Wednesday, 03 December 2014

South Stream, Russia and Turkey: What Does The Deal Mean?

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By Stephen Blank (vol. 7, no. 22 of the Turkey Analyst)

The announcement that the original South Stream is being closed, and is instead going to be redirected through Turkey, is of epochal significance. However, 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. 

BACKGROUND:  In Ankara, on December 1, 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 63BCM annually of natural gas when completed.

The hope is that a hub could then be opened for Southeastern Europe at the Greco-Turkish border.  Undoubtedly, Turkey stands to gain from the redirection of South Stream, while for Russia it represents a setback.  But the implications of the redirection are infinitely more complex, with reverberations for many of these two countries’ neighbors as well as for them.

The South Stream 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 Trans-Anatolian pipeline to Turkey and into the Balkans (TANAP).  The question is whether that pipeline will absorb more shipments or if the new South Stream will preemptively 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. While Turkey stands to benefit from an increase of Russian gas export and of the promised 6 percent price reduction, there are also complications: this outcome makes it potentially more difficult to increase both Azeri supplies to Europe as well as reducing 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. 

IMPLICATIONS: 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 December 1, 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.  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.  But if the price continues to fall on global markets and stay low for a long time, 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 ruble’s accelerating depreciation, and falling global energy prices, Turkey’s position as an importer has grown stronger with regard to Russia.  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. 

But 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 European Union and the United States.  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.

CONCLUSIONS: 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 are at odds with Russia’s objectives. Yet both sides want to assure that their convergent economic and energy relations are prioritized.

Nonetheless, it remains unclear if and how long Russia and Turkey can keep dancing this complicated minuet, even if the South Stream project actually gets off the ground.  Its economic justification remains unproven and its attractiveness to both sides remains above all its geopolitical potential, not necessarily its economic logic.

The existence of a dedicated pipeline network from Ukraine westward and the construction of the Azeri-Turkish TANAP-TAP network, and the continuing construction of network of interconnectors throughout Eastern Europe militate against South Stream being economically necessary. And this apart from the fact that in its original version its projected prices went through the roof and are likely to do so again.  At a time when global energy prices are going through the floor, the economic justification behind this deal is shaky.

Moreover, it is by no means certain that Russian and Turkey can pursue antagonistic policies geopolitically and simultaneously maximize the benefits of their economic cooperation. Neither is it likely that Azerbaijan, which in the past has demonstrated that it has leverage on Turkey, will simply acquiesce in what appears to be a Turkish constriction of the opportunities and potential for their partnership to flourish economically and politically. 

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.

Stephen Blank is Senior Fellow at the American Foreign Policy council

(Image Attribution: Gazprom)

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It is published bi-weekly, and includes topical analysis, as well as a summary of the Turkish media debate.

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