Russia’s South Stream gambit

Russia is using South Stream to create a phalanx of national governments with strong interests in challenging the EU’s authority.

The Ukraine crisis has thrown the spotlight on the West’s new frontline states: the Baltic republics and the central Europeans. An outsider might imagine that the beam of that light would show them united and braced for the next phase of the conflict, when Russia extends its divide-and-rule tactics to European Union and NATO members.

But that was not the picture that emerged from the annual Globsec security conference in the Slovak capital Bratislava last week (disclosure: I sit on the advisory board). A panel of the Czech, Hungarian, Polish and Slovak prime ministers was indeed the highlight of the event – but from a theatrical point of view, not a policy one. Poland’s Donald Tusk publicly rebuked Hungary’s Viktor Orbán for channelling Kremlin propaganda (he had implied that Ukraine was oppressing national minorities). Robert Fico of Slovakia flatly refused to consider higher defence spending and said that sanctions would be far too expensive for his country to implement.

The central European leaders made a virtue of the fact that they can disagree in a friendly and blunt way in public. Nobody can accuse them of hypocrisy. But to Russia, these countries present an increasingly tempting target. Bulgaria, notably, seems to have jumped firmly into the Russian camp. It supports Russia’s South Stream pipeline and disputes the European Union’s right to block it.

Other countries, notably Russia-friendly Austria and Hungary, like the project too. Orbán’s government feels hugely let down by the EU over energy policy in the past. Now Hungary has to look to the national interest: South Stream is admittedly a Russian pipeline, bringing Russian gas – but a route through the Balkans is still better than one that comes through unreliable Ukraine.

This is potentially a grave threat to the EU’s rule-setting ability – and it could point to one of Vladimir Putin’s real aims in the current crisis. The past 15 years do not suggest that he cares greatly (or at all) about Russians in Crimea (or anywhere else). But he does know that time is running out for his regime’s business model, which is based on the collection of rents (unearned income). These come primarily from energy exports. All elements of this model are under attack, mostly from the EU’s energy reforms.

These prohibit, for example, vertical integration – which is when one company owns as much as possible of the whole supply chain, and this makes price-gouging easy and hampers outside scrutiny. The link between gas and oil prices and the Kremlin’s much-loved country-by-country discriminatory pricing (which allows it to favour friendly governments and punish unfriendly ones) is also under attack. The EU is also expected imminently to launch its much-awaited prosecution of Gazprom for market-rigging (which will bring fines and possibly also lawsuits for compensation).

Scenting the danger, the Kremlin has long tried to undermine the EU’s energy policy. In the past, it relied on Germany to give it political cover. But that does not work anymore. Now it is using South Stream to create a phalanx of national governments with strong interests in challenging the EU’s authority.

Busting the EU’s grip on the gas market could open the way to a return to what Russia regards as a golden age, when it did long-term deals with countries, based on a murky mixture of commercial, political and what might euphemistically be called ‘private’ considerations. A new settlement with the EU might also lead to a political resolution of Gazprom’s difficulties over market-rigging.

Such a push would be the equivalent of Russian tanks rolling down the boulevards of Brussels. The EU will fight hard. It needs to.

Edward Lucas writes for The Economist.