Austria-Russia energy deal exposes EU disunity over Ukraine

Austria Russia gas pipeline

A recent gas deal between Austrian energy company OMV and Russian gas exporter Gazprom exposes fractures within the European Union bloc over responses to the Ukraine crisis and threatens the stability of the EU policy-making.

When it comes to natural gas diplomacy, member states of the EU have always found it difficult to unite under the common EU flag. As Europe struggles to reduce its dependency on Russian gas and develop a united position on Russia over Ukraine crisis, Austria’s recent bypassing of the European Commission, while finalising its own bilateral deal on a new gas pipeline, exposes the unprecedented level of reliance of the EU common policy on energy needs and potentially unpredictable policy-making environment within the European community.

The largest Austrian and Russian energy companies, OMV and Gazprom, respectively, signed an agreement on 29 April 2014, committing both countries to the development of the South Stream pipeline. The proposed 2,500 km route would stretch from Russia under the Black Sea through Bulgaria, Serbia, Hungary, and into the Austrian Baumgarten gas transport hub. The new pipeline would bypass Ukraine, providing Europe with an alternative route of gas imports of around 32 billion cubic meters annually from 2017.

Europe natural gas networks

Clash between the EU and member states

The finalisation of the agreement could not have been timed worse or be more at odds with official EU policy. Coinciding with the announcement by the EU and the US to impose additional sanctions on Russia, the deal is a serious reality check for the EU common policy capabilities.

The agreement on the South Stream project means “selling the rope on which Russia can effectively hang Ukraine.” The European Commission has put a deal on hold after Russia annexed Crimea in March. Concerned about the bloc’s dependence on Russia for a third of its gas supply, and interested to use the agreement as leverage in negotiations with Moscow over the future of Ukraine, the Commission insisted that member states not enter into any bilateral agreements with Russia without its approval. It has stated that the South Stream deal does not comply with EU regulations on ownership and third-party pipeline access and, from this point onward would be stopped until future discussions.

However, both Austria and Russia have circumvented this by announcing the deal to be based on a bilateral agreement between countries rather than an EU accord and, therefore, being based on legal standing with reference to a 2010 bilateral agreement regulating the approval. Despite the insistence of the EU Commission that the EU approval supersedes any bilateral agreements, the OMV-Gazprom deal has moved forward.

In defiance of the calls by the European Commission, Bulgaria also backed the South Stream project last month.

Moreover, besides the smaller EU players, a leading European nation and one of the bigger customers of Gazprom in Europe (over $15 billion yearly investments), Germany has also revealed its interest in backing up the South Stream project with its current 15% stake (50%, 20%, and 15% remaining with Russia’s Gazprom, Italy’s Eni, and France’s EDF energy companies, respectively).

Other countries, such as Croatia, Greece, Hungary (which earlier this year signed a nuclear deal with Russia), Slovenia, and non-EU Serbia, have also signed up to build the onshore section of South Stream against the recommendations of the EU Commission.

Geopolitical significance

The current disagreement between the EU and member states over the gas deal exposes the internal disunity in terms of common EU policy on Russia. It also threatens to deepen fractures between Brussels central policy-making and the member states.

The European crisis has been already dividing Europe between eurozone and non-eurozone members in the past years. Some member states have been challenging Brussels over its capabilities to deliver on the promise of economic prosperity.

There is a risk that the ongoing strong EU anti-South Stream position could make the countries involved in the project deepen their resentment towards the central EU governance institutions and make internal future agreements more problematic.

Moscow’s successful attempts to circumvent the EU’s Third Energy Package regulations in the South Stream project through bilateral deals already make the Commission’s recent calls for a joint purchase of Russian gas and a uniform gas price in the common European market more difficult.

In addition, the current deal has already reflected the disagreements between the EU member states over sanctions on Russia. While countries such as Poland and the Baltics remain committed to the hardline EU position, countries that have a stake in a new gas deal have opted for a more lenient approach.

The stakes in Gazprom oil exports have, therefore, led to a controversial sanction package questioning the EU commitment to solving the Ukraine crisis. The EU sanctions over the annexation of Crimea and subsequent actions have so far been limited to asset freezes and travel bans on individuals and companies closely linked to Russian President Vladimir Putin, to Russia’s annexation of Crimea and pro-Russian separatists’ rebels in eastern Ukraine. Yet, considering the stakes of the major European players in the new gas project, neither Gazprom nor its managers have been targeted, in spite of the fact that Gazprom and its Chief Executive, Alexei Miller, remain a longstanding ally of the current Russian government and President Putin.

Finally, while the G7 meeting in Rome on 6 May signified the need for energy diversification and safeguards from external energy coercion within the EU and its current partners, the current reality in Europe seems to point to a paradoxically different development. Despite being one of the most vocal supporters of Ukraine’s reduction of dependence on Russian gas, Austria seems prepared to tie its economy more closely to Russia.

The deal, more than anything, shows that, when it comes to energy, while Europe speaks out about the need for unity and energy independence, in reality, not all countries are prepared to reduce their links with their eastern partner and sacrifice their energy needs for a common internal or external EU policy.

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3 Comments on “Austria-Russia energy deal exposes EU disunity over Ukraine”

  1. May 20, 2014 at 5:39 pm #

    Interesting. Why would the EU commission want to starve its own member states of energy and trade relationships, to support the interests of a non-member state (Ukraine)?

    • May 21, 2014 at 8:19 pm #

      Hi Peterbee, many thanks for raising this question. One possible explanation could be the EU interest in developing a joint purchase of Russian gas and a uniform gas price in the common European market. It is also likely that taking into consideration the forecasts of the finalization of China-Russia gas deal seriously, EU intended to pressure Russia to lower gas prices, which were far higher than domestic consumption prices as well as the offer to Chinese counterpart. Hence, possibly the EU Commission’s position had less to do with the Ukraine and more with increasing the EU negotiating power.

  2. May 22, 2014 at 2:15 am #

    Hmm. Thanks for that answer. Would it be crazy to think the US, as an up-and-coming natural gas producer and potential exporter, might have an economic incentive to inhibit an EU-Russia “natural gas economic zone” deal?.

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