$5 Billion Down the Drain

Russia’s Gazprom has finally thrown the towel on the South Stream pipeline, after spending $5 billion on it. This follows repeated attempts by the EU to shoot itself in the foot using its “competition rules” as a pretext. These nonsensical rules are employed as a pretext for a great many things, but the protection of consumers ranges most definitely at the very bottom of priorities. South Stream would have circumvented the Ukraine and brought Russian natural gas to a number of countries (many in the Balkans, plus Austria and Italy) which are nearly 100% dependent on Russian gas already. Germany presumably doesn’t care because, tada! – it gets its gas via “North Stream”. For unknown reasons the “competition commission” had nothing against that pipeline. One wonders why? We think the only European newspaper that came closest to the truth was the Italian paper La Republicca. While it (wrongly) blamed the decline in energy prices for the decision, it wrote in an aside:

“The latest jolt sweeps away South Stream. The maxi-pipeline – dear to Vladimir Putin, supported by the former Berlusconi government, opposed by the United States - will not be built”

The truth is, the EU’s “competition commission” rigmarole was a pretext for what is at its core a political, not an economic decision. The US opposes South Stream solely for geopolitical reasons, as it has zero commercial importance for it. The EU has neither valid commercial and nor indeed valid political reasons to oppose the pipeline. Europe has been buying energy from Russia even back when it was still part of the evil Soviet Union, the communist empire that was an actual enemy. And yet, as German vice chancellor Sigmar Gabriel remarked in an address (in which he admitted that German subsidies for various “alternative energy” nonsense needed to end), Russia has never reneged on its energy deliveries, not even in the most tense moments of the cold war.

A piece of South Stream in Bulgaria, now a memento of a missed opportunity

Photo credit: Gazprom

The aggressive energy policy run by the United States (a country that has been bombing Iraq for 24 years now, with absolutely nothing to show for it but complete chaos) is an outdated relic of the Carter era, when memories of the Arab oil embargo were still fresh. It has zero applicability to the modern world. Even fricking ISIS – a sworn enemy of the West that would gladly kill all “infidels” – is selling its oil and gas to all comers, at half price to boot. The Arab oil embargo of the 70s is today considered the culprit in the large oil price rise of the era, but this is nonsense, or better said, it is propaganda designed to distract from the true reasons. The embargo was at best a short term trigger – the actual reason was the inflationary policy of the Federal Reserve, which eventually culminated in Nixon’s gold default. Were the Arabs at fault with respect to rising prices of sugar, soybeans and copper too? We’re asking because the prices of these items exploded even more than crude oil prices in the 1970s. In short, the Carter doctrine never made any sense.

Lettuce wave good-bye to the planned South Stream pipeline – click to enlarge.

Map by: Gazprom

Not only is the EU shooting itself into the foot economically, it is in fact diminishing, not enhancing, its own energy security. A reliable and civilized supplier like Russia is a Godsend in the energy business. That most of its pipelines are running through the Ukraine is the main weakness in the arrangement, one that could have been avoided with South Stream (just as Germany evidently adroitly avoided it with North Stream). Regardless of the political differences between Moscow and the new leadership in Kiev, the Ukraine has neverbeen ruled by anything but corrupt kleptocrats since it came into existence in the early 1990s.

As a result, it rarely pays its bills, because its central government is in permanent de facto bankruptcy even at the best of times. Whenever its main supplier (i.e., Gazprom) tries to enforce payment by shutting off supplies, it simply takes what it needs from the pipelines supplying other countries. This is then painted as Putin’s fault in the Western press of course, but the reality is what it is. In fact, even the new, allegedly perfectly democratic and imbued with European values government has threatened to do just that – and once again, unpaid bills were the bone of contention. The fact that Russia may have allowed these bills to remain unpaid if a different government were in charge in Kiev is beside the point (we would also note that in spite of credit covenants allowing Russia to immediately call for repayment of billions of dollars in non-gas debt, it has recently assured Kiev that it won’t enforce this clause in the interest of not damaging Ukraine’s economy further).

We’re not saying anything about whether things should or should not be what they are, we are merely making a statement regarding the situation as it is. For the twin reasons of its own government corruption and its dispute with Russia, Ukraine is a risk factor for the gas supplies Europe needs. Maybe this will change one day, but it sure hasn’t changed yet.

Bulgaria the Last Straw?

Readers may recall that the countries that were the intended recipients of the gas South Stream would have delivered were all for the pipeline. Many of them remain for it, but it is now too late. However, with a pipeline, you only need to put sufficient pressure on one country at a neuralgic point in the planned route, and everybody else can go pound sand. That country was a visibly reluctant Bulgaria. Threatened by the EU, and visited by the angel of death himself (i.e., John McCain – wherever this guy shows up, people are usually soon wading in blood and guts) its (outgoing) government gave in to the pressure and stopped all work on the South Stream.

In Bulgaria, numerous people are incensed over these developments, but they have been ignored so far and it is now anyway too late. According to a report at the BBC (quoted below), they are angry with Putin for stopping the project, but we’re not so sure if that is not a case of mistranslation or projection – after all it was combined EU/US pressure which stopped the project many months ago. It is still interesting to see some of the economic losses toted up:

“In Bulgaria, politicians and analysts are angry at President Putin over South Stream. Some warned that scrapping the project would cost the Bulgarian economy millions of dollars in lost revenue.

Former energy minister Roumen Ovcharov put the figure at $600m (£384m) per annum - $200m more than the sum mentioned by Mr Putin. “Those are not just financial losses, but also geostrategic and political ones,” Mr Ovcharov, a politician from the pro-Russian Socialist party, told Nova TV.”

600 million smackers per annum is not exactly small potatoes for Bulgaria, so they have every right to be grumpy, but they should have thought about that before stopping construction. While the Ukraine conflict clearly overshadows the proceedings – in light of EU sanctions against Russia there wasn’t a snowball’s chance in hell it would relent with respect to South Stream, so this has undoubtedly hastened the decision to scrap the project – the EU’s opposition to the pipeline predates the Ukraine conflict by many moons. In other words, even if a case could be made that in light of the current enmity between Russia and the EU one could not expect the EU to give its nod to the pipeline, the basic economic idiocy argument is not altered in the slightest.

As noted, all the other countries to the North of Bulgaria can now go pound sand. All of them were happy with the project and have made efforts to sign on in spite of EU resistance. Very recently even Austria signed on to the South Stream project, in a rare moment of political sanity. Monuments to economic and political insanity are now bound to be dotting the landscape all over South Eastern Europe. Here is another example from Serbia:

Maybe this piece of pipe can be integrated in the Serbian National Orchestra, for producing very deep sounds.

Photo credit: EPA

Turkey the Winner of EU-Russia Disagreements

If falling energy prices really were the reason Gazprom has given up on South Stream, then why is itproposing an alternative pipeline to Turkey? Turkey has already taken business from the EU, as it has become the main supplier of fruit and vegetables to Russia in the wake of the sanctions tit-for-tat. Certain advantages of having been denied membership in the EU asylum for many years are becoming starkly apparent.

The EU, at loggerheads with Moscow over Ukraine, and keen to reduce its energy dependence on Russia, had objected to the $40 billion South Stream pipeline, which was to enter the EU via Bulgaria, on competition grounds.

The proposed undersea pipeline to Turkey, with an annual capacity of 63 billion cubic metres (bcm), more than four times Turkey’s annual purchases from Russia, would face no such problems. Russia offered to combine it with a gas hub at the EU’s southeastern edge, the Turkish-Greek border, to supply southern Europe.

Alexei Miller, the chief executive of Russia’s state-controlled gas exporter Gazprom , told reporters in Ankara, where he was on a one-day visit with President Vladimir Putin, that South Stream was “closed. This is it”.

Putin accused the EU of denying Bulgaria, heavily dependent on Russian gas, its sovereign rights, and said that blocking the project “is against Europe’s economic interests and is causing damage”.

He announced that Russia would grant Turkey a 6 percent discount on its gas imports from Russia for next year, supplying it with 3 bcm more than this year. Miller said Gazprom had signed a memorandum of understanding with Turkey’s Botas on the pipeline under the Black Sea to Turkey.

We always come across the phrase that the “EU is keen on reducing its energy dependence on Russia”. Fine, but to replace with what exactly? Where are the friendly nations just around the corner that will supply it with energy instead? Does it make sense to invest countless billions in LNG terminals and import US natural gas via tanker ships? And there we thought the EU was so keen on “saving the planet” (those tanker ships do burn bunker oil after all). Besides, this is – contrary to the very realistic pipeline – a completely unrealistic pipedream at this juncture. Again, as noted above, it simply makes no sense. Why would one not want ties with a supplier who even proved 100% reliable back when he was indeed considered the West’s worst enemy?

Conclusion:

Mr. Erdogan should probably be careful henceforth that he doesn’t fall prey to a sudden “Turkish Spring” or some otherwise named ”democratic revolution” that suddenly springs into being in the streets. Just saying. Not that we think much of Mr. Erdogan (we have reported on his autocratic style before, see “The Bizarre Power Struggle in Turkey” for some details), but the Turks are ruled exactly by who they wanted to be ruled by. Every electorate gets precisely what it deserves, and usually good and hard. Anyway, it seems that as long as Mr. Erdogan remains in charge, Turkey will continue to benefit from the side-effects of the conflict between the EU and Russia.

Maps and pics by: Gazprom