Russia launches gas war against Turkey

Russia launches gas war against Turkey
A gas pipeline being built that will bring alternative supplies of gas to Turkey.
By Ben Aris in Moscow March 7, 2016

Russia has launched a gas war against Turkey reminiscent of the Kremlin’s decision to cut off Ukraine’s gas in the depths of the winter on January 1, 2006 – a move that caused homes to go cold across Europe and prompted the EU to diversify its gas supplies. Something similar could happen with Turkey. 

At the end of February Gazprom’s delivery of gas to a handful of Turkish independent gas traders suddenly fell by up to 50% in a matter of days, in what the victims claim is a blatant use of energy as a political cudgel to beat Ankara after the Turkish military shot down a Russian bomber in November last year.  

Gas industry players had some sympathy for the Kremlin’s decision to cut off Kyiv’s energy supplies 10 years ago, as Ukraine simply stopped paying its bills. But Turkey is both Gazprom’s second biggest market and, thanks to the high prices it has paid over the past few years, it is also one of its most lucrative. Turkey has been paying its bills in full and on time, and sources at the Turkish independent traders claim that Gazprom has unilaterally broken supply contracts without justification.

The trouble began shortly after Turkey shot down an SU-24M bomber that strayed into Turkish airspace on the Syrian border on November 24, apparently only for a total of 17 seconds. The Kremlin was incensed by the incident and lashed out at Turkey by imposing a raft of trade sanctions and “recommending” tour agents cancel holidays to Turkey, costing the country billions in lost revenues.

The dispute over gas supplies started shortly after when on December 8 Turkey’s private gas companies received a letter out of the blue from Gazprom Export, the Russian state behemoth’s international trading arm, stating that it was increasing the price for gas. Discussions on a price renegotiation, as provided for by the supply contracts, started politely enough, but then on February 24 Gazprom Export began to deliver less gas than the traders were requesting. Volumes initially fell by 10%, but as of February 24 total supplies from Russia to Turkey had dropped to 26.7mn cubic metres (cm), 40% less than in the period a year earlier, reports Vesti.

Turkey is highly dependent on Russian gas. With no domestic production of its own and little in the way of storage facilities, the country manages its energy supplies by depending on the flows of inbound gas from its largest suppliers. Turkey imports some 55% of its gas from Russia, most of this through the state gas firm Botas, but a third of it via privately owned companies. Gazprom delivered 27bn cm of gas to Turkey in 2015, roughly the same as in 2014. Since gas market liberalisation was launched in Turkey in 2008, about 10bn cm of this gas is now imported by the commercial companies and it is these that have been targeted by Gazprom.

So far Gazprom Export has been playing down the row, and because the private companies are negotiating with Gazprom they have also said little.

In a terse statement on February 25, reports Tass, Gazprom Export said: “Negotiations between Gazprom Export and independent Turkish gas importing customers continue in a constructive manner and the results of the negotiations will be announced after they are concluded. We are interested in maintaining stable contractual relations with our Turkish partners.”

But according to bne IntelliNews industry sources, the talks are becoming more political by the week. The Turkish government regards the reductions as an attack on the country’s energy supplies and is considering retaliating. The whole fight could easily escalate. “We are not in a full-blown gas war yet,” says a bne IntelliNews source close to the talks, “but this was definitely a shot across the bows.”

To make matters more complicated, bne IntelliNews can reveal that there is dissent amongst Gazprom’s top management about the strategy, as the company’s business is already under huge financial pressure.

Europe has spent the past decade successfully diversifying its energy supplies, not least because of Russia’s past actions with regard to Ukraine. US liquefied natural gas (LNG) deliveries will start arriving next year at several LNG terminals that have been built across Europe to receive Middle Eastern, Asian and North African gas. At the same time, the Ukrainian market is almost lost to Russia and its position in the Baltic market has also weakened. For Gazprom, Turkey remains one of the few large and lucrative markets it still has. Moreover, Turkey is a growing gas market. 

“Not everyone in Gazprom is happy with this attack on Turkey, as it is obvious that if you threaten the supplies of gas, you will spur a hunt for alternative energy supplies,” a bne IntelliNews industry source explains. “Turkish businessmen have their own energy schemes, just like the Russian businessmen, and while new LNG ports or expensive new pipelines are not economically viable compared to the current setup, now these schemes are a lot more attractive and viable for political reasons. If Gazprom Export gives further motivation by shaking supply security, some of them will get the green light. There are some in Gazprom that understand they are going to wreck one of their best markets.”

Blowing off gas

The way the gas business works is every day importers apply to Gazprom Export for the nominal amount of gas they need for the next day. Provided the volume is within the range specified in the contracts, the volume is always approved. The two sides are in daily contact, which is why the letter of December 10 demanding higher prices was a bolt from the blue; up until then, relations had been cordial and no one was complaining about prices. “There was no warning. Gazprom Export’s letter [demanding higher prices for gas] just arrived. And given the timing [just after the plane was shot down], it was seen as an aggressive act,” says a bne IntelliNews source in the Turkish gas industry.

The price revision process began in a normal way. The supply contracts include a six-month process for negotiating changes to the prices of gas above and beyond the formula that links gas prices to the current oil price. If the two sides fail to settle on a new price at the end of this process, then the dispute goes to arbitration. Indeed, this has already happened. Botas, the state-owned gas importer and wholesaler that handles 75% of Turkey’s total imports, is currently in arbitration over prices with Gazprom Export.

But tensions rose fast in February when Gazprom Export unilaterally reduced export volumes below contractual levels. Gazprom Export has indicated they had no choice, saying variously that the reductions were due to unpaid debts, the inclemently warm weather and the cancelation of a 10.25% discount. On the contrary, the Turkish government sees the price hikes as an attack on its energy security and is now wondering whether it should not retaliate, according to bne IntelliNews industry sources. Turkish Stream, a proposed gas pipeline from Russia to Turkey across the Black Sea, is already on hold; with Turkey already well ahead in its preparations to receive Azeri gas in 2018, this could kill that project completely.

The cuts are currently exclusively targeting the private companies. Botas did not receive the same letter from Gazprom Export because it is already in arbitration with Gazprom Export. If Gazprom were to try to increase prices against Botas, that would probably have a dramatic affect on the outcome of this arbitration, say experts.

Part of the reason that Gazprom Export is targeting private companies is because the Kremlin believes that is the best and easiest way to put pressure on Ankara to make a formal apology for shooting down the military jet. Turkish President Recep Tayyip Erdogan has so far refused point blank to offer one. “It seems that the Russians think that things work in Turkey the same as they work in Russia; that the private companies are run by oligarchs that are close to the government. So if you pressure the ‘Turkish oligarchs’, then you pressure Ankara. But that is wrong: Turkey doesn’t work like that,” says one insider.

Five Turkish-owned companies work in the private gas import sphere – Avrasya Gaz, Bati Hatti, Enerco Enerji, Kibar Enerji and Shell Energy – and while all enjoy good relations with the ruling AKP, all remain independent from the government as purely commercial enterprises. A sixth company, Bosphorous Gaz, is a Gazprom Export subsidiary.

So far the reductions have not caused any real problems for the Turkish economy thanks to an unseasonably warm winter: average temperatures in Istanbul were an exceptionally high 19°Celsius in the middle of February. But experts say that if there is a cold snap that drives up demand because of Turkey’s limited gas storage capacity, then major cities like Istanbul could face blackouts, as they have in past years.

That would cause huge harm to already strained relations, and force Turkey to follow Europe further down the road of making itself energy independent from Russia.


Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.