Given all the news this week of Russia and Italy’s South Stream deal with Turkey in exchange for a nuclear power plant, I thought I would repost an article written by Robert Amsterdam last fall in Energy Risk on Turkey’s political pipelines.

A
key transit hub of both oil and gas to heavy consumer nations of
western Europe, Turkey is a nexus of multiple important pipeline
projects and increasingly desperate negotiations over access to the
Bosporus Strait. According to a report by the European Commission, the
country is geographically located in close proximity to 71.8% of the
world’s proven gas and 72.7% of oil reserves, and has thus become “the
Silk Road of the 21st Century”.

Although Russia is Turkey’s largest bilateral trade partner ($28
billion) and receives more than 68% of its natural gas from Gazprom,
Turkey has for many years maintained a fierce independence as the
critical transit country balancing the interests of competing countries
in the region.

However, this balance is becoming less stable amid a domestic
political crisis and the opportunistic resurgence of Russia, which may
be driving Ankara away from an energy alliance with the West. If US and
European energy companies hope to remain competitive in the future and
guarantee energy security for their consumers, some smart diplomacy
will have to be marshalled immediately before it’s too late.

The Kremlin’s winning strategy

Events over recent weeks have served as an unpleasant reminder of
how much more effective the Kremlin’s energy policy in Turkey has been
while the US and Europe have been asleep at the wheel – a development
with serious implications for companies and investors in this sector.

What needs to be understood by the West in order to rescue Turkey
from Gazprom’s monopoly is that Russia has gained a significant voice
in Turkish foreign policy thanks to certain pipeline projects; that
Turkey is aggressively pursuing its own regional interests; and that
domestic political constraints have an impact on the state’s energy
preferences.

A smart engagement strategy to keep Turkey plugged into the West’s
preferential energy supply routes will require a careful understanding
of the country’s interests. So far that’s not what we have seen.
Firstly, the West has displayed a frighteningly blase attitude towards
the new importance of Turkey following the war in Georgia, as well as
an ignorance of its national interests.

Precarious markets

Before the war in Georgia even started, energy observers were
reminded of how vulnerable global markets are to supply disruptions in
Turkey when the Kurdish separatist group PKK launched an attack on a
section of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, causing a
prolonged delay that spiked the price of oil. Then with the invasion of
the only non-Russian controlled energy transit route from central Asia,
several critical infrastructure projects were frozen and financing for
new projects was scared off. Though the pipelines of Georgia were left
undamaged, confidence was deeply eroded by Russia’s aggression, and a
new series of diplomatic actions were set in motion.

The BTC, which transports upwards of 850,000 barrels of crude oil
from central Asia to the Mediterranean sea every day (more than 1% of
global supply), is just one of the pipelines covering the East-West
corridor in Turkey, along with other projected pipelines such as the
Trans-Caspian and the Western-backed Nabucco project – both of which
partially serve political purposes as Gazprom-monopoly killers.

Turkey is also affected by a vitally important North-South energy
corridor including the Blue Stream gas pipeline (arguably a foreign
policy instrument of Russia) and the planned Samsun-Ceyhan oil and gas
pipelines designed to relieve the immense amount of traffic going
through the Bosporus Straits, a bottleneck that handles about 3.7% of
the world’s oil supply every day. About 25% of Russia’s oil exports go
through the Turkish straits, which accounts for Moscow’s activist
diplomacy and numerous agreements with the neighbouring governments of
Greece and Bulgaria, ratcheting up the pressure on Ankara.

Gazprom and the Kremlin have also fought back against these
Western-backed competing supply routes in Turkey with their own highly
political projects (which are accompanied by economically unfeasible
prices tags). To defeat the Nabucco, Gazprom has joined up with their
largest European customer, Italy’s Eni, to propose the South Stream
pipeline project, which would be laid straight across the length of the
Black Sea from Russia to Bulgaria in order to cut Turkey (and the
Ukraine) out of the natural gas distribution infrastructure. To avoid
giving up a quarter of their oil exports to Turkish transit tariffs,
Moscow is also pushing the $1 billion Burgas-Alexandroupolis pipeline
to bypass the Bosporus.

There is a very important geopolitical element in these energy deals
that Western governments need to understand in order to be successful
in Eurasia: Turkey views itself as an unparalleled regional leader, and
recognises both the limitations of Russia’s ability to bully such a
vital country as well as the tremendous opportunity to advance their
interests. In other words, it would be a mistake to think that Turkey
is simply awaiting its turn to be moved in the US-Russia grand chess
game. It’s playing a game of its very own.

In September, Turkish Foreign Minister Ali Babacan established the
government’s clear intention to seize the role as the regional
peacemaker, stating that “as a neighbour to the conflict, Turkey has an
enormous stake in overcoming the tension between Russia and Georgia”,
and proposing a new negotiation framework known as the Caucasus
Stability and Cooperation Platform (CSCP). Similarly, just three weeks
after Russia and Georgia signed a shaky peace agreement, Turkey’s
energy minister made an emergency trip to both Kazakhstan and
Turkmenistan to woo these governments into continuing their independent
relations with Turkey.

Turkey: regional peacemaker?

In the summer months leading up to the war, Russia displayed a
perfect understanding of Turkey’s aims and their own geopolitical
limitations with this key player. Although energy relations between the
two countries had been acrimonious in recent years due to Turkey’s
choice to back the Nabucco project, Russia suddenly and unexpectedly
relented in late July, signing agreements for a gas storage hub, a
joint company to run urban gas grids, and an offer to extend the Blue
Stream all the way to Israel. The message from Gazprom to Turkey: we
will make it worth your while to do business with Russia.

Observing this thaw in Turkish-Russian energy relations, Turkish
commentator Sinan Ogan said that there was a “new period of
co-operation”, and that “the rivalry between South Stream and Nabucco
has been to the detriment of both countries”.

Russia’s pre-war strategy proved to be immensely successful. When
the fighting first began, Turkey, a NATO member that had participated
in training exercises with the Georgian military, refused to share
radar data and other military intelligence with Tbilisi, and shared and
consulted on their proposal for the CSCP framework first with Moscow,
which deeply insulted the Georgians. Then, once US warships were
dispatched to the Black Sea on aid missions to Georgia, Washington was
surprised to find that Turkey would strictly adhere to the tonnage
limits on these ships under the 1936 Montreux Convention.

Turkey also mimicked the Russian Navy in reminding the US that they
would only be able to remain in the Black Sea for 21 days. Lastly,
Ankara has also been very lukewarm about the NATO Membership Action
Plans potentially being offered to Georgia and the Ukraine, as Turkey
wishes to remain the only NATO power on the Black Sea.

The fact that the Kremlin has been able to produce such successful
foreign policy outcomes in Turkey is impressive, especially considering
that the invasion, occupation and recognition of the separatist regions
of Abkhazia and South Ossetia is extremely distressing for Ankara, in
light of the destabilising territorial disputes involving Armenia and
Azerbaijan at its own borders.

Comparatively, the US diplomatic initiative to sway energy policy in
the region has been considerably less subtle and effective. US Vice
President Dick Cheney arrived in Tbilisi nearly a month after the war
started, bringing a $1 billion aid package to Georgia and seeking to
lock down commitments for Azeri natural gas for both the Nabucco and
the Turkey-Greece-Italy pipeline. Clearly seeing the US-Russia
relationship frozen until the next presidency, the Azeri president
Ilham Aliyev did not receive Cheney with much hospitality – in fact,
newspapers reported that neither the president nor the prime minister
bothered to greet him at the airport, and telephoned Russian president
Dmitry Medvedev to share details of the meeting.

Trade trumps ideology

Two important reasons why Russia has been more successful in pushing
forward its energy preferences in Turkey than Washington has been that
Russia seems to have grasped that Ankara’s push towards the East is
more about trade ties than ideological alliances, and that the narrow
political survival of prime minister Recep Tayyip Erdogan and the
Justice and Development Party (AK Party) is mutually antagonistic with
with the type of isolationist policies being pushed by Washington.

Gazprom got a leg up on the Americans and Europeans on these
critical pipeline projects simply by offering more business and more
supply to go through Turkey. They promised in no uncertain terms that
they wanted to be part of Turkey’s downstream energy sector at any
cost. This strategy plays well into the government’s plans for economic
expansion and their robustly growing trade. A report by the Council on
Foreign Relations points out that it’s no accident that Ankara is
looking to the East following the war in Georgia, as exports to the
region have risen to $15 billion in 2007 from $3.3 billion in 2001,
while $1.5 billion in foreign direct investment has been sent to
Turkmenistan.

Despite recent failures, there is no reason that US and European
interests in Turkey shouldn’t be successful, they just need to be more
intelligent, taking into account the Turkish aims to play a responsible
role of regional leadership, their economic and trade agendas, and
careful consideration of how these energy projects can be made
politically feasible.

There are certainly a number of other carrots and sticks available
to lure Turkey back out of Russia’s embrace and indeed the Kremlin is
mindful of what could happen if the West is forced to look around
Turkey to use other levers of influence in the Middle East. Oddly, the
US could learn a lot from Turkey’s anti-isolationist platform in the
region, as many experts regard the inclusion of Iranian natural gas as
the one piece that would guarantee the success of Nabucco – the last
thing Russia would want to see.

These developments in Turkey’s energy diplomacy must be carefully
monitored by investors and companies seeking to gain an assessment of
the political risk profile of the country – an infrastructure or
transit project or deal is never as simple as commercial sense, and
could be reversed quite rapidly if one of the regional players locates
sufficient leverage.

In the end, projects like the Nabucco are not going to put a halt to
Russia’s energy business, but rather offer consumers important
competing supply routes that should ideally deliver more efficiency,
more affordable prices, and to the surprise of even Gazprom, a more
healthy business environment for future projects. There is a compelling
argument that the deepening of energy competition and the building of a
vibrant trade market in Turkey and the Caucasus would be a win-win for
all the players involved.

Last 5 posts by Robert Amsterdam

• Grigory Pasko: Yuri Luzhkov's Water Grab - November 23rd, 2009
• Who Helps Russia's Corrupt Get their Money Out? - November 23rd, 2009
• Sergei Magnitsky's Final Petition - November 23rd, 2009
• Energy Blast - Nov 23, 2009 - November 23rd, 2009
• Today in Russian Business - Nov 23, 2009 - November 23rd, 2009