Russia and the European Union on a collision course over the South Stream pipeline

It was a week ago that the European commission told Russia that the “South Stream” pipeline, already under construction, and the contracts between Gazprom and six members of the European Union, including Hungary, violate European Union law. Klaus-Dieter Borchardt, director for energy markets at the European Commission, told the European Parliament on December 4 that the “intergovernmental agreements are not in compliance with EU laws.” The EU countries that signed agreements with Gazprom were told that “they have to ask for re-negotiations with Russia, to bring the intergovernmental agreements in line with EU laws.” The countries in question are Bulgaria, Hungary, Greece, Slovenia, Croatia, and Austria, as well as Serbia, which is a member of the Energy Community, an EU-backed international agreement covering former communist countries in Eastern Europe.

The European Commission identified three major problems with the South Stream. First, Gazprom is in violation of the so-called ownership “unbundling” rules, according to which a company cannot be both a producer and a supplier of gas. It cannot own production facilities and transmission networks. Clearly, Gazprom does. Second, according to EU law, non-discriminatory access of third parties to the pipeline must be ensured. In other words, Gazprom cannot have the exclusive right to supply gas through the pipeline. Finally, the Commission found problems with the tariff structure.

If these treaties must be renegotiated, there will be a delay of not months but, according to Borchardt, at least two years. Bulgaria has already protested. Bulgarian foreign minister Kristian Vigenin, who used to be a member of the European Parliament, made it clear that his country is not happy with Brussels’ decision. “It is not a nice move to slow the construction, because the parties to the track area are already in readiness to kick off.” He emphasized that “this is a very important project” for Bulgaria and expressed his hope that the European Union will not “stop the South Stream project.” Bulgaria already began construction of the South Stream at the end of October.

Brussels, however, seems to mean business. Borchardt said “in all openness and frankness that the South Stream pipeline will not operate on the territory of the EU if it is not in compliance with our energy law.” The Russians seem to be as resolute as the European officials are. A representative of Gazprom who was present at Borchardt’s announcement stressed that “nothing can prevent the construction of South Stream.” Russia’s position is similar to that of Viktor Orbán: EU law cannot prevail in EU-Russian relations, which are governed only by international law.

The Hungarian media covered the news coming out of Brussels, but the Hungarian government offered no response to the rather harsh verdict of the European Commission on the bilateral treaties that had been negotiated with Russia. Although here and there one could read about visits of Gazprom officials, nothing was known about the actual state of the negotiations and their particulars. Only yesterday Világgazdaság, a normally well informed paper dealing with economics and finance, reported that perhaps in the next week or so Orbán and Vladimir Putin will talk about the EU objections. Apparently Mrs. László Németh, the minister in charge of national development, was charged with preparing the prime minister’s visit to Moscow. I’m not sure, however, whether this meeting will actually take place. Because, as we just found out today, an agreement has already been signed.

As usual, details of Hungary’s negotiations with foreign powers came from the other side. The Hungarian public learned today that Aleksei Miller, president of Gazprom, paid a visit to Budapest yesterday and signed an agreement concerning the construction of the South Stream pipeline. Journalists immediately bombarded the head of Orbán’s press department for details. They were told that the prime minister and the head of Gazprom didn’t sign any agreement. He added that negotiations between Mrs. László Németh and Gazprom will proceed according to plans.

So we had two versions of the story. Someone was not telling the truth. At least this was the conclusion journalists of opposition papers came to. Stop, an online site, asked its readers whom they believed, the Hungarian government or the head of Gazprom. A relatively new online paper whose political views seem to me to be close to the Demokratikus Koalíció talked about the “selective memory” of the officials of the Orbán government.

It turned out that the spokesman for Viktor Orbán didn’t lie outright. It is true that Orbán himself didn’t sign anything. But something was signed all right: an agreement between Gazprom and MVM (Magyar Villamos Művek/Hungarian Electricity Ltd.), a state-owned company. As I understand it, MVM and Gazprom established a joint company called Déli Áramlat Zrt (South Stream Corporation), each with a 50% ownership. It is a large, expensive project that might pose serious financial risks to MVM, especially if the EU stands fast.

Experts figure that the Hungarian part of the project will cost around 300 billion forints, for which MVM will be responsible. Today’s Népszabadság points out, however, that MVM will be able to borrow such a large amount of money only if the project has the European Union’s blessing and financiers feel safe lending so much money to the Hungarian company.

I have the feeling that this is just the beginning of an extended imbroglio. Viktor Orbán is ready for his next battle with the EU, Hungary’s enemy.