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The ‘South Stream’ Train Stops in the Balkans. For How Long?

Bulgaria is the first country against which the European Commission has launched infringement proceedings, over the construction of a section of the South Stream gas pipeline, writes Dariusz Kalan.

 The EC alleges that Sofia broke European Union public procurement law in choosing its section’s constructor without transparent procedures. The case is that after a six-month process, the tender, worth around €3.7 billion, was won by a consortium composed of Russian oil and gas company Stroytransgaz and a five Bulgarian firms, affiliated under the name Bulgarian Gazproekt Jug AD.

Two things are particularly shocking. First, that intergovernmental agreement between Sofia and Moscow granted preferences to Bulgarian and Russian companies. It is in clear contradiction with the TPA (Third Party Access) anti-trust rule that provides for an obligation on gas companies operating transmission and distribution networks for offering services to the third parties. And second: just guess who is the main shareholder in Stroytransgaz? It is Gennady Timchenko, who is on the U.S. sanctions list of oligarchs close to the Kremlin.

As a result, the left-wing Plamen Oresharski cabinet has already announced its readiness to move the start of construction, scheduled for the end of June. This was due to pressure from both the EU and the U.S. (Oresharski made his decision after conversations with three American senators and the U.S. ambassador, who had earlier threatened to impose sanctions on firms cooperating with Stroytransgaz), and the junior coalition partner’s threat that it would leave the government. Shortly thereafter, the possibility to suspend Serbia’s part of the investment was mentioned also by some members of the government in Belgrade.

Though, in fact, this is not the very first legal doubt regarding South Stream. The list is longer. The EC has already pointed out that the project is inconsistent with anti-trust policy and EU energy market liberalisation rules. Therefore, in December 2013, the EC challenged the intergovernmental agreements signed by Moscow with the countries through which South Stream will pass; these contracts gave both parties a monopoly on the construction and use of the pipelines, and the exclusive right to determine tariffs.

Doubts thus remain, but tools are different now. Proceedings against Bulgaria prove the intractable position of the EC, which thus widened the scope of its activities with completely new mean of exerting pressure: EU public procurement law.

What certainly helped to stiffen the EC position, was the crisis in Crimea, after which geopolitical doubts resounded, in addition to legal uncertainties. The annexation of the peninsula and engagement in separatist activities in eastern Ukraine have undermined the credibility of Russia as a predictable member of the international community. The EU Energy Commissioner spoke of the need to suspend investments in connection with the loss of confidence in Moscow, meanwhile the European Parliament adopted an amendment declaring that South Stream was unbeneficial to EU interests. The possibility to abandon the project was publicly considered by Italian company Eni, which besides Gazprom is the main shareholder in South Stream.

However, does it all mean that South Stream’s future is in danger? Well, not really. The EC has neither the will, nor the instruments, to halt construction of South Stream completely. True, it can try to change the terms of investment, so that it is beneficial for the whole EU, and remains in line with EU legislation. The infringement proceedings against Bulgaria indeed suggest that the EC is determined enough to implement anti-trust policy and the liberalisation of the energy market, which – if successful – could make South Stream more beneficial for the whole EU.

Also, even if Bulgaria and Serbia decided to suspend construction of their sections, it should not be expected that any of the countries in the region will withdraw fully from this project. For many of the Central and Southern European states that are dependent of Ukrainian transit, and which were affected to varying degrees by the 2009 gas crisis, South Stream remains the only real opportunity for diversification of gas supply routes. Governments thus prefer to increase the predictability of supplies at the cost of continuing energy and economic (also political) subordination to Russia.

This perception will rather not be changed by EC warnings, or by the conflict between Ukraine and Russia. The latter has shown that the primacy of economic interests is more important than long-term geopolitical reshuffles, and this  is why the region has generally distanced itself from EU sanctions, as well as from the Polish idea of an energy union.

In spite of all of that, the result of the EC procedure against Bulgaria will be a precedent and a reference point for further activity of the EU institutions. Despite the possible resistance of the big EU countries, whose companies are involved in the construction of the pipeline, the EC should continue, on the one hand, to mobilise Member States through the instruments of anti-trust law, or, at a later stage, the third energy package, while on the other hand putting pressure on Russia to renegotiate its intergovernmental contracts. Ongoing legal disputes also work to Moscow’s disadvantage, because it is forced to bear the additional costs.

Although the EC has to be prepared for a confrontational response from the Kremlin (the threat to limit gas supplies via Ukraine, or extension of the third and fourth lines of Nord Stream) due to its political and economic weakening by the Ukrainian crisis, the current restrictive policy should be maintained, even after the formation of the new EC.

Dariusz Kałan is Senior Research Fellow and Central Europe Analyst at the Polish Institute of International Affairs

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