Tepid Turkish Delights

Medvedev’s Visit to Turkey Was Expected to Continue Russia’s Recent Winning Streak of Foreign Policy Successes, but Turkey May Be Spoiling the Party

Out of about 25 bilateral deals that the Kremlin’s top Foreign Policy Adviser Sergei Prikhodko said were ready for signing during President Dmitry Medvedev’s two-day visit to Ankara last week, only 17 made the mark. Missing were crucial agreements giving a green light for construction of Gazprom-backed South Stream and Blue Stream-2 pipelines, which are expected to pump Russian gas under the Turkish Black Sea to Bulgaria and then on to other European countries. On the eve of the visit Prikhodko billed the projects as "promising areas of Russian-Turkish cooperation," touting them as "the most significant commercial contracts” relating to the duo of Gazprom and Rosneft. But they were not to be – at least for now.

In clear reference to work still undone, Medvedev said after talks with Turkish Prime Minister Recep Tayyip Erdogan, that Russia and Turkey "will be able to move forward in the implementation of projects" which "are aimed at strengthening energy security of our countries and allowing the opening of transport corridors to supply Europe and other countries more efficiently." In an apt assessment of Medvedev’s visit, the Ukraine’s Ura-Inform Rating Agency wrote: "The Turkish authorities did not succumb to exhortations of President of Russia Dmitry Medvedev to accept the document, which would allow construction of the Russian-Italian South Stream pipeline on Turkish territory."

In August of last year, Prime Minister Vladimir Putin and his Turkish counterpart agreed on an environmental study in Turkish territorial waters for the South Stream pipeline, a joint venture between Gazprom and Italian oil and gas firm Eni. However, Russia has so far not received any permission for construction of the pipeline, which will compete directly with the European Union-backed Nabucco. Gazprom spokeswoman Anastasia Ivanova downplayed the seriousness of this problem, however, saying that the parties never intended to sign any agreements on gas pipelines during president Medvedev’s visit. “Russia and Turkey signed an intergovernmental agreement last year by which Turkey is expected to give permission for the South Stream project before November 1,” Ivanova said. “Since the agreement was signed, nothing has happened to invalidate it.”

But whatever the official spin, it is obvious that the parties have so far failed to reach agreements on those key issues, experts say. “Relations between Russia and Turkey are very volatile and hit bumps at every turn,” Konstantin Simonov, the head of the National Energy Security Fund, said. “Take the Burgas–Alexandropoulos pipeline for instance. Russia decided to build the Burgas–Alexandropoulos pipeline because Turkey did not allow our oil tankers to pass through the Bosporus and the Dardanelles. That was why we had to bypass the country and transport our oil through Bulgaria and Greece.”

In what could deal a fresh blow to the South Stream project, the Turkish Prime Minister arrived Monday in Azerbaijan to sign a deal for natural gas that could turn the Shah-Deniz gas field in Azerbaijan into a possible source for the long-awaited Nabucco pipeline. The EU-backed project aims to break the Russian grip on the regional energy market and unlock Asian energy resources for the European community. “If indeed the Turkish prime minister was able to clinch a deal, this will give the green light to the second phase of the Caspian Shakh-Deniz field and will attract other participants, from Turkmenistan, Iran or even Iraq, and render Russia’s South Stream project superfluous,” Michael Krutikhin, a gas expert at East European Gas Analysis, a Pennsylvania-based consulting firm, told the BBC Russian Service.

However, other experts did not see a sea change affecting Russian gas exports, even if Turkey was able to bring Azerbaijan into the Nabucco pipeline project. "Azerbaijan is considered a potential gas supplier for the Nabucco pipeline, but if we look at the figures closely we see that Azerbaijan could only supply eight billion cubic meters of gas from its Shakh-Deniz field," Simonov said. "This is not sufficient to make a revolution in gas exports to the EU. If the agreement had been with Iran, then that could be a big problem for Russia."

Also on Monday, Russia faced a fresh irritant in already testy ties with Turkey as Iran agreed to hand to Turkey 1,200 kilograms of its enriched uranium in a deal brokered by Brazilian President Luiz Inacio Lula da Silva and Turkish Prime Minister Recep Tayyip Erdogan. Under the agreement, Turkey will be the venue of a uranium swap between Iran and the West, bypassing both Russia and France, which were earlier designated as the countries for swapping and enrichment. “It is puzzling that Russia failed to obtain necessary permission for the construction of South Stream while Turkey was able to clinch a deal as the venue for the uranium swap between Iran and the West,” said Alexei Moiseev, a senior economist at Renaissance Capital. “These are issues that directly or indirectly touched on Russia’s interests. Russia remains an outsider both ways.”

Simonov said the decision to transfer enriched uranium to Turkey instead of Russia is a slap in the face because Russia had wanted to act as a mediator and to monitor how Iran develops its peaceful nuclear program. “Russia is practically bankrolling Turkey in order to make the country a more agreeable partner,” Simonov said. “We are helping Turkey to become a nuclear power by building the world’s largest nuclear reactor, which Russia does not need at all. We are putting in huge sums of money which Turkey will only pay back in eight years time. In addition, we are providing them with a nuclear station which is in direct competition with our gas exports to Europe. You can only go so far to achieve reciprocity.”

Analysts and industry experts have mainly attributed Turkey’s hydra-headed diplomacy and foot-dragging to its willingness to leverage its exclusive location as the transit route to Europe, to gain political and economic concessions from Russia. Dmitry Maslov, an analyst at investment company Metropol, said that Turkey is pressuring Moscow to slash the price of gas supplied to Turkey by ten percent and abandon Gazprom’s “take or pay” contracts, which stipulate that customers import a certain amount of gas, regardless of whether they ultimately need that much, or pay a fine. Turkey buys 62 percent of its gas from Gazprom, making the country the second biggest importer of Russian gas next to Germany. Moscow recently made such a concession to Ukraine. Turkey could gain close to $7 billion if the “take or pay” clause were removed, Maslov said.

Simonov said it is significant that president Medvedev was unmoved by Turkey’s diplomatic onslaughts ahead of the May 12 meeting. “Moscow was in no hurry to give price concessions to Ankara, because they hoped to change the route of the pipeline from the south to the north and lay the pipelines along the Ukrainian offshore coast. If Kiev agreed to a merger of some sort between Naftogaz Ukraine and Gazprom proposed by Vladimir Putin, Russia would not need South Stream in its current form,” Simonov said.

Moscow may also have pushed Turkey into a tight corner by its insistence that Turkey should not participate in the Nabucco project in exchange for its participation in other Russian-backed projects, analysts say. “Nabucco remains a pet project for the EU and anything that threatens to derail it will obviously touch on a raw nerve in Europe,” Moiseev said. “Ankara surely intends to join the EU. This may explain the carefully crafted balancing act that Turkey is playing in relations with Russia.”

Artyom Konchin, an oil and gas analyst at UniCredit said Turkey appears to want it both ways: hoping to gain political concessions from the European Union while reaping economic concessions from Russia. "Russia and Turkey have failed to agree because Turkey is far more interested in building the competing Nabucco pipeline. Firstly, this enhances the status of Turkey in its relations with the EU, and secondly, this would make Turkey the hub of distribution and supply of gas, not only from Azerbaijan, but also from Turkmenistan to Iran and Iraq, and in the future, to Egypt," Konchin said. "On the other hand, Turkey’s primary objective is to have a cheap supply of energy. This could be through Russia’s South Stream or Blue Stream-2 project, and it could even be through the massive $20 billion, 4.8 gigawatt nuclear power plant that Russia plans to build.”

By Tai Adelaja

Russia Profile, May 19, 2010