23 January, 2008: Keeping up the theme of energy-related posts, OAO Gazprom’s recent pipeline deals deserve some discussion.

Last week, Gazprom, Russia’s gas monopoly, agreed to build a 550-mile pipeline, dubbed South Stream, running under the Black Sea into Bulgaria. The new pipeline, which will cost $14.7 billion to construct, will supply Europe with upwards of 1.15 trillion cubic feet of natural gas a year, and will further cement Russia’s dominant position in Europe’s energy market. Moscow currently supplies 40% of the European Union’s gas.

To make matters worse from the perspective of Brussels, Gazprom reached a provisional pact with the Serbian cabinet to buy a 51% stake in the country’s state-owned oil company, NIS, for around $600 million. The Moscow-based company also agreed to invest over $700 million in modernizing Serbia’s energy infrastructure and promised it a major role in the new South Stream system.

These two deals, coupled with an agreement signed late last year between Russia, Turkmenistan, and Kazakhstan, seriously undermine the Nabucco pipeline, which the EU and U.S. hoped would carry natural gas from the Caspian through Turkey and into Europe (see diagram at the bottom of the page for illustration), thoroughly diversifying its supply.

What is particularly interesting about the Serbian deal is that there was no tender process, whereby companies could make bids; Gazprom’s bid was the only bid. Indeed, Austria’s biggest energy company, OMV, had expressed interest in the Serbian company but was unable to pursue a deal for lack of a bidding process. Furthermore, according to Serbia’s Economy Minister Mladjan Dinkic, who opposed the deal, “the price could be five to eight times higher than the Russia offer” had a tender process been undertaken.

Analysts point out that the deal was rooted in politics, but what are the issues? First and foremost, the lack of a tender process was Belgrade’s revenge for the West’s position on Kosovo’s independence. It could be more though. Seeing Russia as its only strong ally in this battle—and also having significant leverage over the EU—pro-Moscow Prime Minister Vojislav Kostunica is currying favor the Kremlin. By doing so, he could be calculating that the E.U., and maybe even the U.S., will think twice before recognizing Kosovo for fear of agitating the Bear.

These moves are part of a power play that is not limited to the Balkans though. At the moment, Russia and the West are trying to draw up their spheres of influence in the former Soviet Union. Following the collapse of the Iron Curtain, an emboldened West was able to dictate the terms of the relationship, expanding the North Atlantic Treaty Organization (NATO)—which Moscow sees as an avowed enemy—and the European Union to include states that were formally part of the USSR—Poland, Czech Republic, Estonia, Latvia, etc. Yet, as energy prices have climbed and Russia’s economy has strengthened, the Kremlin has pushed back against what it sees as encroachment on its historical turf. From Ukraine’s membership in NATO to the stationing of U.S. missile defence installations in the Czech Republic and Poland, Moscow can see Washington and Brussels creeping ever closer.

In response, Moscow has been using its energy supplies—it is the world’s largest supplier of natural gas—to pull individual states away from the main bloc. Last year, Gazprom agreed to a 50-50 joint venture with Italy’s ENI SpA to build the South Stream pipeline. In the north, Russia’s gas monopoly has deals with Germany and the Netherlands that ensure it has a dominant position in Europe’s energy future. The two major pipelines—South Stream and Nord Stream—have the added benefit of taking power out of the hands of transit states like Poland, Ukraine, and Belarus. Critics fear that Moscow will use its energy monopoly, or “energy whip,” in Europe to exert political influence, as it has in the past.

Again, as I have noted before, these actions look to be well-thought out strategic moves by a shrewd player, Russian President Vladimir Putin. What is interesting about all this is that Russia’s dauphin, Dmitry Medvedev, accompanied Mr. Putin on this recent shopping spree. Indeed, he has headed Gazprom’s board of directors since 2002. So what does this mean for Russo-EU energy relations when Mr. Medvedev inevitably takes office after the presidential elections? What can the EU do to improve its negotiating stance vis-à-vis Russia? Is Nabucco dead in the water?

Send us your thoughts at editors@diplomaticourier.org.

Map from BBC.com