NEW CENTURY - CEAS - Serbia: South East Europe in the eye of the post-Ukrainian tempest – the political economy of energy dependence

http://ceas-serbia.org/root/images/Ilian_Vassilev_-_South_East_Europe_in_the_eye_of_the_post_Ukrainian_tempest.pdf

New Century

Edition of the Center for Euro-Atlantic Studies – Serbia

President Putin’s push for a new world order has reverberated across the European continent and South East Europe makes no exception. Energy dependence tops the vulnerability check list of SEE governments and the Russian President’s veiled threat in his “gas” letter to the EU state leaders alluding to a possible shut down of gas supplies clearly aims at driving a wedge in the EU camp and trigger sauve-quit peut type of reactions.

The Bulgarian Grand Slam and mostly the South Stream project exemplify Russia’s strategy of retaining remote control mechanisms over current and future EU members foreign and domestic policies, ready to be used in emergencies like the Ukrainian crisis.

Russia’s expansion of its up to downstream asset base – expansions, acquisitions, JVs – in the energy sectors of CEE countries is a key ingredient of its SEE strategy. Although EU sanctions – formal and informal – have resulted in a dramatic drop of political level exchanges between Moscow and SEE capitals – business communications remain largely immune to strategic level pressure. Where Russia’s diplomatic resources have come short – Gazprom, Rosneft and Lukoil join in to complement Moscow’s leverage base.

Apart from keeping the pressure on Kiev and balancing between different lobbies’ interests within Kremlin – Russia’s energy arsenal serves to open and sustain channels of political influence in different South Stream transit countries. One of the Russian corporate leaders in the region said it openly – Kremlin can rely on energy resources to a greater extent than on its military hardware such as tanks. Similar multilayered web of dependencies hinges upon substantial financial flows to selected groups in SEE’s business, political and media elites – what Ambassador Chizhov calls Russia’s Trojan horses.

 

Even if Kremlin’s capacity to shape domestic and mostly foreign policies in SEE countries in the course of EU and NATO accession and later membership, has been considerably constrained – its business and media levers have been upgraded to a stage severely impacting the respective governments’ capacity to engage and implement key EU and NATO membership strategy initiatives, including trade and political sanctions against Russia.

Recent Reuters story referred to Bulgaria as Europe’s anomaly. Most of the Bulgarian public still fails to grasp the motives behind such an assertion in spite of piling up evidence of Bulgaria’s elite cognitive dissonance with EU’s mainstream reasoning on events in Ukraine.

The European Parliament passed a resolution calling for sanctions on Russian energy companies and for an effective ban on the South Stream project as primarily serving Russian strategic interests and inconsistent with EU’s Third energy package. Yet the Bulgarian government blasts with infuriation while the leader of the Party of European Socialists and leader of the Bulgarian Socialists Sergei Stanishev has called the EP motion “scandalous”.

 Minister of Energy Stoinev remains adamant and seems to ignore Commissionaire Oetinger’s warnings, stating firm intent to seek compensations and proceed with South Stream as usual.

With upcoming elections for European Parliament Bulgarian voters find it difficult to identify many clear cut messages on what the EU and NATO should be doing in the Ukrainian crisis. Most of the candidates shy away from the topic, busy courting pro-nationalist and pro-Russian groups within their own ranks. The leftist and nationalist groups in the National Parliament have a long history of replicating vintage old Zhivkov school of lip service pro-Russian statements in return for “pragmatic” benefits.

At the time the former dictator’s business plan was simple – to re-export cheap Soviet oil collecting instant hard currency gains (close to the model applied today by Luckashenko). He and his entourage conveniently ignored the heavily discounted prices for Bulgarian exports to Russian and expensive items on the import list – cars, machines, military hardware, including SS-23 missile.

In modern days the incentives package contains privileged access to lucrative energy deals with hundreds of millions of euro reshuffling hands to and fro Russian energy companies with residual reverse flow to local political and business entourage.

The attempts of pro-Russian circles in the Bulgarian government and in Parliament to pursue a virtual midcourse balancing between the West and the East imply a non-aligned policy line and a sheer neglect for membership duties within NATO and the EU.  Moscow encouraged campaigns to dissuade new CEE applicants from joining the Euro-Atlantic institutions preceded Bulgaria’s start of NATO and EU accession talks after the Kosovo crisis. Then Russian Prime Minister Primakov’s calls for Finland type of neutrality were echoed by senior figures on the left with motions in Parliament.

No wonder these days Kremlin is revisiting the old textbook offering Ukraine the same East and West midcourse – conveniently ignoring the risks to Ukrainian security from Russian annexation of Crimea and intervention in the south and east of Ukraine.

 In a classics mode Moscow has resorted to a blend of coercion (even subversive actions) against non-compliant governments (such as the previous GERB government in Sofia) and charm offensives – incentives such as  ”cheap” gas, energy deals at seemingly generous terms, financing for “politically correct” groups in the ruling elite and the media. 

Russian propaganda scored a major success and demonstrated its ability to mobilize divergent groups – left to right, industry to environment, religion to culture, – in enforcing a moratorium on shale gas exploration and production, which had the rare capacity to challenge Russia’s political and business grip on the CEE energy markets.

The public in the SEE is often irradiated with promises for unique and privileged access to the ‘insatiable’ Russian market. Few if any of these promises have ever been met with the region’s market access to Russia still below EU averages. At the same time, Russian companies have expanded their strongholds in virtually all segments of the regional economy that generate exports of goods and services to Russia. Suffice to look at the petty to negligible share of contracts received by Bulgarian companies related to the Sochi Winter Olympic.

 Moscow’s energy initiatives remain the key driver in bilateral relations, systematically enhancing lines of dependence and counterbalancing EU efforts for diversification of energy supplies.

Putin’s revered energy pragmatism has triggered shock waves across Bulgaria’s energy sector parasitizing on widespread idealistic and often naive perceptions of contemporary Russian politics – a kind of gratitude for benefits swap.

The widening gap between the high prices of Russian gas and socially acceptable domestic gas price levels led to piling up debt in the Bulgarian state gas company – Bulgargaz and a liquidity crunch that has crippled its ability to engage in gas supply diversification or local exploration and production projects. Rising corporate debt levels have been constantly garnished with tacit proposals for assets swaps by Gazprom.

Looking at the EU gas price map of Gazprom one could easily notice the interrelationship between dependence on Russia and gas price levels.

In its turn the new NPP “Belene” project has almost wrecked the National Electric Company with more than 1 billion euro gone and the dispute ending up in a court of arbitration. Rosatom has made it no secret that it expects a debt for equity swap resolution with NEC divesting one of its most valuable assets – the chest of hydro power plants.

The South Stream pipeline fits naturally into the Soviet time pattern of politically motivated transaction with long term strategic economic and political objectives. Gazprom once attempted to take full control of Bulgaria’s transit system back in 1995. Ever since it has never ceased to seek fresh opportunities to increase debt levels on energy resource sales and try swaps for equity in key energy companies. 

By engaging the Bulgarian Energy Holding in South Stream Gazprom has tried to replay this old adage. Bulgartransgas is guaranteed at present 90% of the transit fees on a “ship or pay” basis at the moment on more than 17 billion cubic meters of Gazprom gas destined to Turkey, Greece and FYR Macedonia. If the South Stream goes ahead the Bulgarian side will have to rely on high risk scenarios for full take up of the South Stream transit capacity and stretched over time debt amortization on the ultra-expensive Bulgarian segment of the South Stream. The chances BEH will follow the fate of NEC and Bulgargaz ending up deeply in the red and with debt for equity swaps are far from slim.

This classic Kremlin foreign policy pattern can be traced across Central and East Europe with Russian energy companies persistently aiming at acquiring key energy assets. In most countries this key feature of the Moscow’s foreign political economy has been easily decoded by the region’s political elites except for parts of leftist and nationalist circles in Bulgaria and Serbia.

In the mid and long term, the monoclonal energy power base of Russian foreign policy is doomed. Events in Ukraine have already triggered a process of total reappraisal of relations with Putin’s Russia beyond the tipping point of balancing of mutual interests. With so many red lines crossed the SEE elites have exhausted the chances to pretend to be part of the West while enjoying privileged business with Putin’s entourage. The choice is clear – integrate or join Russia in isolation.