COMMENT: Hungary to soon join Russia's South Stream gas pipeline

By bne IntelliNews February 25, 2008

Ariel Cohen in Washington -

Sources in the Hungarian government who requested anonymity have disclosed that after prolonged secret negotiations, Hungary is about to sign onto Russia's South Stream gas pipeline project. Hungary's participation in South Stream, together with Serbia and Bulgaria, could spell the end of the Nabucco gas pipeline project, which is being heavily backed by the US and EU as a way to diversify Europe's gas imports.

Russian media are now reporting that presidential candidate Dmitry Medvedev will visit Serbia and Hungary even before presidential elections scheduled for March 2 to sign the South Stream deal, giving him a major foreign policy achievement and international visibility, especially during the Kosovo crisis.

Russia has put a lot of work into fostering its relationship with Hungary; Russian President Vladimir Putin has met Hungarian Prime Minister Ferenc Gyurcsany five times in the last three and a half years - a frequency unprecedented in the history of the two countries' diplomatic ties.

Ties that bind

Budapest's tilt toward Moscow suggests that in Central and Eastern Europe the old Soviet-era ties - between "fraternal" parties and intelligence services - are ties that bind. A former young communist leader, Gyurcsany has never outright rejected South Stream, even though Hungarian opposition figures declare it would clearly be in Hungary's best interest to diversify its natural gas supplies and reduce its dependence on Russian energy.

Last March, Gyurcasny called Nabucco a "dream" and Russia's South Stream pipeline a "reality." His country, he said, needed reality, not dreams. A barrage of complaints from its EU and Nato allies made the Hungarian government more cautious and secretive in its pursuit of deals with Russia. "It appeared that Budapest was becoming more serious about the Nabucco project. Instead, it seems Hungary only learned to better conceal its intention to make a deal with Russia", says a senior Hungarian politician who requested anonymity.

The Gyurcsany government knows that Washington, Brussels and the majority of its Western partners in Nato and the EU strongly disapprove of Hungary's participation in the project. On February 22, Matthew J. Bryza, deputy assistant secretary of state met with EU officials including Energy Commissioner Andris Piebalgs in a last-ditch attempt to accelerate Nabucco and block South Stream. He criticized the high prices Europe is paying for Russian gas and said that, "helping Europe diversify its gas supplies has become extremely urgent". Yet it's what the Europeans and Russians do, not what Americans say, that defines the balance of energy power in Europe.

Moscow's pipeline chess game

Russia has been aggressively promoting the Black Sea's South Stream pipeline and its northern counterpart, the undersea Baltic pipeline Nord Stream. In May, Putin went to Austria to secure deals that would guarantee the Russian pipelines' integration into the European gas network through a giant gas hub аnd storage in Baumgarten. In December, on his last official trip abroad during his presidency, Putin got Bulgaria to sign onto the South Stream project, and an agreement with Serbia followed.

Bulgaria and Serbia were two brilliant grandmaster moves in Moscow's chess game. While Romania hesitated - its politics is partially paralyzed with an internecine struggle - Serbia was eager to repay Russia for support in the Kosovo crisis by allowing a 550-mile South Stream leg through Serbian territory. With rising Russian influence in Bulgaria and Serbia, it was only a matter of time (and money) to find the appropriate partners among these countries' rulers and to finalize the deals. And regardless of who will rule Italy after the April elections - Silvio Berlusconi or Romano Prodi (Putin is friends with both) - it's only a matter of time before Italy signs up as well. Italian oil company Eni is already a partner.

When it comes to energy, Moscow has never been satisfied with promises, commitments or guarantees. It has always sought key assets that provide real control over gas transmissions. If a country is unwilling to provide such assets, Russia refuses to offer it the opportunity to transport Gazprom's gas.

In Bulgaria, Gazprom obtained 50% ownership over the Bulgarian section of the South Stream as part of the pipeline deal. In Serbia, it purchased NIS, the state oil and gas company, while in Austria it received a stake in OMV's gas hub at Baumgarten, one of the largest of its kind in Europe.

EU's weak answers

The EU is still trying to push through its own planned pipeline, Nabucco, which would transport gas from the Caspian Sea littoral states - including Azerbaijan, Turkmenistan and possibly Kazakhstan - to Europe. Even Iraq could join in the future, Bryza says. But South Stream would saturate the market, making Nabucco economically unviable. Without Nabucco, the EU can't diversify its gas supplies. Essentially, all of the Central European members of the EU would remain dependent on Russia for gas for at least another generation. If the "new" EU members become more dependent on Russia's gas supply, they would lose a strong bargaining position with Russia during diplomatic negotiations at a time when Moscow is trying to reclaim its influence in the region.

According to knowledgeable Hungarian sources, negotiations between Budapest and Moscow are nearing an end. The parties are discussing two scenarios, both of which would involve Hungary participating in South Stream. One of them would call for Budapest to reverse the gas flow in Hungary's only small gas link to the West. Thus, the Hungarian energy company Mol's Baumgarten pipeline's flow would be reversed to service South Stream. Gazprom would take either a near 25% stake in the country's gas transmission network or a 50% stake in the new pipeline.

During a recent discussion of the Gyurcsany government's national energy policy paper, an opposition leader questioned the lack of commitment to any of the three projects to supply the country with gas: Nabucco, Blue Stream/South Stream, and a liquid natural gas (LNG) terminal at the Adriatic Sea.

The most troubling part of the programme from the point of view of Hungary's energy security is its lack of commitment to Nabucco. The concept says that, "among the alternatives for diversification, it is not desirable to give priority to any of the projects."

A senior government official claimed that the Hungarian government is not in a decision-making position, as the projects will be decided based on business interests and neither one's primary aim is to meet the demands of the Hungarian market. However, the document admits that, "it is necessary to ensure the support of the Hungarian government to projects of joint interest to be achieved in the forming energy political field of the European Union." Yet the language is vague and fails to support the Nabucco pipeline or the LNG terminal.

If this deal goes through, Gazprom - which even its Russian masters openly recognize is not just a corporation but an important tool of Russian foreign policy - would gain control over a key passageway of an EU and Nato member's energy infrastructure. As a result, Russia would gain the ability to leverage its energy power over most of Europe.

Only a vigorous joint EU-US effort can prevent this deal and save the Nabucco pipeline. Hungary is emerging as the final link in Russia's strategy to ensure that Nabucco will die while South Stream will live.

Ariel Cohen, Ph.D., is Senior Research Fellow at the Heritage Foundation in Washington, D.C.

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