The End of South Stream and the Future of Russia’s Pipeline Politics
11AM-12:30PM, December 17, 2014
Johns Hopkins SAIS, Room 500, 1717 Massachusetts Ave. NW, Washington, DC

On a recent visit to Ankara, Putin announced the scrapping of the multibillion dollar South Stream gas pipeline project and signaled that a new link could be built with Turkey. South Stream, which had been in the works for 7 years and was worth $40 billion, was seen as an important part of Gazprom’s European export strategy. On December 17, CGI hosted Edward Chow, senior fellow in the Energy and National Security Program at CSIS, and Tim Boersma, fellow and acting director of the Energy Security Initiative at Brookings, for a discussion on the surprise cancellation of project.

The speakers discussed the possible difficulties facing Russia’s alternative pipeline projects with Turkey and China, including China’s hesitation to invest and Turkey’s need for domestic reforms. At the same time, they agreed that Russian gas will remain a major player on the European market for the foreseeable future and suggested ways to reduce Europe’s vulnerability to supply disruptions in the short term. Their main points are summarized below.

Edward Chow, Senior Fellow in the Energy and National Security Program, Center for Strategic and International Studies:

  • South Stream was a political project with only marginal economic viability. Its main goal was to increase transit security by diversifying supply routes away from Ukraine.
  • The South Stream pipeline cancellation came as a major surprise. While President Putin blamed EU policies for the termination, it is far more likely that falling oil prices were the cause. As a result of Putin’s surprise announcement, we can expect to see significant contractual cancellation fees paid out to companies who had invested in the project.
  • The China pipeline project is Putin’s new top priority. Its main difference from South Stream is that it will be denominated in rubles rather than euros. However, the absence of a loan announcement from China to finance the project suggests that China now sees a higher risk in dealing with Russia, which places their future energy cooperation under question.
  • A Russia-Turkey agreement is possible, at least in political terms. Turkish Prime Minister Recep Tayyip Erdogan has the closest relationship with Putin of any other NATO ally since the departure of Italian Prime Minister Silvio Berlusconi. Erdogan and Putin are both comfortable with being outliers in Europe.
  • It is hard to foresee a scenario in which Europe can do without Russian gas altogether. Addressing corruption in Ukraine’s oil and gas transit system would be a short-term solution to the stability of the European gas supply.

Tim Boersma, Fellow and Acting Director of the Energy Security Initiative, Brookings Institution:

  • The end of South Stream will have little, if any short-term impact on the European gas supply, as existing pipelines can fulfill the requirements of all current gas agreements.
  • While the non-binding memorandum signed by Putin and Erdogan on December 1 contains very little of substance, it is likely that a Russia-Turkey pipeline will become a reality in the future. As European demand for gas declines, it is logical for Gazprom to turn toward growing gas markets, like Turkey and China. At the same time domestic market reforms pose a major hurdle for Turkey, which wants to become an energy hub rather than just a transit country.
  • The current anti-Russian sentiment in Brussels has revitalized the discussion of a European Energy Union. However, the chief problem is not over-reliance on Russian gas, as many in Europe believe. More critical is the lack of inter-state collaboration within Europe, which leaves many states vulnerable to supply disruptions. Improving inter-state cooperation – particularly within Central and Eastern European states – would solve this problem, but progress is stalled over disagreements about who should finance the project.
  • Russia’s deal with Turkey, along with its other recent bilateral agreements, should be a reminder to those in Washington and Brussels who espouse the narrative that “Putin is isolated and alone.” To China, Turkey and India, Putin is not the pariah that many in the West think he is, a critical point for policy makers to keep in mind.