Putin's cancellation of South Stream pipeline brings relief to Ukraine

12/2/2014

Putin's cancellation of South Stream pipeline brings relief to Ukraine

LADKA BAUEROVA 

KIEV (Bloomberg) -- President Vladimir Putin’s decision to cancel the $45 billion South Stream gas pipeline project is a boost for Ukraine, where the faltering economy depends on the transit of Russian natural gas to Europe.
 
The 2,446-kilometer pipeline, designed to link Russia directly with the European Union through the Black Sea, would have deprived Ukraine of leverage against its bigger neighbor. Now, Russian gas export monopoly OAO Gazprom will still rely on Ukraine’s network to supply customers in Europe.
 
Calling South Stream “an unnecessary political project of the Russian Federation,” Ukrainian Prime Minister Arseniy Yatsenyuk today urged European Union and U.S. partners to invest in his country’s pipeline system.
 
Ukraine’s Soviet-era pipeline network, which ships half the gas Gazprom’s exports to Europe, has long been a focus of the relationship between Russia and Europe. By successfully blocking South Stream, the EU has signaled political support for Ukraine and boosted its economic prospects.
 
The EU started to challenge the agreements nations hosting South Stream had with Russia as early as 2010 and kept up pressure on member states, including Bulgaria, to stay within European law. As Russia’s annexation of Crimea and its support for armed separatists in eastern Ukraine further soured relations with the 28-nation bloc, the new pipeline became less and less likely and Putin scrapped the plan yesterday.
 

Commercial Partners

“The Russians thought they would be able to go ahead with the project thanks to involvement of western European partners like Eni or EDF,” said Vladimir Bartuska, the Czech government’s envoy for energy security, naming some of commercial partners in South Stream. “But that would have meant playing according to their rules.”
 
Reactions were less clear-cut in other parts of eastern Europe, which depends on Russian gas. From Hungary to Bulgaria, the former Soviet satellite nations have pinned their hopes on South Stream, worried that Russia could disrupt supplies through Ukraine as conflict between the two nations drags on.
 
“For eastern Europe the scrapping of South Stream complicates the region’s energy security, making it all the more dependent on the Ukrainian pipeline,” Andras Deak, an associate fellow at the Hungarian Institute of International Affairs, said by phone. “The EU and the IMF effectively will have to finance Ukraine’s gas bill now if they want to make sure that gas keeps flowing through Ukraine to Europe.”
 

Balkan Nations

Among the most disappointed is Bulgaria, which was hoping to become an important transit country earning 400 million euros ($496 million) a year in fees, according to opposition Socialist lawmaker Zheluy Boychev. Neighboring Serbia planned to earn 200 million euros a year, national monopoly Srbijagas said last year.
 
Both Balkan nations are still reeling from memories of Russian energy cuts during unusually cold winters in 2006 and 2009 that led to severe shortages.
 
Earlier this year, Bulgarian authorities halted preparatory work for South Stream only under intense pressure from the U.S. and the EU, which argued that the project didn’t comply with its laws on pipeline management.
 
“The EU position on south stream doesn’t change,” European Union foreign policy chief Federica Mogherini said today. “Obviously anything that goes on EU territory with South Stream must follow EU rules.”
 
Putin’s announcement is likely to cause consternation in Hungary, which openly defied the EU last month by adopting laws that gave a green light to the South Stream project.
 

Energy Security
 

“Hungary needs to explore further opportunities on how to ensure energy security in the long run following Russia’s decision on South Stream,” Foreign Minister Peter Szijjarto said, according state news service MTI.
 
Austrian oil and gas company OMV AG, one of Gazprom’s South Stream partners, said Europe should use gas as a political weapon.
 
“It’s very dangerous to turn gas into a geopolitical weapon,” Chief Executive Officer Gerhard Roiss said. “Europe desperately need gas highways that traverse borders.”
 
Halting the project is also a setback for Gazprom, which had spent 487.5 billion rubles ($9.4 billion) in the last three years on South Stream and upgrading the Russian pipelines that would have supplied it, according to bond filings. Gazprom’s partners in the Black Sea section of the pipeline were Eni SpA, Electricite de France SA, and Wintershall AG.
 

Economic Crisis
 

Gas transit fees remain a vital source of income for Ukraine, grappling with economic crisis, wracked by a war with pro-Russian separatists in its eastern provinces and locked in a price dispute with Russia. A year after Ukrainians rose up against pro-Russian President Viktor Yanukovych, the fragile new government led by President Petro Poroshenko is racing to avoid default.
 
Ukraine relies on a $17 billion loan from the International Monetary Fund to stay afloat. The hryvnia has lost 45 percent against the dollar this year, the biggest decline among all currencies tracked by Bloomberg and central bank reserves are at $12.6 billion, the lowest level since March 2005.
 
To improve the security of transit through Ukraine, which accounts for about half of Russian shipments to Europe, the European Investment Bank agreed yesterday to provide 150 million euros for renovating the country’s pipelines.
 
Prime Minister Yatsenyuk called on western companies to invest in his country’s infrastructure.
 
“This has to be a joint approach to ensure energy security for both Europe and Ukraine,” he said in Kiev.

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