WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Listen to the interview (in German) as it was broadcasted on 2 December, 2014.

Obituary to South Stream

Vasily Astrov

Russia’s decision, announced on 1 December 2014, to stop the South Stream gas pipeline project was not a complete surprise, following an earlier statement by Russian Economics Minister Alexei Ulyukaev questioning the project’s wisdom. Still, it came as a shock to many nonetheless. What were the reasons behind Russia’s sudden turnaround?
The stated reason behind Russia’s decision to abandon South Stream – namely, the reluctance of the European Commission to give it a ‘green light’ – may be valid, but it alone cannot explain why the project has been officially dropped only now. After all, the European Commission has been opposing South Stream already for a number of years, citing both competition concerns (alleged violation of the EU’s ‘Third Energy Package’ regulation requiring an unbundling of gas production and transportation) and the need to diversify EU energy supplies away from Russia (Russia’s Gazprom covers now about 30% of EU gas consumption).
More likely, it was the new additional factors on the Russian side which sealed the fate of South Stream. Already for a long time, the project had looked more political than economic in nature. The prime Russian motivation behind South Stream had been to expand its ties with Europe (or tighten its ‘grip on Europe’, in the view of Russia’s critics) via increased energy supplies, while the economic profitability of this hugely expensive and technically ambitious undertaking had been increasingly put into question by the declining gas prices in Europe (thanks to the inroads made by liquefied natural gas (LNG) and indirectly also the ‘shale gas revolution’ in the United States). Therefore, the decision to drop South Stream indicates that Russia may have given up on its ‘European vector’ of integration, reflecting a profound shift in Russia’s priorities in the current environment of tensions with the West over Ukraine. The recent impressive breakthrough in Russia’s ‘energy dialogue’ with China – with one long-term gas supply contract already signed and another one in the making – is another confirmation of this shift in priorities. Finally, the Western financial sanctions imposed against Russia earlier this year may have played a role as well, since they made borrowing, and therefore investing, for Russian companies more difficult – even for Gazprom, which is not on the sanctions list (though Gazpromneft, the oil subsidiary of the gas giant, is).
The decision to drop South Stream may be not much of a problem for the EU as a whole: although the EU’s gas import needs will continue rising as domestic production gradually dries up, they will likely be satisfied by the increased supplies of LNG and by gas shipped via pipelines from other countries, such as Azerbaijan. However, for the European countries which directly participated in the South Stream project: Bulgaria, Serbia, Hungary, and also Austria (as well as the companies involved in its construction), the project’s death is rather bad news. Not only will they not be able to benefit from transit fees, but some of them – notably Bulgaria, but also other Southeast European countries – will continue to depend on Russian gas supplies through unstable Ukraine, potentially threatening a repeat of the past episodes of gas supply cuts.