A Lose-Lose Strategy
Brussels and Moscow are engaged in a lose-lose strategy. One may even wonder if both sides are actually out of their minds.
Recent South Stream developments show that both sides are stuck on their position, blind and deaf to each other. Russia’s reaction, to call for an adaptation of European legislation to South Stream is a clear over-estimation of their position in negotiations with the Commission. It is also a clear indicator that Russia seems not to get Brussels’ determination. After years of showing off its 'muscle', the European Commission should step back from its position? The European Commission has been showing publicly its strong-will not to concede anything to Russia. So when Russians ask for European legislation to adapt to South Stream, are they out of their minds? Instead, they should be asking for exemptions. Do they completely over-estimate their position? Is Russia’s strategy actually to be called a non-strategy (a wait-and-see-and-lose position), or a complete misunderstanding of reality? Or is it Brussels that does not understand the actual situation?
Last December, the European Commission finally got a mandate to negotiate with South Stream on behalf of the EU transit countries. Last January, on the 20th, at the occasion of the visit of Russian Energy Minister Novak to Brussels, a working group was finally created. All of this is interesting, but when looking at it, it only seems that the Commission keeps moving on while Russians keep dreaming. Is the Russian side that candid, and unable to get how the European Commission really works? Brussels knows how to make the other waste time, meanwhile working behind its back. After three long years, we only have a …working group?! That’s all? With all the hostility shown by the Commission since the very beginning, this working group should have been created much earlier. But hold on a second… is this group another “trick” from the European Commission to keep playing the clock against Russians? Is it supposed to make them believe that things are finally moving on for good?
Russia kept going quietly with the inauguration of the project, etc., irrespective of the Commission aggressive stance. Russia (naively!) thought that because the EU needs gas, and because It simply wants to sell its gas at a fair price, all would be solved for the best between reasonable people. In other words, Russians keep dreaming of a win-win partnership. Sadly, it seems to be the wrong understanding.
As emphasized by Mr. Alexey Grivach (Deputy Director for Gas Consulting Projects at the National Energy Security Fund), back twenty years ago, 100% of Russian gas was transiting through Ukraine, thus creating a huge transit dependency. It was a negative situation for both the European Union and Russia. Diversification of supply route is beneficial for both the European Union and Russia. Ukraine, in the middle, is in the position to blackmail both Russia and Europe. Ukrainians refused to pay market price, and instrumentalized their position in-between. On top of that, this in-between situation of Ukraine is being instrumentalized by Americans against Russia, no matter of what will happen with European gas supplies. Selfishness is the key word in American foreign policy.
A 'detail' in the current situation is not to be forgotten: the transit contract with Naftogaz ends in 2019, namely five years ahead from now. As of January 2020, Russia will no longer be under the obligation to deliver gas through Ukraine. But, contracts with European Member States such as Italy will still be running. Hence the question: what will happen if the European Commission maintains its blockage over the construction of South Stream? A gas infrastructure cannot be built overnight, so there will soon be a point where the critical deadline for South Stream to be built on time to timely deliver gas will be overdue. Worse than that, what would happen to European supplies if there is no gas running through Ukraine, and no gas running through South Stream? By showing off too much, the European Commission locked itself into a very tricky position. Publicly going backward would be a humiliation, but waiting until 2019 would be an even bigger humiliation for Brussels. Russia has no interest either in that uncertainty. And it is a fact that Gazprom supply contracts with its European clients have to be honoured, otherwise a large fine must be paid. It is also a fact that whether the gas flows through Ukraine or through South Stream is a concern for Gazprom, not for its clients who cannot be held responsible for Gazprom route choice. A non-renewal of transit contract with Ukraine and a non-construction of South Stream could hardly be considered as a force majeure. Brussels may count on that to force Russia to give up and fully surrender to whatever condition.
It is good to keep in mind that gas industry is a capital intensive business, and Brussels' regulatory choices present a high risk for any investors, including Gazprom. The lack of clarity from the EU regulatory landscape and the uncertainty over return on investments is high. And this does not help to secure supplies. Yet, interestingly, Gazprom still believes that the situation will positively evolve for both sides, and South Stream construction is to be held anyway, even with the risks of poor use and returns uncertainty due to EU regulation. The European Commission should stop hearing gas stakeholders and should start listening to their concerns.
Instability in the Middle East, and acknowledgement that there will be no shale gas revolution in Europe (only some possible developments), should remind Brussels that it is time now to look for a win-win strategy with Russia, beneficial for both sides. It’s time to work on a real exit to this deadlock situation, otherwise the European Commission's 'institutional ego' will crash on a hard reality.
European factories and household consumers can only hope that Brussels will realise the tricky situation it created, and finally that it will solve it for the best. Let’s hope that Brussels’ knight will come down on earth for good, and change the lose-lose situation into a win-win partnership.
Yasmina Sahraoui is based in Moscow and comments on natural gas developments. The views expressed are those of the author