However, Turkey is in a better position to negotiate with Russia than Ukraine, as it has many more bargaining chips. This is important, as Moscow and Ankara are pursuing their own agendas, even if they share certain interests.

Ankara, for its part, has the ambition of becoming much more than a transit state for Russian gas. It wants to become an energy hub, buying gas from Russia (and other suppliers) and then reselling it to European consumers. Yildiz recently stressed this point, saying: “Turkish Stream…will not only be a transit project, but will turn Turkey’s Thrace region into a gas hub.”

Moscow, meanwhile, will not readily surrender the dominant role it has played for decades by giving Ankara full control over its gas. However, it is probably ready for a compromise, given that its position in the European market has eroded in recent years.

As such, it is likely to be willing to share its European gains with Ankara in order to maintain as much leverage as possible, even as it seeks to maintain control over the volumes of gas exported to Europe. Russian energy minister Alexander Novak has already floated one possible compromise. He said recently that the 6 percent discount on the price of Russian gas supplies to Turkey could be raised to 15 percent if the Turkish gas market “becomes more profitable.” But it looks like this plan will depend on the role Russia plays in the whole scheme.

Finding Common Ground

The unveiling of the new project indicates that Russia intends to play hardball with the EU and Turkey—and that it has a good chance of winning.

If Moscow and Ankara find common ground and build Turkish Stream, they will depend on each other much more than ever before. In that case, they would be bound together by the pipeline and by long-term obligations to deliver gas to the EU market, and this would have implications for other aspects of their relationship. For example, they would become the main instrument of gas deliveries to the European market. They even could decide to work together in negotiations with Brussels in the face of common challenges.

This, in turn, would put more pressure on the EU, as it would complicate efforts to proceed with gas supply diversification plans. If the proposed Turkish Stream pipeline is built, then Turkey will gain partial control over a large portion of the Russian gas flowing to Europe, even as it moves ahead with plans to help European consumers tap into Caspian gas flows. Turkey is already slated to host the Trans-Anatolian Gas Pipeline (TANAP), which will serve as the middle section of the EU-backed Southern Gas Corridor. In short, Turkey stands to secure more influence if it controls two major gas transit routes.

Conflict of Interests?

Officials in Ankara have signaled that they do not believe Moscow’s new plans will conflict with the Southern Gas Corridor program.

Commenting on the possible consequences of the Russian-backed project, Yildiz said Turkish Stream posed no risks for TANAP and would not affect European market interest in Caspian gas. “We would not be involved in a project that would threaten TANAP, which is our own project,” he said. “No one should be uncomfortable about the future of TANAP.”

It remains to be seen, however, whether Brussels has the same level of comfort with plans for future cooperation between Moscow and Ankara. EU officials may therefore raise the question of whether they should continue to support plans for making Turkey the transit route for all Caspian gas, including Turkmen as well as Azeri production.

If so, they may seek to speed up talks on alternative delivery routes via Georgia and the Black Sea, as these would bypass Turkey.

In the short term, Ankara and Moscow will probably seek to use their deal as leverage in talks with the EU and other Western interests. They certainly have room to do so. As Yildiz pointed out last week, the agreement signed during Putin’s visit was a nonbinding MoU, so there is still ground to cover before construction can begin.

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