Younkyoo Kim & Stephen Blank. Journal of Balkan & Near Eastern Studies. Volume 18, Issue 1, February 2016.
Introduction
Rerouting South Stream through Turkey, Russia is striking at Azerbaijan and at potential Central Asian gas exporters to Europe. Over the last couple of years, under Baku’s lead, Azerbaijan and Turkey have been working on bringing to fruition the so-called Southern Gas Corridor (SGC), which aims to bring Caspian-sourced gas through the Trans-Anatolian Pipeline (TANAP) to the Turco-Greek border and, from there, to South-eastern Europe via the Trans-Adriatic Pipeline (TAP) and regional interconnectors. The goal of this paper is to examine Russia’s recent high-stakes game to threaten vital Azerbaijani interests, including the SGC, particularly developments since the cancellation of South Stream—or ‘Turk Stream’. ‘Turk Stream’ is likely to propel the Balkans and Ukraine into front-line states in a serious struggle between the European Union and Russia. Yet, the obstacles to ‘Turk Stream’ are considerable. It is by no means certain that Russia and Turkey can pursue antagonistic policies geopolitically and simultaneously maximize the benefits of their deepened energy relation and increased economic cooperation. And in its eagerness to become a gas hub, Turkey has severely limited the possibilities for Ukraine, Azerbaijan and Central Asian gas producers to break free of Moscow’s energy grip.
On 14 January 2015, Aleksei Miller, the CEO of Russia’s state-owned natural gas giant Gazprom, sent a letter of warning to European Commission Vice President for the Energy Union Maros Sefcovic. In his letter, Miller wrote that Russia intends to stop all shipments of gas to Europe via Ukraine as soon as it completes a new pipeline corridor via Turkey. And he cautioned that, to avoid any future energy import disruptions, Europe will need to be prepared for that moment by building the necessary pipelines, interconnectors and gas hubs now. ‘The EU has, at most, a few years to do this’, he wrote, ‘To meet this deadline, work on a new pipeline in the European Union must begin immediately, today.’
The Caspian pipeline war never dies down but is clearly undergoing a period of exacerbation in connection with the Ukrainian crisis. Moscow’s December 2014 decision (which was not an unplanned decision taken in a fit of pique) to terminate the South Stream gas pipeline project through the Balkans and reroute it through Turkey would, as Turkish analysts admit, generate an outcome whereby Turkey relies on Russia for over 70 per cent of its gas. By rerouting South Stream through Turkey, Russia is striking at Azerbaijan and, beyond it, at potential Central Asian gas exporters to Europe as well as at the European Union (EU). Over the last couple of years, under Baku’s lead, Azerbaijan and Turkey have been working on bringing to fruition the so-called Southern Gas Corridor (SGC), which aims to bring Caspian-sourced gas through the Trans-Anatolian Pipeline (TANAP) to the Turco-Greek border and, from there, to South-eastern Europe via the Trans-Adriatic Pipeline (TAP) and regional interconnectors. Both of these pipelines have yet to be built. And if Russian gas is sold at the Turco-Greek border Russia apparently counts on being able to evade EU restrictions since Turkey is not a member of the EU and therefore not subject to its rulings. At the same time if Turkey becomes excessively dependent on Russia, Moscow could exploit that reliance to place enormous pressure on Turkey to downgrade the TANAP-TAP line and to block the SGC’s intentions to connect Caspian-area gas producers directly to European markets. The failure to realize the potential of the SGC would marginalize Azerbaijan, restrict its access to key customers, frustrate its ability to move toward Europe, diminish its future cash flows, and entail the diminution of its sovereignty and influence. And it would also be a serious defeat for the EU and a victory for Russia over it and other potential competitors like Azerbaijan.
Much has been written about the failure of Nabucco, the rationale behind the TAP’s choice over Nabucco West, and the role of Azerbaijan as a genuine player in Balkan energy through TANAP-TAP in 2013-14. The focus of this paper is on Russia’s recent high-stakes game to threaten vital Azerbaijani interests, including the SGC, particularly developments since the cancellation of South Stream—or ‘Turk Stream’, as it is now being called. This paper argues that Russia’s gambit confirms that the failure of South Stream to materialize is likely to propel the Balkans and Ukraine into front-line states in a serious struggle between the EU and Russia. And the implications of this current struggle will undoubtedly have enormous geopolitical and geo-economic consequences. The first section characterizes the Caspian energy game in 2013-14. The second section examines geopolitical and geo-economic impacts of TANAP-TAP. The last section explains Russia and Turkey’s high-stakes game aimed at countering TANAP-TAP through ‘Turk Stream’.
The New Great Game of Caspian Energy in 2013-14
Most EU countries use gas extensively as a source of energy and the share of gas in total energy consumption is up to 40 per cent in some of them. According to Eurogas, total gas consumption in the EU-28 in 2013 was equivalent to 462 billion cubic metres (bcm). Europe increasingly relies on imported gas. All of these countries would face extensive difficulties in case of disruptions of Russian gas supply. In an ongoing effort to diminish dependence on Russian imports and unreliable transit countries, the EU seeks to create a single, integrated energy market and diversify its supply sources. By 2030, Europe will be importing approximately 70 per cent of its gas demand, making the SGC and Caspian gas crucial to the EU project. To meet the European demand-supply gap there were three main pipeline projects: Nabucco from the Caspian Sea region, South Stream from Russia and TAP from Azerbaijan. Of these, only TANAP-TAP is still being developed.
Russia’s efforts to dominate Eastern Europe, isolate Ukraine from Europe or from leverage over Russian gas shipments and control Caspian producers through the South Stream pipeline are well known and long-standing. The great game of Caspian energy has entered a new stage. As Milan Simurdic has duly observed:
The Balkans represent the final stage of oil and gas delivery from that region towards, in the case of gas and gas pipelines—the European markets, and, in the case of oil to sea ports, transporting oil further to the world market. More and more, the Balkan region is being connected to the ‘New Great Game’, i.e. the modern re-run of the struggle between Imperial Britain and Imperial Russia of the XIX century for influence in Central Asia.
As Mehmet Ogutcu also observed:
the Southern Corridor’s original purpose was to facilitate diversification of energy supplies. It would open up access to vast new Caspian and Middle East pipelines while reducing, if not ending, Russian dominance of gas supplies to Central and Southeastern European states who have been too dependent upon Gazprom. Yet as long as there is only one supplier, i.e. Russia, and depressed demand since 2008, talk of such a corridor is nonsense.
This energy agenda binds together European, South Caucasian and Central Asian security in general not just these regions’ energy security. The current struggle for the Balkans, now occurring through competitive energy projects and political models, ties into the larger East-West geo-economic and geopolitical rivalry founded on control of energy supplies and routes from the Caspian through the Caucasus and Ukraine.
The Balkans’ geostrategic importance today is in no small measure due to the fact that it is the heartland of the confrontation between rival energy pipelines, the EU’s Nabucco pipeline and Russia’s South Stream project. Energy is intrinsically linked to competing geopolitical agendas. Since the Bosphorus and the Dardanelles are limited in the amount of energy that can be transported through them, the Balkan landmass, including Turkey, becomes all the more important in this context and each state therefore does its utmost to ensure that oil and gas pipelines traverse their territory. However, as the current Ukrainian crisis and the periodic previous eruptions of gas crises between Kiev and Moscow since 2006 remind us, this linkage between energy and geopolitics applies as well to Ukraine and to the Caspian region. Analogously the fact that the Caspian Sea is landlocked ensures that the energy holdings of the littoral states will be an object of geopolitical contention.
Hitherto the only rival plan to Russian gas was the EU’s Nabucco project which never got off the ground and may never do so. Instead, in late 2011 the Turkish and Azerbaijani governments buried their differences and agreed to build the TANAP line which would be the first dedicated pipeline bringing Azerbaijani and potentially Central Asian natural gas to Europe through non-Russian means.
The economic conditions fostering a genuine SGC have now become a reality. Ensuring the realization not just of TANAP’s projected progress, but also on opening up a genuine SGC that will enhance and secure the sovereignty and security of all the non-Russian Caspian producers and transit countries like Ukraine is now conceivable. Admittedly, TANAP’s volumes are not enough at present to meet this challenge and the Ukrainian crisis of 2013-14 shows just how much is at stake economically and geopolitically if Russia can dominate Ukraine’s energy and politics. But the door is now open to expanding the possibilities for a SGC.
If indeed, Azerbaijan can increase its gas production to 40-50 bcm/year or if the West can actually persuade other Caspian producers like Kazakhstan and Turkmenistan to ship gas through a trans-Caspian pipeline and bypass both Iran and Russia, or if Iran opts to join the SGC as a result of diminishing tensions with the West in the wake of the recent 5 + 1 agreement with Iran then there will be a competition in South-east Europe from which European gas consumers and non-Russian producers such as Azerbaijan can only gain. In the case of Greece, for example, it can make millions on tariffs without being subjected to the always onerous conditions attached by Moscow to its gas shipments. And that can bring a measure of relief to its stricken economy and strengthen its ties to the EU. In addition, Turkey will then be able to realize its cherished dream of being a real energy hub for all gas coming from the Caspian and for South Stream. It is also clear that Azerbaijan is gaining influence among East European states who are soliciting its investments as well as its gas and is in a position to contribute to this process of mutual strengthening of their economies and polities against Russian efforts to dominate them.
But as long as the political will to act remains absent in both Washington and Europe this whole area (south-eastern Europe and the non-Russian CIS—Commonwealth of Independent States) will remain convulsed by recurrent and periodic crises due either to what might be called ‘illegitimate governance’ at home, war and imperial power plays. Much of this area right now is the scene of civil wars, failed or failing states, unresolved ethnopolitical conflicts, great power depredations and energy rivalries. Ensuring diversity of consumers and of producers operating under market principles rather than man-made political distortions in the market can materially alleviate these problems.
It is clear that Moscow has in no way renounced its efforts to isolate Ukraine, suppress Central Asian energy producers, circumscribe Azerbaijan, and enhance its influence in Turkey and the Balkans. It is equally clear that Turkey seeks to enhance its geo-economic influence as an energy hub while still pursuing policies in Cyprus and Syria that clash and are at odds with Russia’s objectives. Yet both sides want to assure that their convergent economic and energy relations are prioritized.
While the announcement that the original South Stream is being closed, and is instead going to be redirected through Turkey, is of epochal significance, it is by no means the last word from either actor. Rather it is merely the latest move in a complex, never-ending game. Moscow is attempting to force an easing, if not an end, to EU sanctions that were placed on Russia for invading Ukraine. In this respect, Russia intends to exploit what it perceives as publicly visible divisions within the EU over whether or not to ease sanctions. Russia is also blackmailing Balkan and other European states into allowing it a free hand as well as major leverage on their economics and politics by threatening them with gas cut-offs, especially at the height of winter—a long-standing Kremlin policy. Moscow wants to destroy any hope of Ukraine’s self-rule by forcing it into eternal economic and strategic dependence on Russian gas by threatening to freeze it out. Moscow has also announced that it will no longer sell gas to Ukraine at subsidized prices after 1 April 2015. In extending its gas leverage over European countries, therefore, Moscow hopes to inhibit that kind of European integration as well as undermine the expansion of the EU’s remit within Russia’s neighbourhood. Moscow also wants to establish Turkish dependence on Russia as the major, if not exclusive, provider of gas to that country.
Geopolitics and Geoeconomics of TANAP-TAP
Turkey and Azerbaijan signed a major gas deal on 25 October 2011. Turkey will get 6 bcm of gas annually from Azerbaijan’s Shah Deniz-II field, recovering what it lost from Russia by its earlier termination of the contract with Russia for gas from the Western Balkans pipeline. Turkey will also serve as a transit point for another 10 bcm annual supply of Azeri gas to Europe through spare capacity in its pipelines. These accords also envisage building the new TANAP pipeline for Azeri gas through Turkey, while the existing line’s operation, which transports Azeri gas from the Shah Deniz-II field, should go into effect by 2017 and send gas until 2043.
These agreements ensure that for the first time Azeri gas can traverse a dedicated infrastructure to Turkey and then flow to Europe. Moreover, since the announced agreement refers to the new TANAP pipeline as carrying an ‘initial’ volume of 16 bcm, this suggests that Azerbaijan hopes to increase its annual volume first to 24 bcm, especially as it projects an estimated annual production of 50 bcm by 2017 and an estimated reserve of 10 billion tons of hydrocarbons (oil) in fields in Azerbaijan or offshore. Gazprom will thus lose significant revenue in sales to Turkey and then the Balkans, and Russia will lose considerable political leverage, as Azerbaijan charges a significantly lower price to Turkey than Russia charges and received a side payment to make up the difference between its price and what Gazprom charged. These agreements also resolve all issues of gas transit between SOCAR and BOTAS—Turkey’s state-run energy company—who have both essentially replaced Gazprom with Azerbaijan as gas suppliers at least to the extent outlined above.
The decision by Azerbaijan and Turkey to build TANAP and then link it not to a ‘Western Nabucco’, but to the TAP is therefore one that has been marked throughout by strategic and geopolitical considerations. Baku has now become a major future supplier of natural gas to Europe through TANAP that will bring Azeri gas from the Shah Deniz field to Europe through Turkey. Beyond the fact of its possessing huge gas and oil reserves, if the legal delimitation of the Caspian can be achieved and if the West can summon the will to pay for, build and defend a trans-Caspian pipeline, or if another way can be found to bring Central Asian gas to Azerbaijan and then Europe, or if Iran opts for using the SGC to export gas, Azerbaijan will become not just a supplier in its own right, but also a major transit hub for Central Asian gas going to Europe and potentially the Middle East. The development of liquefied natural gas (LNG) technology that can move gas from point to point without incurring the drawbacks of building pipelines through politically hostile territory may yet accelerate this trend. For example, a genuine southern corridor through the Caspian could allow countries like Kazakhstan and Azerbaijan to build on the late 2013 agreement between them to ship 4 million tons of oil through the Baku-Ceyhan pipeline to include gas and larger amounts of oil. And if Iran does effect a rapprochement with the West it is possible that this could lead to a diminution of Azeri-Iranian tensions and maybe an Iranian connection to the TANAP although that remains for now purely conjectural. On the other hand, in such a circumstance Iran might supplant Azerbaijan as a supplier to Europe. But in that case Baku would reap much money from tariffs and if there is enough growth occurring in the global economy, and given the advances in LNG, it might be able to find or open new markets. It also is possible that there could be an expansion of existing Iranian swaps with Kazakhstan or with Turkmenistan building on current agreements among these states. In other words, we now stand before many alternative and largely positive options for energy and security outcomes.
Indeed, the TANAP pipeline, largely driven by Baku, answers many Azeri as well as European and potentially Central Asian interests. It encourages Turkmenistan to pursue a trans-Caspian gas pipeline thereby diversifying its options away from exclusive dependence upon China and/or Russia. It stimulates a more active EU engagement with Azerbaijan and Turkmenistan towards that pipeline objective. It enhances Georgia’s transit role as an automatic part of the pipeline route and thus Georgia’s importance to Europe while ensuring Georgia’s energy security and Azerbaijan’s financial security. It greatly enhances Turkey’s role as a transit hub country and represents the first, indeed only, dedicated pipeline to realize the idea behind the Nabucco project of a non-Russian pipeline bringing Caspian energy to Europe if not the actual Nabucco programme. And as we have seen it also allows Turkey to take a stronger position with other suppliers like Russia and Azerbaijan. It makes Azerbaijan a major contributor to European and Eurasian energy security while linking it organically with Turkey—a major Azeri aim—and allowing it to become an investor in Turkey and Turkish energy equities. It brings Azeri gas directly to European consumers and will stimulate major foreign investment in Azerbaijan itself. This pipeline and the strong linkages it has already fostered and will foster in the future will strengthen cooperation if not something closer to an alliance among Turkey, Georgia and Azerbaijan. It also provides an alternative to South Stream in South-eastern Europe and to the Russian political influence that is connected with the South Stream project. The TANAP-TAP linkage also brings Azerbaijan into a much more integrated relationship with Europe, particularly the Balkans where it is becoming a major investor, not just an energy supplier.
At the same time, the TANAP strengthens and validates Azerbaijan’s pro-Western orientation and justifies enhanced Western attention to and engagement with Azerbaijan, especially as the European Commission regards TANAP as an integral ‘dedicated’ segment of the planned SGC to Europe. Involving potentially pipelines from Turkmenistan and Kazakhstan through Azerbaijan to Europe. Indeed, the Shah Deniz consortium has already decided to triple the capacity of the Baku-Tbilisi-Erzerum gas pipeline (or South Caucasus Pipeline) from 7 to 21 bcm annually to be fed into TANAP once the latter is built. Beyond those figures that were originally contemplated, the project is designed to be expandable to 30 bcm and ultimately 60 bcm a year. And in parallel with the TANAP Baku is funding and completing construction of the Kars-Tbilisi-Baku railroad with a ferryboat link to the eastern Caspian shore connecting European and Central Asian rail networks. ‘Thus Baku initiates and implements large-scale projects of European interest from its own natural and investment resources, and with [a] business rationale buttressed by [a] strategic rationale.’ Neither is this railroad the only such programme. Indeed, SOCAR, Azerbaijan’s energy firm, has now become the moving spirit behind a series of non-energy-related large-scale infrastructural projects in trade, transport and even telecommunications to bring Azerbaijan, the Caucasus and Europe into a much closer relationship.
The process leading to the construction of the TANAP has also rekindled interest in Turkmenistan’s becoming a major supplier for Europe. Europe as a whole and Eastern European countries in particular seek access to Turkmenistan’s gas. Ukraine and Romania have approached Turkmenistan to discuss such possibilities after Ukraine built an LNG terminal near Odessa in 2012. Indeed, Romania regards such a pipeline as the basis for an energy partnership with Turkmenistan and a freight transport corridor from the Caspian to the Black Sea that would, in turn, serve as the basis for a strategic partnership with Turkmenistan. Romania therefore has expressed its support for a trans-Caspian gas pipeline. In addition, at least since 2010 it would appear that Turkmenistan wants to move this way provided it can settle its disputes over Caspian energy installations with Azerbaijan and ensure the security of its gas as it traverses the Caspian Sea. Indeed, the TANAP project is now the only pipeline under construction bringing non-Russian gas to Europe from the former Soviet Union. Furthermore, if Azeri gas goes to Europe without having to pay for the transit service of third parties then that gas becomes price competitive in Europe. Moreover, Azerbaijan could then collect transit fees from other producers (including other Caspian producers) and shippers using this pipeline and since Azerbaijan is the majority owner of the TANAP it will probably be immunized against possible interference in the guise of transit problems in Turkey.
Meanwhile these projects have also substantially helped Turkey realize its dream of being a critical Eurasian energy hub while Azerbaijan has become the largest foreign direct investor in Turkey thanks to its investments in Petkim, Turkey’s petrochemical complex, and TANAP. And they also materially promote Caucasian energy security by expanding the South Caucasus Pipeline from Azerbaijan to the Georgia-Turkey border. It is planned to increase this pipeline’s annual output from 7 to 24-25 bcm/year by 2018. And SOCAR’s president, Rovnag Abdullayev, foresees that Azerbaijan’s total gas export capacity could reach 40 bcm/year by 2025.
The impact on Turkey is of particular importance since Turkey considers itself to be foreordained to be Eurasia’s energy hub and realizing this dream may be the number one priority of Turkish policy. In search of that goal Turkey wants to support other pipelines that would make up the Southern Corridor, for example, from Iraq, Iraqi Kurdistan and Iran. TANAP also aids it in obtaining Azeri gas at a preferential price. Geopolitically Turkey’s now established role in the Southern Corridor is deeply tied to the resumption of its negotiations with the EU for membership there. Ankara has ardently supported the Southern European Corridor (SEC) initiative not only for the possible revenues it could generate for the Turkish economy, but also in order to bring the EU and Turkey closer and to enhance Turkey’s EU membership bid. Turkish politicians remind their European counterparts on a regular basis that Turkey’s possible membership would add to the energy security of the EU. In fact, Turkey and the EU share similar interests in the region, as they both suffer from over-dependence on a single country. They would both like Caspian and Middle Eastern gas to reach European markets in order to replace their dependence on Russian supplies, and Turkey hopes to take a portion of the natural gas that is due to flow through its territory to meet its own domestic demand. It is therefore impossible to disaggregate Turkey’s energy strategy from its EU membership bid and its larger foreign policy goals.
Since all parties grasp the potential opportunities here it would be desirable for the USA and/or the EU to step up their actions to encourage not only mediation between Baku and Ashgabat but also to help promote the development of the requisite LNG capabilities and infrastructures throughout the Caspian so that ships, not pipelines, could carry the LNG and attacks on ships are much more dangerous than attacks on pipelines. Liquefaction would thus reduce Russia and Iran’s ability to threaten a trans-Caspian gas pipeline as they have in the past and further integrate Turkmenistan and Azerbaijan with Europe. Not only could these states contribute more gas to Europe and gain security and income thereby while Europe gains an alternative and reliable gas source; given Ukraine’s interests in LNG and the relentless Russian pressure upon it, this LNG option could allow Ukraine to utilize its LNG terminal at Odessa to take this gas, reduce Ukraine and Romania’s vulnerability to Russia and strengthen Georgian security as well. What these examples duly show, therefore, is the inherent importance of unencumbered energy production and transit through states like Azerbaijan for the entire region from Central Europe and the Balkans through Ukraine, the Caucasus and Central Asia.
The start of construction of the TANAP has made Azerbaijan a sought after investor throughout Eastern Europe. As Vladimir Socor has observed, the advent of TANAP, along with Azerbaijan’s careful management of its oil revenues, and the prospect of a genuine trans-Caspian pipeline has given Azerbaijan a triple role as supplier, transit country and foreign investor. The prospect of obtaining real gas supplies from the Caspian area in general and Azerbaijan in particular has opened up a whole new field of activity for Azerbaijan to invest money throughout Eastern Europe and enhance its political standing throughout that area. Especially in the Balkans where Russia is strongly pushing its South Stream pipeline project, the TANAP is now the only apparent viable alternative to countries who naturally wish to maximize their access to all available gas supplies and avoid excessive dependence on Russian gas. Consequently, they welcome Azeri investment.
Thus, Gunther Oettinger, the EU Commissioner for energy admitted that TANAP represents an important element of the planned infrastructure of the EU’s ‘Southern Gas Corridor’ to connect Caspian producers with Europe. Hungary’s State Secretary for Foreign Affairs and External Economic Relations, Peter Szijarto, not only expressed an interest in Azeri gas supplies to Central Europe but also called Azerbaijan ‘a guarantor of European energy security’. He also called for an acceleration of the work to complete the AGRI Interconnector. This Interconnector will bring LNG from Azerbaijan through Georgia and the Black Sea to Romania and Hungary as well as other potential European markets. It will begin with 2 bcm of gas through AGRI and grow to 5-6 bcm.
Just because Hungary has excellent relations with Azerbaijan one should not think this is an isolated or diplomatic remark. The sentiments expressed above are increasingly visible throughout Eastern Europe. Serbia’s ambassador to Azerbaijan has announced his government’s interest in Azeri gas supplies. Albanian Prime Minister Sali Berisha has promoted the TAP pipeline in talks with Azeri leaders as the best pipeline for transmission of Azeri gas to Western Europe and the Balkans. And Foreign Minister Edmond Panariti has discussed the TAP project with his Italian and Azeri counterparts. With support from the government of Montenegro, SOCAR will invest over 250 million euros in Montenegrin resort development.
SOCAR has bought into Greece’s gas company DEPA (part of DESFA which Baku has now acquired), a move that checks Russia, enhances Azeri influence in the Balkans and gives it access to the ITGI (Italy-Turkey-Greece Interconnector). While the ITGI is no longer in the running for the projected European Balkan pipeline, it is easy to see that an Azeri presence there would enhance its ability to supply Greece and Italy from TANAP or other, future alternatives.
However, Moscow has not given up the fight. Since the initial announcement of Azerbaijan’s purchase of DEPA and its gas distribution subsidiary DESFA who operates Greece’s gas grid, Russia is obstructing Azerbaijan’s efforts to buy a 66 per cent stake in DESFA. Moscow has long coveted not only the Greek grid but also other distribution networks throughout Europe. And if it becomes able to exploit Greece’s own economic distress it will no doubt reconsider making those investments again. Therefore, if it could block Azerbaijan here and gain this contract for itself it would not only control domestic distribution and gain major leverage upon Greece’s politics, but also thwart Azerbaijan TANAP-TAP and be the sole purveyor of energy through the Balkans to Italy or Austria and Germany. These games indicate the centrality of Greece to Balkan pipeline projects and the geostrategic as well as economic importance of Greece to Europe, undoubtedly a factor in EU deliberations with Greece during the current crisis. Indeed, America too is seeking to pressure Greece to reject Turk Stream and support TANAP-TAP instead. And Washington is pushing TANAP-TAP throughout the Balkans.
Meanwhile Azerbaijan has also invested $10 billion in Turkey’s Petkim petrochemical complex over 10 years that will go from a 25 to a 40 per cent share. And beyond that investment Azerbaijan is reportedly planning to invest $17 billion in Turkey to build an oil refinery, hydro-energy power plant and a shipping container terminal. Under the circumstances it is hardly surprising that Azerbaijan’s president, Ilham Aliyev openly voiced his ambition for Azerbaijan becoming a leading gas supplier to Europe for at least a century, especially as many EU countries are thinking of shunning nuclear power and power plants as an energy source. As he said, Azerbaijan’s connection to the Black Sea and Mediterranean countries can give it access to Europe’s gas markets.
At the 2014 Davos World Economic Conference, President Ilham Aliyev outlined the future course of Azerbaijan’s projects. Phase II of the development of the Shah Deniz field is underway along with the three pipelines connecting it with EU members. Now that investment decisions have been made construction can begin on all three pipelines that together comprise the SGC. These three pipelines are the South Caucasian pipeline connecting Azerbaijan to Georgia, the TANAP and the TAP and total costs are preliminarily estimated at $45 billion, already considerably cheaper than South Stream which will undoubtedly go still higher. Since Azerbaijan’s state oil company, SOCAR, is a shareholder in all these four consortiums of production and transportation it is now a major player across the entire SGC. SOCAR plans to enter South-east European markets and the Greece-Bulgaria Interconnector that is now under construction through DESFA which it owns. SOCAR will also enhance the TAP by gasifying Albania either through TAP or DESFA. Baku envisages a future capacity for TANAP of over 30 bcm/year to accommodate its own gas and transit of third-party gas, thus linking together European and Azeri interests. Moreover, since the EU never really mobilized the requisite financial, economic and political resources or will to build any variant of the projected Nabucco pipeline, it is solely the construction of the TANAP-TAP that has opened up for the first time the direct possibility of tying together Caspian suppliers with European consumers. And Baku has done this without directly challenging Russia and South Stream by opting for the Nabucco West route that would be extremely dangerous for it in the absence of guaranteed political cover by the West.
Since the announcement of TANAP, Russia, already under pressure from the EU, the discovery of shale gas and Europe’s ability to import LNG, has accelerated construction of first South Stream and now Turk Stream to pre-empt all competitors and preserve its hegemonic position in the CIS. However, while Russia is still trying to acquire a dominant leverage in the Balkans, those governments appear ready to deal with anyone, while the EU now sees TANAP as a key element of its projected SGC. Ukraine too has expressed an interest in buying into it to escape dependence on Russia, and SOCAR has become the major distributor of gas in Georgia.
South Stream, Russia, and Turkey
In Ankara, on 1 December 2014, Russian President Vladimir Putin and his host, Turkey’s President Recep Tayyip Erdoğan, announced that Russia’s South Stream project is being redirected. The original South Stream project is now ‘closed’ and it will instead traverse Turkey, carrying 63 bcm annually of natural gas when completed. The hope is that a hub could then be opened for South-eastern Europe at the Greco-Turkish border. Undoubtedly, Turkey stands to gain from the redirection of South Stream, while for Russia it represents a setback. However, the implications of the redirection are infinitely more complex, with reverberations for many of these two countries’ neighbours as well as for them. The South Stream pipeline was and remains largely a geopolitical project that aims to isolate Ukraine from Europe; by reorienting Russian gas flows away from Ukraine to the Balkans and forcing Ukraine into exclusive dependence on Moscow with no countervailing leverage. Russia’s continuing pursuit of this objective reaffirms Putin’s unrelenting determination to subordinate Kiev to Moscow.
It is unclear what impact the pipeline project will have on the joint Azeri-Turkish plans to ship gas from Azerbaijan, if not eventually Central Asia as well, through the TANAP. The question is whether that pipeline will absorb more shipments or if the new Turk Stream will pre-emptively checkmate new sources of gas from Turkmenistan and Central Asia for the Balkans and Europe more generally. There can be no doubt that Moscow still intends to prevent Central Asian gas from reaching Europe by any means other than those under Russian control. Turk Stream also intends to bypass Ukraine and force it into complete dependence on Russia. But by June 2015, thanks to European resupply of gas to Ukraine, Naftohaz announced it was only getting 10 per cent of its gas from Russia and on 1 July Ukraine rejected Moscow’s terms for Russian gas forcing Russia to suspend gas shipments for Ukraine (shipments to Europe through Ukraine are not affected). The idea of sending gas to Turkey up to the border with Greece also entails keeping the EU from being able to exercise any jurisdiction over gas flows from that border into Europe. However, this seems to be a vain Russian hope. Nevertheless, Russia is trying to break up the EU’s unity by playing to the stricken Greek government. Although Russia cannot bail Greece out of its nightmare, Putin signed an agreement with Greek Premier Alexis Tzipras in June 2015 to bring Greece into Turk Stream.
Putin has stated that Greece may borrow from Russia using its gas-transit guarantee as collateral. Meanwhile Gazprom will guarantee to deliver up to 47 bcm of gas annually to Europe through Greece by 2019 when the pipeline would become operational. By June 2015, Russia and Greece signed an agreement to bring Turk Stream to Greece, enabling Greece to obtain billions of dollars in transit fees. These moves clearly aim to fracture EU unity on sanctions against Russia, move Greece further away from the EU and NATO (North Atlantic Treaty Organization) and create a way to isolate Ukraine and retain a dominant position in Balkan energy flows that circumvents the EU.
As for Turkey, while it stands to benefit from an increase of Russian gas exports and of the promised 6 per cent price reduction for that gas, there are also complications: this outcome makes it potentially more difficult to increase both Azeri supplies to Europe and reduces the possibility that Turkey would build still more capacity to transmit gas from Turkmenistan and Central Asia should it become available. In its eagerness to become a gas hub, Turkey has severely limited the possibilities for Ukraine, Azerbaijan and Central Asian gas producers to break free of Moscow’s energy grip. South Stream emerged in 2007 as a core part of Moscow’s gas and overall foreign policy strategy to isolate Ukraine, perpetuate Central Asian dependence on Russia, punish Turkey for the failure of the concurrent Blue Stream project to go anywhere and secure Russian influence if not hegemony in the Balkans. Right up to the 1 December 2014 termination of South Stream, Russian officials were bringing pressure and inducements to bear, particularly in Hungary, Serbia and Bulgaria to promote the project and claiming that all of these states would be a potential hub for it. The project served as the primary gateway for the expansion of Russian influence in Central Europe and the Balkans.
Such Russian posturing underscores what many Western commentators have always asserted about South Stream: namely, that it had no real economic justification other than to punish Ukraine and was a political as much as an energy ploy to isolate Kiev, enmesh the Balkans in a web of dependency on Moscow, and prevent Azerbaijan and other Caspian producers from sending their gas to Europe while bypassing Russia.
This pattern has already been observed before. In December 2013, Moscow increased the projected cost of South Stream’s construction to over $22 billion, 50 per cent more than previous estimates, and gave no explanation for doing so. Furthermore, Gazprom admitted that for the first quarter of 2012, the tariff for gas transit to Germany through the 55 bcm Nord Stream pipeline in the Baltic was twice the transit cost through Ukraine. What this means is that Germany and other recipients are paying much higher prices so that Russia can circumvent and thus isolate Ukraine. Essentially, European customers are subsidizing Moscow’s power plays in Europe.
Assuming that the new project will move forward, which means that these countries will get their Russian gas through Turkey—and will have to wait longer for the project’s completion—the question is what this will mean in terms of Russian influence in the Balkans. Concurrently, Turkey may be in a position to wield more influence in the Balkans as a result of being a hub for Russian, Azeri and even possibly Kurdish gas to the Balkans and onward to Central Europe.
The possibility of a larger Turkish role in the Balkans is real. Taking into account its 50-year deal with the Kurdistan Regional Government (KRG) in northern Iraq and the new Iraqi-Kurdish agreements on energy exports from KRG, Turkey is now in an excellent position to realize Erdoğan’s long-standing objective of making Turkey an energy hub. Turkey has shown that it is willing to pursue, if need be, this goal in a high-handed fashion. It still conducts ‘gunboat diplomacy’ vis-à-vis Cyprus trying to force its way into Cypriot energy policies and decisions and Ankara challenged the sovereignty of Iraq by its energy deals with KRG, bypassing Baghdad. But now, assuming this new pipeline actually is built—and that is potentially a very questionable assumption—Turkey could become a genuine hub and seek to use that potential to enhance its international leverage in the Middle East, Black Sea and Caspian basins, as well as in the Eastern Mediterranean.
At the same time, Ankara has unquestionably strengthened its economic and political standing vis-à-vis Moscow. The fact that it is getting more gas in advance of the construction of South Stream and at a discounted price for all the gas it will be getting starting in 2015 underscores Turkey’s ability to determine the price it will pay. However, if the price continues to fall on global markets and stays low for a long time as now appears to be the case, Ankara runs the risk of having overpaid for its gas. Nevertheless, it is clear that in the present conditions, with sanctions against Russia—that Turkey is not observing—the rouble’s accelerating depreciation and falling global energy prices, Turkey’s position as an importer has grown stronger with regard to Russia. And as it aims to continue to pursue its geopolitical ambitions, Moscow has come to depend more on Turkish support than before.
Even so it is clear that on issues like Syria, Cyprus, the Crimean Tatars and the annexation of Crimea, Russia and Turkey publicly disagree. Thus, both sides are pursuing converging economic objectives while in some cases being at odds geopolitically. If Turkey becomes an energy hub and enjoys so diversified a stream of sources, it will acquire certain immunity; it is going to be very hard for anyone to dictate prices and other economic conditions to it. Hitherto it was the case that Turkey, being an importer in an exporter’s market, to some degree depended excessively on Russia.
However, even if Turkey enhances its geopolitical leverage in most or even all of the regions where it plays a major role there is still no guarantee that it will be able to dictate terms more effectively than it has until now. In Syria and in the Caucasus it has conspicuously failed to inhibit the realization of Russia’s goals. In Cyprus it is still being frustrated by Western and Russian support for Cyprus and its gas claims. Nevertheless, the agreement with Moscow illustrates just how resolutely Ankara is determined to pursue an independent policy regardless of the costs it may incur vis-à-vis the EU and the USA. Indeed, this may, as Moscow has also indicated, be one major reason that makes the new pipeline deal geopolitically attractive for Russia. Turkey and Russia share a quest for independence; and there can be no doubt that an entente with Turkey holds a major attraction for Russia under present circumstances.
Conclusion
Given the past history of Russian ‘mega-projects’ and its energy policies there is good reason to believe that the costs of both the South Stream and Turk Stream pipelines will actually be much higher than advertised. Former Bulgarian Ambassador to Russia and energy expert Illyan Vasilev writes that the Russian Nord Stream project that is fully underway is greatly underutilized, reaching only 43 per cent of its full capacity while in the third quarter of 2013 only 9 per cent of its full capacity was utilized. Nord Stream’s profits also fell 41.3 per cent in 2013. Similarly, the Blue Stream project to Turkey is also operating under 50 per cent of capacity. And these pipelines supply gas markets that are far more resource-intensive than those to be supplied by South Stream. For countries like Bulgaria which is already receiving transit fees from all the 17 billion square metres of gas supplies redirected to Turkey, Greece and Macedonia, those fees equal the profits obtained from North Stream. Embracing South Stream therefore means losing all those revenues. South Stream would have had to transit twice this amount to Bulgaria to equal that amount and Bulgaria still would have to invest several billion euros into the requisite infrastructure for South Stream. And this figure does not take into account the operator’s costs. Since Gazprom, a notably inefficient operator and one that is utterly corrupt as well as Moscow’s tax farmer and dispenser of corruption, will hardly relinquish its veto powers here and will block third companies who are in Bulgaria from transmitting their gas through South Stream, it is quite debatable what it and similarly situated countries would gain from South Stream. Consequently, the prognosis for Turk Stream is not likely to be better.
Moreover, the EU continues to insist that the contracts for South Stream with EU members and Serbia who will begin adhering to the Third Energy Package in 2015 violate EU regulations in that Package and continues to insist on a revision of those agreements. Gazprom’s studies that sending gas through South Stream would be 10 per cent cheaper than through Ukraine which charges a transit fee and that this project costs only $45 billion (itself a sharp increase in the original estimated cost) must be regarded with considerable scepticism given its position and management. And in any case, Russia’s habitual resort to energy boycotts and its behaviour towards its neighbours underscore the risks of excessive dependence for anyone on Russian supplies of gas and oil apart from the corruption and vast almost epic mismanagement of companies like Gazprom and Rosneft. Moreover, the EU will not surrender its efforts to subject a future Turk Stream pipeline to its regulations given the fact that its members will be consumers if not transit states.
Furthermore, if we focus on the geopolitical context, it is clear that we cannot count on a crisis-free environment in Eurasia. Pervasive misrule from Ukraine and Belarus east and south to Central Asia ensure that crisis is always a very conceivable outcome in any of the supplier states and we cannot count on peace there. It is clear from Russian policy that Moscow neither respects nor accepts the sovereignty or territorial integrity of the former Soviet states and its policies aim to exploit every conceivable pressure point or fissure in those states for its benefit. In 2012, Russian President Vladimir Putin admitted that the Russo-Georgian war had been premeditated since 2006 with the deliberate use of separatists. And Russia’s aggression in Ukraine speaks for itself. Putin’s admission also should remind us that Russia still refuses to accept the finality of the territorial settlement that occurred in the wake of the Soviet disintegration and perhaps even more importantly, there is abundant evidence, including this admission that Russia does not really believe in the genuine and full sovereignty of the post-Soviet states in the former Soviet Union. Therefore, the outbreak of war in Europe and Eurasia cannot be ruled out and security throughout this expanse cannot be taken for granted. Indeed, the minute major demonstrations broke out in Kiev in January 2014 the Russian media started publishing articles claiming that partition of Ukraine—an outcome only conceivable if force is used—was no longer inconceivable or off the table. Other writers similarly now warn of a civil war there. And in the summer of 2015 the dangers of renewed Russian offensives or of a frozen conflict there are very tangible. Thus, what ultimately is at stake in Ukraine and in the Caucasus’ many unresolved conflicts and energy issues is the overall structure of security in Eurasia and thus Europe as a whole. For as was already apparent in the 1990s, the security of the Transcaucasus and that of Europe are ultimately indivisible.
Putin’s admission should also remind us that Russia still refuses to accept the finality of the territorial settlement that occurred in the wake of the Soviet disintegration and perhaps even more importantly, there is abundant evidence, including this admission that Russia does not really believe in the genuine and full sovereignty of the post-Soviet states in the former Soviet Union. The evidence in favour of this assertion is overwhelming and worse, long-lasting. Therefore, it should evoke much greater public concern from governments from London to Baku, as well as Washington. And again this is not just one scholar’s views. As James Sherr has recently written:
While Russia formally respects the sovereignty of its erstwhile republics; it also reserves the right to define the content of that sovereignty and their territorial integrity. Essentially Putin’s Russia has revived the Tsarist and Soviet view that sovereignty is a contingent factor depending on power, culture, and historical norms, not an absolute and unconditional principle of world politics.
And he has used force once already to back it up. Similarly, Susan Stewart of the Stiftung Wissenschaft und Politik recently wrote that Russia’s coercive diplomacy to force its neighbours into its Eurasian Economic Union and Customs Union undermines any pretence that this integration project is based on anything other than Russia making other countries ‘an offer that they cannot refuse’. Furthermore, its coercive behaviour shows its own nervousness about the viability of these formats and the necessity to coerce other states into accepting it.
Indeed, Russia’s war in Ukraine has only amplified all of the threats to European security, including energy security, that were latent before 2014 and confirmed Moscow’s disregard for the sovereignty and integrity of its neighbours, its contempt for the contracts and treaties it has signed with them and continuing readiness to use force by whatever means it can to impose its will upon them. This war and Moscow’s consistent attempts throughout the period since the war began in February 2014 to use the energy weapon to blackmail Ukraine and Europe have also shown that it continues to regard energy as a strategic weapon and the energy trade as an instrument for achieving strategic goals not purely an economic or commercial relationship. Thus, any attempt by Russia to ‘rescue’ Greece ultimately has onerous economic conditions attached that are masked by short-term or immediate gains for Greece. And those longer-term conditions are neither in Greece or its neighbours’ interests. Naturally, this war and Russia’s behaviour stimulated the EU to react and it did so by imposing the sanctions on South Stream that ultimately led to its demise.
However, Moscow’s recent gambit to establish ‘Turk Stream’ with Turkey to replace the defunct South Stream continues the use of energy as a weapon with which to threaten vulnerable states. Turk Stream continues Moscow’s efforts to force Ukraine into total dependence on Russian energy and Russia while isolating it from Europe. Moreover, in its recent moves on Turk Stream Russia essentially has laid down an ultimatum to Europe as Miller’s statement above shows Moscow has many motives for making this move. It is attempting to force an easing if not an end to EU sanctions on it for invading Ukraine. Second, Russia is blackmailing Balkan and other European states into allowing it a free hand as well as major leverage on their economics and politics by threatening them with gas cut-offs—a long-standing Kremlin policy. Third, Moscow wants to destroy any hope of Ukraine’s self-rule by forcing it into eternal economic and strategic dependence on Russian gas by threatening to freeze it out, especially during the winter. Fourth, it aims to prevent European integration around the EU and also the enlargement of the EU area through Deep and Comprehensive Trade Agreements (DCFTA) otherwise known as Association Agreements with former Soviet republics. Fifth, it wants to establish Turkish dependence on Russia as the major, if not exclusive, provider of gas to that country. In this connection, Moscow’s December 2014 decision to terminate the South Stream project through the Balkans and reroute it through Turkey would generate an outcome where Turkey would depend on Russia for over 70 per cent of its gas. Moscow’s recent decision to cut off gas to Ukraine, Turkey and five other Balkan states underlines the real dilemma that Turkey could face due to this excessive dependence on Russian gas.
Equally crucial and sixth, by making this move now and by rerouting South Stream through Turkey, Russia is striking at Azerbaijan and beyond it, at potential Central Asian exporters to Europe. The SGC is currently embodied exclusively by the Azeri-Turkish programme to bring gas through the TANAP to the Turco-Greek border and thence to the Balkans through the TAP and regional interconnectors.
If Turkey became excessively dependent on Russia, Moscow would exploit that dependency to place enormous pressure on Turkey to downgrade the TANAP-TAP line and to block the SGC’s intentions to integrate Central Asian gas producers with European markets. The failure to realize the potential of the SGC would marginalize Azerbaijan, restrict its access to key markets and ability to move toward Europe, diminish its future cash flows, and entail the diminution of its sovereignty and influence. Since Azerbaijan has moved strongly in the last four years to become a genuine player in Balkan energy markets and forge strong commercial ties with European energy markets, Russia’s recent gambits clearly threaten vital Azerbaijani interests, including SGC, which is a vital Azeri interest. Indeed, attesting to the severity of this new threat to Azerbaijan, Turkey, and their European customers and partners, Russian commentators have approvingly commented that this decision speaks to Europe (and others) in the language of ultimatums. Thus, the nightmare currently taking place in Ukraine is by no means an accidental or unintended aspect of Russian policy. Ukraine shows that energy subordination to Moscow cannot ultimately bring security or a guarantee of no further Russian threats, quite the opposite.
Finally, and seventh, Moscow now is also attempting to shatter the EU consensus on sanctions and energy that strikes at its economic power in Europe and at the Russian economy by cultivating Greece as a potential participant in Turk Stream and renegade from the EU. The lure is that of using Turk Stream as collateral for future loans. Moreover, despite the EU bailout of Greece, it will face difficult times in capital markets. And, in any case, Greece is now, by virtue of that bailout, committed to an EU course of action and Russia suffers from crippling sanctions and falling energy prices that inhibit its ability to offer Greece any meaningful relief. The lure of billions in gas-transit receipts from fees and taxes is also a common ploy in Russia’s overall Balkan policy. Indeed, during South Stream it promised virtually every Balkan state that it would be a gas hub and reap millions or billions. Russia has done this with both Greece and Turkey, for example. Greek Prime Minister Konstantin Karamanlis publicly embraced the idea that the Burgas-Alexandropoulos oil pipeline and South Stream gas pipeline will turn Greece into an energy hub. More recently, Russia made the same pitch about becoming an energy hub to Bulgaria as Energy Minister Sergei Shmatko said, in speaking about the three current Russian projects with Bulgaria:
We do not doubt that the implementation of those three projects is exceptionally important for Bulgaria itself. The projects will allow Bulgaria to become a very important energy center in South Europe and a powerful energy transit junction in Europe. I think that Bulgaria’s current leadership, which has in mind the country’s long-range national interests, must excellently understand this.
However, given shrinking demand for Russian gas and stagnant energy prices, this pledge appears to be just another mirage. Therefore, it is utterly comprehensible why Azerbaijan and NATO have agreed to ensure security of the Caspian gas infrastructure that Azerbaijan and its partners have built. And given the fact that the onerous burden and risks of reliance on Russia have become so palpable, it is also clear why many are urging the USA not only to take advantage of the opportunity to expand the SGC but also to export shale gas and LNG to Europe now that the price differentials between Europe and the USA are so much in favour of American exports of this gas abroad.
Thanks to the opening of the Southern Corridor as a truly feasible project we can already discern a new dynamism or opportunities in European and Eurasian energy prospects. However, the political will to secure, consolidate and expand this ‘beachhead’ must be tangibly manifested and sustained over time in key capitals, Brussels, Washington, individual European capitals, Ankara, and in Baku and Ashgabat. Without exaggeration it is fair to say that not only are the economic opportunities and stakes immense, so too are the geopolitical ones. Indeed, any perusal, even a cursory one, of contemporary headlines demonstrates the centrality of energy issues in this geopolitical flashpoint and the fact that without resolution of energy issues as well as other security challenges, the geopolitical future of these regions will be at best clouded and at worst, highly conflictual. Nobody in Europe, Eurasia or even Washington and Houston should think that what happens in Eurasia stays in Eurasia. Failure to take advantage of the opportunities that now stand before us ensures new conflicts and crises, not stability and certainly not energy or any other kind of security. Energy security is no longer an individual issue but a global one and we must conduct ourselves accordingly.