South stream gas pipeline map

Russia and the European Union sit on opposite sides of the fence over Ukraine. The EU, which has already led one unsuccessful campaign to lure the former Soviet state into its trading bloc with the promise of more a favourable trading environment, remains steadfast in its support for a democratic process. Russia, on the other hand, is happy with the recent referendum vote for Crimea to be annexed by its eastern neighbour, which has been defined as illegitimate by the wider international community, to stand.
But even as the EU and Russia are engaged in a tug-of-war over Crimea, they are also working together on a project that when complete will neuter what little bargaining power Ukraine has left.

Stretching approximately 931 kilometres, the South Stream Pipeline is an ambitious infrastructure project between Russia’s state-backed energy supplier Gazprom and a number of European partners including EDF and BASF. Beginning in Russia before travelling under the Black Sea, through Bulgaria, Serbia, Hungary and Slovenia and ending in Italy, the pipeline is projected to enable the transport of up to 63 billion cubic metres of gas from Russia into the European market.

"South Stream is projected to enable the transport of up to 63 billion cubic metres of gas from Russia."

Taking Ukraine out of the Russian gas supply chain

Construction of the pipeline runs directly counter to Ukraine’s interests. Once completed, the country’s domestic energy supplies would remain under the control of Russia, but its role as the main transportation route for the gas that is sold into the much larger European market will cease to exist. Having already slashed the importance of Ukraine to the transport of Russian gas with the Nord Stream pipeline, which has been pumping Russian gas directly into Germany since 2011, it is now looking to wipe it out entirely with South Stream.

Ukraine relies on Russia for 60% of its gas supplies. In isolation, this means that Russia could inflict an energy crisis on it by simply turning off the taps. In reality though, things are more complex because in addition to the Russian gas that is pumped through for Ukrainian use, supplies for other European countries also go through the pipelines. The consequence is that while Russia holds the balance of power, its wider economic interests, in terms of selling its gas to the much larger EU market, rely to a degree on keeping Ukraine on side.

However, the completion of South Stream could leave Ukraine dependent on Russia for its own supplies, but completely cut out of the supply chain that takes Russian gas on to the wider market.

If Russia shuts down supply, how will the void be filled in the short-term and what would Ukraine’s energy future look like without Russia? .

This has led many to question whether the EU, and more specifically its member states that are involved in the project, should continue to support the project. The argument reached new heights last week when it was reported that European Commission energy commissioner Günther Oettinger told a German newspaper that the project would be put on hold until the Ukraine situation had been resolved.

The pipeline serves to insulate EU member states from becoming indirect casualties of conflicts between Russia and Ukraine, so there remains a strong incentive for it to provide continued support. But continued backing could become unpalatable within Europe if economic sanctions against Russia, so far in the form of asset freezes and travel bans, fail to prompt President Putin’s government to back down.

Bearing down on Russian gas dominance

In its paper on the implications of the conflict, the Oxford Energy Institute envisages two separate outcomes with respect to EU-Russian collaboration on South Stream. In the first scenario, economic logic prevails and the two parties continue to collaborate on the project to secure Russian revenues and European supplies. Under the second scenario, political will takes the lead, and South Stream is used as a diplomatic weapon to try and knock Russia into shape over Ukraine.

"Russia could inflict an energy crisis on Ukraine by simply turning off the taps."

The Centre for Security Studies in Zurich called for the EU to impress the values of competition on Russia by forcing it to open up access to the pipeline to other suppliers; Russia could apply for an exemption that allows it sole use of South Stream. In the long term, the paper also calls for the EU to implement a number of actions to try and reduce its reliance on Russian gas.

It recommends that the Transatlantic Trade and Investment Partnership (TTIP), a bilateral trade agreement between the EU and US, be processed more quickly in order to make it possible for US LNG imports to come into the market. Further, it calls for a more rapid exploitation of European shale gas reserves.

The current conflict in Ukraine is a complex problem that will almost certainly require a complex solution that strikes a balance between the needs of Russia and the European Union. The problem for Ukraine is that while it remains unallied to either side, there remains a very real prospect of it being left out in the cold.

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