Slovakia's precarious balancing act

By bne IntelliNews July 11, 2014

Tim Gosling in Prague -


Many EU states have baulked at antagonizing Russia by backing sanctions over its role in the Ukrainian crisis, but Slovakia is alone in actually blocking the West's efforts to offer direct support to Kyiv. Questions are now being asked in Washington about where Bratislava's loyalties really lie, especially given the series of deals between Slovakia and Russia that are currently on the table.

With Russia using its exports of natural gas as a tangible means to pressure cash-strapped Ukraine, the EU has been pushing to supply Kyiv with cheaper supplies – albeit the gas is still actually bought from Moscow. The likes of Poland and Hungary are sending small volumes by reversing pipeline flows, but Slovakia, which sits on the main line that carries Russian gas through Ukraine to Europe, is key.

The situation moved up a gear in June, when Moscow cut gas supplies to Ukraine over its unpaid bills. That leaves the EU exposed, with Ukrainian pipes carrying around 40% of Russian gas headed for the bloc, and Kyiv likely to be tempted to siphon off some gas should it still be cut off come the winter.

While Poland and Hungary – which began reversed supplies in 2012 – are sending around 6bn cubic metres a year (cm/y) combined to Ukraine, Slovakia could potentially boost that to 36bn cm/y, according to estimates. That would all but cut the threat of another winter spent shivering for the states at the eastern end of the EU, as happened during the Russian-Ukrainian "gas wars" in 2006 and 2009. The bigger point is that it would severely dent Moscow's leverage over Kyiv as it looks to move closer to the EU and out of Russia's orbit.

However, despite years of negotiation, Bratislava refuses to play ball. It claims that reversing one of the four pipelines on the main line would be at odds with its contract with Russia's state-controlled gas exporter Gazprom. It has also slammed Ukraine for its conduct in the "gas wars," when it diverted flows headed west for its own use.


That stance is not so surprising given Ukraine's track record over the gas trade, suggests Sharon Fisher from IHS. "Slovak policymakers are not happy with Ukraine since 2009, and they remain skeptical about the interim government," she says.

Weeks of talks over reversing the pipeline early in the year produced little more than bickering and vitriol. Then, on April 9, US Vice President Joe Biden rang Slovak Prime Minister Robert Fico. Slovakia agreed on April 22 to open a disused pipeline. However, that offers a capacity of just 10bn cm/y. Moscow was quick to give the deal its blessing to the limited route. Lukewarm responses out of the US and EU were just as instructive.

Bratislava has been open throughout that its own gas supply – of which over 80% comes from Russia – takes priority. Slovakia's role as a transit state for around $20bn worth of Russian gas flows to Europe is a major earner for the budget, but it faces rising threats to that business due to the crisis in Ukraine. "Energy is the top priority for Bratislava," says Otilia Dhand at Teneo Intelligence. "There are deep connections with Russia across the sector."

Bratislava received its reward in April, when Gazprom handed it a discount on gas imports. The reported price cut of 10% leaves the country paying around $340 per 1,000 cm, according to estimates, at the lower end of the scale among European states.


More immediately, keeping in with Moscow is vital right now as Fico faces rising political pressure at home. The PM was stunned in May when he lost the presidential election to political rookie Andrej Kiska. The years of tough economic conditions and an authoritarian bent on the part of some bigwigs in Fico's Smer party cut into his support.

The price cut for gas imports hands the government a potential route to stem the losses. A double-digit drop in gas prices for households in 2015-16 was announced at Smer's congress on June 28, as part of an "anti-austerity" package worth a reported €250m.

Surprising many, the left-wing Smer has pressed hard to keep Slovakia's precarious fiscal situation on track since coming to power four years ago. Any space to loosen the belt has been hard earned. "Fico is only interested in keeping gas prices low," suggests Fisher. "With [national gas utility and importer] SPP back in state hands [since June], it will be a challenge to lower gas prices for a budget already under huge strain."

The move appears a gamble on Slovaks being more worried about their wallets than about the Russians. "Slovaks are generally pro-western and worried about Russia and Ukraine," suggests Fisher. Dhand points to a recent survey in which 83% of respondents expressed their disagreement with Russian policy in Ukraine.

Cat amongst the pigeons

The stakes could yet rise, however. Reports of deals between Russian banks and the Slovak energy sector, even as the US and EU consider further sanctions against Russia, are prompting speculation that deeper cooperation could be on the cards.

On June 15, even as Russian banks struggled to secure any kind of deal in the US and EU, SPP-Distribucia – 51% owned by Bratislava with Czech-based energy group EPH holding the remainder – announced it had selected VTB Bank to run a €500m bond issue. However, it was an agreement a week earlier by another Russian state-owned banking giant, Sberbank, to lend dominant power producer Slovenske Elektrarne (SE) €870m that put the cat amongst the pigeons.

Analysts note that such a size of loan is unusual for a Slovak company without syndication. On top of that, it's around the volume of investment needed for Slovakia to finish the long-delayed expansion of the Mochovce nuclear power plant.

The deal has sparked much speculation in the Slovak press that the loan points the way to a potential Russian buyout of the 66% stake in SE held by Italy's Enel. Fico has been highly critical of Enel for helping to raise the cost of living since it bought into SE in 2006 for €840m, while the Mochovce project is seriously behind schedule and over budget.

Enel said on July 10 that it will look to sell a portfolio of overseas assets, including SE. Writing in Slovak daily SME on June 12, Economy Minister Tomas Malatinsky, who has since lost his job in a cabinet reshuffle, said the Russian state nuclear agency Rosatom is a potential buyer.

Any sale would require Bratislava's approval, and several other suitors are understood to be keen, not least Czech utility CEZ. Rosatom has been sniffing around Slovak nuclear assets for some time, but handing Russia ownership of an EU nuclear facility may be a step too far even for the strong pro-Russian contingent in Bratislava.

Old school ties

At the same time, both Dhand and Fisher say they wouldn't be surprised to see Slovakia strike more deals in the energy sector with Russia, given the strong Russian ties of senior officials in the government. "Slovakia's alignment with Russia predates its stance in the Ukraine crisis," says Dhand. "The ruling circles include people who traditionally have good relations with Russia, are former Communist Party members or studied in Moscow. That includes Fico."

Another prominent official with strong connections in Moscow is Foreign Minister Miroslav Lajcak. His trip to Moscow on May 18-19, which saw him meet with individual officials included on the lists of western sanctions, raised eyebrows. "Lajcak's visit made everyone sit up and take notice," notes Dhand.

Washington, in particular, is casting an increasingly wary eye over Bratislava, confirms Fisher, who is based in the US capital. Although she says that US officials have come round to understand Slovakia's caution over Kyiv's track record on paying its gas bills, other issues have clouded the picture.

"For Washington, the most damaging thing was Fico's comments on Nato troops," says Fisher, referring to the rejection by the PM on June 4 of US President Barack Obama's proposal to boost the US military presence in Central and Eastern Europe, and compared the idea – which has been heavily backed by Poland and the Baltic states – to the Warsaw Pact invasion of what was then Czechoslovakia in 1968. Opposition parties have accused the PM of "acting like a Russian agent."

While Czech officials had made similar comments the previous month, Prague is seen differently in the US, Fisher says, even if that's not entirely fair, or a view shared in Brussels. "There's a long-standing fear of Slovakia going back to the Meciar era," she says referring to the anti-market authoritarian PM that governed Slovakia for most of the 1990s.

While Brussels is fairly unperturbed – indeed Slovakia was amongst the first in "new Europe" to adopt the euro while euro-scepticism stalks the Czech Republic –Fisher adds that "Washington has always viewed the Czechs as more reliable."

Balancing act

The suspicions over Slovakia's loyalties also appear a little unfair given the stance of many other European states. While the likes of France and Germany have strongly criticized Moscow's role in Ukraine, they have spoken out against sanctions in the interests of maintaining economic ties. Hungary, Austria and Bulgaria are also fighting against Brussels' efforts to halt the construction of the massive Russian-led South Stream gas pipeline, which would bypass Ukraine to deliver Russian gas to a hub in Austria. All three states would host the South Stream pipeline on their territory, providing access to gas as well as transit fees.

However, the South Stream issue only illustrates the fine line that Slovakia appears to be trying to tread between east and west. Indeed, it's a similar balancing act to that which Ukraine practiced over the past 20 years.

On the one hand Slovakia appears to be deepening its dependence on Russia when it comes to energy and the economy. "Slovakia has not been moving quickly enough to diversify," agrees Fisher, "and is potentially digging itself into a hole." At the same time, analysts and officials worry the economy is over-reliant on the Eurozone for exports.

On the other, the country risks losing huge revenues should South Stream go ahead, as Russian gas flows that bypass Ukraine will also bypass Slovakia. "It's somewhat surprising the Slovaks didn't manage to get on the South Stream route somehow," says Fisher. "Everyone else in the neighbourhood is grabbing a slice."


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