One NATO state wins big from Putin clash with West

Russian President Vladimir Putin is trying to make the best of a tough geopolitical situation, and one NATO member is seeing big benefits.

Russia scrapped plans for a pipeline into Southern and Central Europe, and instead announced this week a new pipeline to carry discounted natural gas into Turkey. Moscow has already spent $4.5 billion on the so-called South Stream project, which would have seen Gazprom transport its product under the Black Sea and potentially all the way to Italy by way of several countries.


Russian President Vladimir Putin (R) Turkish President Recep Tayyip Erdogan (L) seen during a welcoming ceremony in Ankara, Turkey on Dec. 1st, 2014.
Dmitri Azarov | Kommersant Photo | Getty Images
Russian President Vladimir Putin (R) Turkish President Recep Tayyip Erdogan (L) seen during a welcoming ceremony in Ankara, Turkey on Dec. 1st, 2014.

Turkey will be getting gas at what some have suggested may be a double-digit discount, while furthering its aspirations to be a regional energy hub.

"Turkey is looking out for itself," said Lauren Goodrich, senior Eurasia analyst at global intelligence and advisory firm Stratfor. "It's good for Russia to have a country that has a stake in Ukraine and a stake in the Black Sea and a NATO member that isn't putting sanctions on Russia...Turkey is standing on its own and they're going to reap the benefits from it."

Following Russia's announcement it was abandoning the project, some European politicians have already suggested that the South Stream project could be revived.

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Gazprom has reported that discounts could be about 6 percent for Turkish customers, Goodrich said, but Russian energy minister Aleksandr Novak reportedly said an arrangement could settle on a 15 percent discount.

"Turkey is in a very interesting position," Goodrich said. "They see an opportunity that the rest of the world is kind of against Russia right now, so if they work with Russia they can get a better deal."

Russia previously announced a gas deal with China that many have said favored Beijing because of the geopolitical pressure on Moscow from Europe and the United States.

Still, experts stressed that those deals do not mean Russia is desperate, but simply playing its cards as well as it possibly can.

Putin's Monday announcement of the $30 billion South Stream pipeline's cancellation marked the culmination of increasing difficulties for the project, which began in 2007. Bulgaria ceased construction on its part of the line in June following pressure from the European Commission that the deal would violate the Third Energy Package legislation, and other E.U. states were being similarly influence, Goodrich explained.

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Additionally, the cost of the project had ballooned from its original $10 billion projection, with some estimates putting the ultimate price tag around $50 billion. While the new Turkish pipeline may cost as much, Goodrich said, Moscow sees the market there as more promising than the tepid European one.

In fact, Russia has already found a successful partnership with Turkey in the Blue Stream pipeline between the two countries, explained Tim Boersma, acting director for the Energy Security Initiative at Brookings. He described this week's announcement as a "reinforcement" of those relations that reflects shifting global energy demand.

"Similar to China, in Turkey natural gas demand is expected to increase substantially in the coming decades, whereas European gas demand is in decline," Boersma told CNBC. "I think Russia's decision should be seen in that context, and is further incentivized by the anti-Russian sentiment in Europe."

The cost of sanctions

While experts said the South Stream cancellation was largely due to other factors, the sanctions and rhetoric against Moscow from the West have taken their own toll on the Russian energy sector. The major drop in oil prices has also taken a toll.

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"The Russian economy is obviously in a dire state at this point," Boersma said, pointing to an estimated $100 billion annual cost of oil's decline and a $40 billion yearly effect from sanctions. "Having said that, I have always believed that there will be buyers for Russian commodities, even if the U.S. and Europe believe that they can 'isolate' Russia, and the deals with China and Turkey are good examples of this in my view."

Still, damage from sanctions is likely to become increasingly dire for the Russian energy sector, Goodrich said, as firms will find it impossible to secure credit for either new projects or to pay off loans. Moscow-controlled oil company Rosneft is particularly disadvantaged, with $23 billion due in the next 3 months, but Gazprom would also suffer if sanctions continued for years.

Another consequence of the sanctions have been the loss of faith in Russian companies, James Henderson, senior research fellow at the Oxford Institute for Energy Studies said in a Thursday talk at Columbia University. In fact, Rosneft oil sales to Japan have essential ceased because no one wants to finance those deals, he said.

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The loss of Western energy technology will also begin to take a toll on the sector, as American and European firms are the only ones possessing the capabilities to access Russia's energy reserves. "Everything that is conventional energy in Russia has really been tapped," she said.

Chinese companies have developed some of those required technologies, but they remain untested, Goodrich added.