IN THIS ISSUE

*Italy’s ENI seeks Nabucco life-belt for Gazprom’s sinking South Stream
*...as gas shortfall, redundant pipeline capacities threaten the project
*Western North Caucasus faces increasing levels of violence and instability
*Yanukovych majority forms its first cabinet
**Visit the Jamestown blog on Russia and Eurasia (http://www.jamestown.org/blog):
- A New Russian Invasion of Georgia: is it so Unrealistic?

Gazprom’s Partner ENI Loses Confidence in South Stream

Vladimir Socor

Italy’s ENI chief executive, Paolo Scaroni, has proposed unifying the Gazprom-led South Stream with the European Union-backed Nabucco pipeline project. The Italian state-controlled energy conglomerate ENI is the key technological and commercial partner to Gazprom in South Stream, the project aimed at transporting gas from Russia across the Black Sea to Europe.

In his remarks to a Cambridge Energy Research Associates forum in Houston (Bloomberg, March 9; Platts Commodity News, March 10), Scaroni called for a partial merger of the South Stream and Nabucco pipeline routes. He identified the segment where the two planned routes overlap, which runs overland from Bulgaria to Austria. However, the Nabucco consortium has clearly defined its pipeline route (Bulgaria-Romania-Hungary-Austria) and has already commissioned the engineering work on it, whereas Gazprom has avoided both.

Circumstantial indications suggest that a further option of “unifying” Nabucco and South Stream is also under consideration. This would shift Nabucco’s Turkish section from land to the seabed of the Black Sea, where ENI holds the technological lead.

ENI’s CEO would like to see South Stream combined with Nabucco in “one large project.” Scaroni portrays the two projects as complementary, rather than competing against each other. He argues that a partial merger of the two projects would reduce investments in construction and the subsequent operating costs, as well as increase the prospective financial returns overall.

Scaroni’s call reflects a loss of confidence in South Stream’s chances to materialize in the new global and regional market environments, which are now taking shape. It also confirms diminishing confidence in Gazprom’s capacity to supply all of its giant pipeline projects, including South Stream, with gas during the post-crisis years. Finally, the merger proposal is a response to the Nabucco project’s recent advances, contrasting with South Stream’s stagnation at all levels, other than Kremlin promotional activities and playing various potential transit countries against each other.

In effect, ENI seems to be attempting to downscale its commitment to South Stream and to devise a creative way for joining Nabucco, the likely winner. The argument that the two projects are complementary, rather than rivals, is a familiar disclaimer in situations that denote genuine competition.

ENI is a sine qua non participant in the Gazprom-led South Stream. It provides the technology (which Gazprom lacks) for laying the pipeline on the seabed of the Black Sea, and is the main potential customer for Gazprom’s gas through the southern branch of South Stream, which is planned to reach Italy. In the event of a South Stream-Nabucco unification as just proposed, however, northern Italy can receive gas via the unified pipeline from Central Europe, even in the increasingly likely event that South Stream’s own branch to southern Italy fails to materialize as intended.

Whether ENI has aired the South Stream-Nabucco unification proposal on its own, or in coordination with Moscow officials is unclear. Moscow’s public position remains one of confidence that South Stream can prevail against Nabucco. This posture ignores the ongoing, market-transforming processes. It also seeks to delay the moment when Russia’s gas shortfall will no longer be hidden by the recession-induced demand slump. Moscow’s declarative confidence in South Stream may well be about to change behind the scenes.

The reasons behind ENI’s declining confidence in South Stream seem easily discernible. They are both circumstantial and structural, both internal and external to the South Stream project itself.

The Russian-declared cost of the South Stream overall project has ballooned to 25 billion Euros, as confirmed most recently in Moscow to Croatia’s visiting Prime Minister Jadranka Kosor (Vjesnik [Zagreb], March 9). No financing is in sight, or imaginable, on anything approaching this scale. Russian attempts through certain German, and indeed Italian circles, to obtain some seed funding from the EU for South Stream have failed. The EU’s new Energy Commissioner, Guenther Oettinger, has ruled out EU financing for South Stream while announcing their release of initial funding for Nabucco.

Russian officials have never identified a source of gas for South Stream in their multiple negotiations with potential customer and transit countries. The often-quoted capacity figure of 63 billion cubic meters annually is only remotely imaginable with Turkmen gas. When ENI joined South Stream in 2007, it could still rely on a continued Russian monopoly on Turkmen gas to feed this pipeline project. That assumption was shattered in Turkmenistan in 2009, however; and ENI, as Gazprom’s key partner, seems to be drawing its own conclusions and seeking an alternative to the South Stream project. That alternative seems to be piggybacking on Nabucco.

South Stream: a Casualty of Moscow’s Excess Pipeline Capacity Building

Vladimir Socor

Like all parties involved with South Stream, ENI must rely on the new Ukrainian President Viktor Yanukovych agreeing to share control of Ukraine’s gas transit system with Moscow. In that case, Gazprom would no longer need South Stream as a Ukraine-bypass option, which Moscow had brandished all along to pressure Kyiv into ceding control of the transit system. Moreover, Gazprom would have to commit to full use of the Ukrainian system as part of the bargain with Kyiv, instead of shifting volumes from the Ukrainian system into South Stream, as the scenario had envisaged.

Furthermore, an investment decision in Russia’s supergiant Shtokman gas field has recently been “postponed” (or possibly abandoned), further constricting Russian gas export potential in the years ahead. This also affects South Stream directly, placing it in competition with Nord Stream and other Russian pipeline projects, all now reliant on Siberian gas in limited availability. Shtokman’s postponement has left Nord Stream –the Baltic seabed pipeline to Germany– without any source of gas for the project’s second stage. While Nord Stream One has Siberian gas earmarked for it, putatively at 27.5 billion cubic meters (bcm) per year, Nord Stream Two was planned to be fed to the same annual capacity from Shtokman in the Barents Sea. Instead, Nord Stream Two, as well as South Stream ,would have to draw on Siberian gas, where the shortfall looms.

Thus, apart from the undeclared rivalry with Nabucco, the South Stream project has entered an undeclared competition with Nord Stream Two, the Ukrainian transit system, and even the Blue Stream pipeline (which ENI built for Gazprom earlier on the seabed of the Black Sea to Turkey, and is only being used at one half of its 16 bcm annual capacity). All of these projects, existing or virtual, must vie for access to gas supplies from western Siberia, even as those fields move past their peak, while Russian domestic demand recovers.

It would be logical to anticipate that the Italians would lobby in Moscow for South Stream and against Nord Stream Two. It also seems logical that Moscow might prioritize its German, French, and Dutch customers in Nord Stream, ahead of the South Stream project. South Stream cannot count on the strong political lobbying at state levels that helps drive Nord Stream forward.

South Stream seems to have resulted in a no-win situation at this point. Ultimately, these insoluble dilemmas stem from the Kremlin’s pre-crisis policy to build export pipeline capacities in vast surplus, compared with Russia’s own export potential. South Stream and other projects are the fruits of that policy. It was wrongly premised on continuing Russian monopolization of Central Asian gas; European consent to high-priced, take-or-pay long-term commitments to Russian-delivered gas; predatory acquisitions of infrastructure assets in consumer countries; and, as an intent, a Russian-led cartel of gas exporters to Europe. Both Dmitry Medvedev (Gazprom chairman, then head of state) and Vladimir Putin (head of state, then prime minister) are closely associated with that policy.

Failure to invest in Russian field development (apart from Siberia’s east and far east) and loss of Gazprom’s dominance in Turkmenistan have left South Stream without dedicated resources. Market-transforming processes in Europe, through the surge of LNG and spot markets, have left South Stream behind both in a non-competitive position and as an unappealing investment prospect. Like Nord Stream in some ways, the South Stream project is rooted in the invalidated assumptions of past years.

ENI’s proposal to unify South Stream with Nabucco could provide a lifeline for the South Stream project, serving ENI’s corporate interest as well as Russia’s strategic advantage in Europe. Meanwhile, however, Moscow affects a lack of interest in such unification. Following Paolo Scaroni’s proposal, Russian Foreign Minister, Sergei Lavrov, and Energy Minister, Sergei Shmatko, have reasserted Moscow’s full confidence in South Stream and its resolve to press ahead with it. These responses did not even allude to ENI as such. As Russian officialdom has done all along, Lavrov and Shmatko each made self-contradictory arguments: that South Stream and Nabucco are not in competition against each other, but that South Stream is in a far stronger position to succeed, compared with Nabucco. For its part, Gazprom acknowledged –but downplayed– ENI’s proposal. Gazprom spokesman, Sergei Kupryanov, parried that Scaroni was merely trying to demonstrate that South Stream and Nabucco are not rivals (Interfax, March 14, 15, 16).

In a far more nuanced position, Russian Gas Society President Valery Yazev (who also lobbies for Gazprom as a senior Duma deputy), has suggested that the proposed South Stream-Nabucco unification “is worth considering” and “could make sense” from Moscow’s standpoint. In that event, Yazev said, Turkmen gas would be supplied through the planned Caspian Littoral pipeline and existing pipelines to Russia’s Black Sea coast and then pumped into South Stream on the seabed of the Black Sea. Thus, South Stream-Nabucco unification would “add a branch [Nabucco] to our South Stream” in Europe and “solve the problem of filling the pipeline with Russian and Turkmen gas,” Yazev pointed out. His statement entreated West European companies in the Nabucco project to cooperate in unifying it with South Stream (ITAR-TASS, March 14).

While Moscow’s political officials affect lack of interest for reasons of prestige (as some Western policymakers assume) or play hard to get (as seems more likely), Yazev has spelled out Russian interest in a possible unification of the two projects, depending on terms to be negotiated. Unification could perhaps rescue some downscaled version of South Stream, but only at the expense of the Nabucco project and of European energy security. Considering its recent and continuing advances, Nabucco does not need South Stream in order to succeed.

Murder of Circassian Activist Unsettles Multi-Ethnic Karachaevo-Cherkessia

Valery Dzutsev

On March 15, the funeral of a Circassian activist killed the previous day turned into an impromptu protest rally. An estimated 200 Circassian demonstrators gathered at the central square, next to the republican government building in Cherkessk, the capital of Karachaevo-Cherkessia, to protest against the murder of Aslan Zhukov and demand a proper investigation of the crime. The police were mobilized to protect the government (www.regnum.ru, March 15).

On March 14, an unknown gunman killed Aslan Zhukov near his home in Cherkessk. The 36-year-old father of three was a small-time businessman and popular with the politically active Circassian youth (www.kavkaz-uzel.ru, March 14). The president of Karachaevo-Cherkessia, Boris Ebzeyev, made a special statement following Zhukov’s murder, conveying condolences to his relatives and calling on the people to avoid “coloring the murder in ethnic tones,” before an investigation was conducted (www.kchr.info, March 15).

President Ebzeyev visited the murdered activist’s family within an hour after the killing, since the incident quickly drew a large crowd. This is probably just an indication of how precarious the situation is within this multi-ethnic republic. Investigators said they were looking into Zhukov’s business-related activities, hoping to find leads in the murder case. However, Zhukov’s relatives and friends received this explanation with indignation, saying that small-time business activities like the victim’s could not have led to his murder. Zhukov was known for speaking out and warning about increased ethnic-related violence in the republic (Kommersant, March 16).

On March 1, the Karachaevo-Cherkessian police, after months of silence on the issue, held a special event on the ethnic clashes between Karachay youth, on one side, and Circassian and Abaza youth, on the other, that had taken place in the republic. Massive street fights between the young people, involving dozens of participants, reportedly started in October 2009 and continued into 2010, with the latest large clash reportedly taking place on February 19. Some civil activists accused the authorities of passivity, while the interior ministry of Karachaevo-Cherkessia asked not to dramatize the situation (www.kavkaz-uzel.ru, March 2).

Karachaevo-Cherkessia witnessed a large-scale upheaval during local presidential elections in 1999. The Karachay and Circassian communities struggled to prop up their candidates for the presidential position (Vladimir Semenov and Stanislav Derev, respectively). The political struggle turned violent, as both sides accused each other of rigging the ballot and used small arms to defend their interests. A compromise in the form of a power-sharing scheme was eventually reached, but the situation seems to be spiraling out of control once again as the Circassian elites feel excluded from political power. Given the high dependency of business activities on politics in the region, this means that the elites who are deprived of access to political governance also find their business interests threatened.

Karachaevo-Cherkessia, with a population of a little less than 500,000, is one of the most ethnically diverse republics of the North Caucasus, second only to Dagestan. The four major indigenous ethnic groups in the republic include the Karachays, Circassian, Nogais and the Abaza people. The Karachays, who are closely related to the Balkars who live in neighboring Kabardino-Balkaria, speak a Turkic language and comprise about 40 percent of the population and occupy the commanding positions in the government of Karachaevo-Cherkessia. Ethnic Russians comprise about 30 percent of the population, but are largely politically inactive and reportedly have been leaving the region in large numbers. The Circassian and the Abaza people are related to each other and to the Kabardins and Adygeis in neighboring Kabardino-Balkaria and Adygea. The Circassian and the Abaza, combined, comprise less than 20 percent of the republic’s population, but are nevertheless prone to challenging the otherwise almost unchecked political power of the Karachays in Karachaevo-Cherkessia.

Meanwhile, Aslan Zhukov’s associates are preparing for further demonstrations to achieve the political goal of separating the Circassian part from Karachaevo-Cherkessia and creating a separate autonomous republic. The head of the Circassian organization Adyge Khase, Mukhamed Cherkesov, said he would press for more demonstrations and public events to advance the goal of an autonomous republic for the Circassian of Karachaevo-Cherkessia, as they “had no other alternative” (www.kavkaz-uzel.ru, March 16).

President Dmitry Medvedev paid a surprise visit to Karachaevo-Cherkessia and Kabardino-Balkaria on February 27. Medvedev named extremism, corruption and the poor socio-economic development of Karachaevo-Cherkessia among the main problems that plague the republic (www.kavkaz-uzel.ru, March 2).

Besides the ethnically complex composition of Karachaevo-Cherkessia and the related rivalries, there is another important trend that may attract the attention of observers to this republic: namely, the growing movement among the Circassians living in the North Caucasus and abroad demanding that the Russian government recognize the Russian empire’s genocidal practices during the conquest of the Circassian lands in the nineteenth century. The protests and rising awareness of the public come at an especially sensitive moment for the Kremlin, as the Olympics in Sochi in 2014 will be held in lands that were owned by Circassians in the past and where the alleged genocide took place. It is also widely assumed that the Sochi Olympics are “Putin’s personal project.”

It is unsurprising that Russian government officials react warily to any attempt by the Circassians to organize themselves to advance their interests, which does nothing but further alienate them from the Russian government. On the day of Medvedev’s visit, the International Circassian Association in Nalchik appealed to the Russian president “to incorporate the Circassian element into the Sochi Olympics.” The organization resented the fact that while a Native American Indian theme was incorporated into the most recent winter Olympics in Canada, the Circassian subject has not received nearly the same amount of consideration in the planning for the Sochi games (www.kavkaz-uzel.ru, February 28).

All the President’s Men in a Deja-vu Ukrainian Cabinet

Pavel Korduban

A new pro-Yanukovych majority in parliament appointed its cabinet on March 11. Prime Minister, Mykola Azarov’s, cabinet, numbering 29 ministers, is the largest in Europe after Belarus. It looks very much like the cabinet of the then-Prime Minister Yanukovych in 2006-2007. Azarov’s cabinet is dominated by representatives of Yanukovych’s native Donetsk Region and by one party, Yanukovych’s Party of Regions (PRU). The communists and the centrists from Speaker Volodymyr Lytvyn’s bloc, who joined the PRU in a new parliamentary majority, are assigned only secondary roles. Most key ministers are either leading businessmen, or are linked to specific oligarchs. It will not be easy for a handful of reformers and technocrats in this cabinet to conduct badly needed reform.

The Russian-born Azarov, like Yanukovych, started his career in Donetsk. In the mid-1990’s he founded Ukraine’s tax service and was its first head. Azarov’s tax service was often used under the then-President Leonid Kuchma to muzzle free media and businesses linked to the opposition. As first deputy prime minister, and finance minister under Prime Minister Yanukovych in 2002-2004 and 2006-2007, Azarov was often criticized for his Soviet-style leadership and accused of stifling free enterprise. He is also one of the PRU’s founding fathers.

Azarov’s cabinet includes as many as seven deputy prime ministers, which is probably a record for Ukraine: six of them represent the PRU. These include Azarov’s first deputy, Andry Klyuyev, a businessman from Donetsk who served as deputy prime minister for energy in Yanukovych’s cabinets; Donetsk-based businessman Borys Kolesnykov, linked to the steel tycoon Rinat Akhmetov; Volodymyr Semynozhenko, who served as deputy prime minister in 1999-2001 and, like Azarov, was among the PRU’s founders; agricultural deputy prime minister, Viktor Slauta, who served in the same position in Yanukovych's cabinets; and Viktor Tykhonov, a former chairman of Luhansk Region council, who was one of the organizers of the November 2004 Severodonetsk anti-Orange Revolution gathering by pro-Russian politicians. Azarov’s deputy for security, Volodymyr Syvkovych, is a businessman and a former KGB operative who, as chairman of the parliamentary committee which looked into former President Viktor Yushchenko’s 2004 mysterious poisoning, was the first to publicly question Yushchenko’s claims that he had been deliberately poisoned by his rivals (ProUA, March 11; Zerkalo Nedeli, March 13).

Among other key figures representing the PRU and its oligarchs are Industry Minister, Dmytro Kolesnykov, a protégé of Akhmetov; Fuel and Energy Minister, Yury Boyko, who served in the same position in 2006-2007 and made RosUkrEnergo, a joint venture of Gazprom and energy and chemical tycoon, Dmytro Firtash, the intermediary in gas trade with Russia; Ukrainian Security Service (SBU) Chief, Valery Khoroshkovsky, a media mogul linked to Firtash; Interior Minister Anatoly Mogilev, a former Crimean police chief known for conflicts with the indigenous Tatar population; and Foreign Minister, Kostyantyn Hryshchenko, the former Ambassador to Russia.

Deputy Prime Minister for the Economy, Serhy Tyhypko, the businessman who came third in the January presidential election with a 13 percent share of the vote, is probably the only dedicated reformer in Azarov’s cabinet. On the one hand he is a liberal who owes his popularity with the middle class to his economic reform program, while being a politician independent of the PRU and its oligarchs. Tyhypko is interested in pursuing market reforms, but he is also an obvious scapegoat should the reforms fail. Tyhypko was among the founders of Ukraine’s largest private bank, Privatbank, in the early 1990’s. His first post in government in 1997 was the same as now, and he was one of the very few liberal economists in several cabinets in the late 1990’s. He served as central bank governor in 2002-2004, and in 2004 he managed the headquarters of the then-presidential candidate Yanukovych. From 2005-2008, Tyhypko developed his banking and insurance businesses.

A potential ally of Tyhypko is Finance Minister Fedir Yaroshenko, a classic technocrat and a protégé of Azarov. He and Azarov have worked together since 1997, when Yaroshenko became Azarov’s first deputy in the tax service. In 2002-2004 he served as deputy finance minister. Due to Yaroshenko’s professional qualities and apolitical image, he was also hired by the PRU’s rivals, the cabinet of Yulia Tymoshenko, where he served as deputy tax chief from 2008 to 2010. Yaroshenko’s background (he managed poultry farms in Donetsk Region in the 1980’s and 1990’s) suggests that he may have interests in the food industry, but he has no direct links to any large industrial business, and is less prone to depend on oligarchs (www.file.liga.net, March 12).

Azarov’s cabinet should be more stable than most of its predecessors, since it is essentially a cabinet of one party and, unlike most cabinets after 2004, it has presidential backing. However, Azarov is no reformer, as Tyhypko pointed out in one of his very first interviews as Azarov’s deputy (www.kontrakty.ua, March 12). The businessmen behind the PRU will expect the cabinet to further their interests. This may hinder reform and make it difficult for Azarov and Tyhypko to persuade international lenders to issue loans, which Ukraine badly needs to fill a budget hole which is estimated at over 10 percent of GDP, and to compensate for a 15 percent GDP plunge in 2009.

To view other artciles published by Eurasia Daily Monitor, The Jamestown Foundation click here