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(Fascinating article on the tangled relationship between the Bulgarian
ultraright, the EU and Putin's failed attempt to build a natural gas
pipeline.)
NY Times, Dec. 31 2014
How Putin Forged a Pipeline Deal That Derailed
By JIM YARDLEY and JO BECKER
SOFIA, Bulgaria — Barely two weeks after President Vladimir V. Putin
annexed Crimea on one side of the Black Sea, he won a different prize on
the other side. In Bulgaria’s Parliament, lawmakers gave initial passage
to a bill clearing the way for a mammoth gas pipeline from Russia.
The pipeline, known as South Stream, was Mr. Putin’s most important
European project, a tool of economic and geopolitical power critical to
twin goals: keeping Europe hooked on Russian gas, and further
entrenching Russian influence in fragile former Soviet satellite states
as part of a broader effort to undermine European unity.
The bill that Parliament took up on April 4 was arcane. But it swept
aside a host of European regulations — rules that Mr. Putin did not want
to abide by — for a pipeline that would deliver gas throughout southern
Europe.
It was a dream bill for Mr. Putin, and with reason. While Bulgaria’s
Energy Ministry ostensibly wrote the legislation, documents reveal the
hidden hand of the Kremlin: Not only did much of the language come from
a subsidiary of Russia’s state-owned energy giant, Gazprom, but Mr.
Putin’s energy minister was directly involved.
For years, Mr. Putin bullied and cajoled Bulgaria, one of the European
Union’s weakest nations, into doing Russia’s bidding on South Stream.
And he seemed poised to succeed, but for one fundamental miscalculation:
He underestimated the West’s response to his aggression in Ukraine.
Faced with punishing sanctions, a petro-economy pushed to the brink by
plunging oil prices and the wildly gyrating value of the ruble, Mr.
Putin this month halted the project.
But if the story of South Stream shows how larger geopolitical concerns
can, at least temporarily, limit Mr. Putin’s ability to use his energy
riches as a foreign-policy tool, it is also a case study of how he has
operated in Europe, and will probably continue to do so.
He has won influence abroad by wielding the tools of crony capitalism
that have made him so powerful at home. After a secret meeting between
Bulgaria’s prime minister and the head of Gazprom, pipeline contracts
were given to a company controlled by a member of Mr. Putin’s inner
circle and politically connected Bulgarian companies.
In Russia, Mr. Putin has at times used Russia’s state-owned banks for
his own ends; they helped underwrite the Sochi Olympics, for instance.
In Bulgaria, a subsidiary of one of those banks, VTB, showered the
country with politically strategic investments as Mr. Putin pushed the
government to move forward on South Stream.
As elsewhere in Europe, Mr. Putin courted Bulgaria’s pro-Russian far
right party, which promoted Russian interests by helping to beat back
plans to explore for Bulgarian shale gas. Seeking to nail down support
for South Stream, a member of the Russian Parliament, whose card
identified him as a special emissary of Mr. Putin, even offered what one
former Energy Ministry official understood to be a tacit bribe.
“It’s not just South Stream, and it’s not just Bulgaria,” said the
Bulgarian official, Bojan Stoyanov, who was deputy energy minister in
2013. “The Russians are promoting behavior where people are willing to
dig the hole of a volcano in the middle of their country and not worry
where the lava goes as long as they get paid.”
Putin’s Favorite Musicians
Vladimir Putin had a problem.
By 2011, his plan to build South Stream, estimated to cost more than $40
billion and four years in the making, had hit a stumbling block in
Bulgaria, where the pipeline would make landfall after traversing the
bed of the Black Sea. Geological surveys suggested that Bulgaria could
be sitting atop an underground ocean of natural gas, enough to be
self-sufficient for years, enough to eclipse the advantages of South Stream.
Bulgaria, once a staunch Soviet ally, and Russia share similarities in
language, religion and culture, and Bulgaria still celebrates as a
national holiday its 1878 liberation from the Ottoman Empire by the
troops of the czar. Bulgarian leaders supported South Stream, declaring
that the pipeline would provide not just transit fees but energy
security: The country receives 90 percent of its gas from Russia, along
a route through Ukraine that has left it vulnerable to periodic pricing
disputes between Moscow and Kiev. In the winter of 2009, Bulgarians were
left shivering for two weeks when Russia shut off the gas to teach
Ukraine a lesson.
But in the middle of 2011, Bulgaria’s prime minister, Boiko Borisov,
also granted Chevron a permit to explore for shale gas. Almost
immediately, a well-organized campaign emerged to kill shale exploration
before it began, fueled in part by loyalists for Ataka, one of several
far-right parties that Mr. Putin has cultivated in Europe. Parties like
Jobbik in Hungary and the Northern League in Italy view Mr. Putin as a
bulwark against a tide of Western liberalism. But the appeal is more
than ideological. In France, the leader of the far-right National Front,
Marine Le Pen, recently acknowledged that her party had received a loan
for 9 million euros, or about $11 million, from a Kremlin bank.
In Bulgaria, Volen Siderov, the chairman of Ataka, said his party
received no direct funds from Moscow.
“I’ll ask her how she managed to do it,” he joked of Ms. Le Pen.
Still, Mr. Siderov has undeniably close ties to the Kremlin. He kicked
off his most recent political campaign in Moscow, where he was receiving
the Fatherland Star medal for promoting closer relations between Russia
and Bulgaria. When he needed entertainment for a rally this fall, he
landed singers described in Ataka promotional literature as “Putin’s
favorite musicians”: Oleg Gazmanov, an aging Russian pop singer, and
Iosif Kobzon, a lawmaker and singer who recently performed in Donetsk, a
Russian separatist-held stronghold in eastern Ukraine, accompanied by
the orchestra of Mr. Putin’s Interior Ministry.
The anti-fracking movement became so broad that in January 2012,
Parliament banned not only the extraction of shale gas, but even
exploration that would quantify the country’s reserves.
Environmentalists praised the vote, but many Western officials were
suspicious.
In Brussels, Anders Fogh Rasmussen, secretary general of NATO, later
accused the Russian government of using “sophisticated information and
disinformation operations” to help derail shale gas exploration in
Bulgaria and other countries.
With the death of shale gas, South Stream’s rationale was stronger than
ever, especially as the Borisov government weakened. Mr. Borisov had
signed preliminary pipeline agreements, even once presenting a puppy to
Mr. Putin as a gift, but he was still considered pro-Western. Barely a
year after the fracking demonstrations, Ataka members again took to the
streets, joining protests over high electricity prices. In March 2013,
Mr. Borisov resigned.
A caretaker government was appointed, pending new elections, and Mr.
Putin’s representatives quickly sought out the crucial figures involved
in South Stream.
The Putin Steamroller
The meeting occurred after midnight at La Casa del Habano, a cigar bar
in Sofia. Mr. Stoyanov, a New York-based corporate turnaround specialist
who had returned to Bulgaria to serve as deputy energy minister in the
interim government, had received several calls from an old acquaintance,
insisting they meet for a drink.
But Mr. Stoyanov was surprised to find that his friend was not alone at
the bar. With him was Aleksandr M. Babakov, a member of the Duma, the
lower house of the Russian Parliament, whom Mr. Putin had appointed as a
special envoy. (Mr. Babakov has been identified by the French news media
as the middleman who arranged the Russian bank loan to the National
Front in France.)
The purpose of the meeting soon became clear. “He wanted to take my
temperature on the South Stream,” Mr. Stoyanov recalled in an interview.
Mr. Stoyanov said the project would not reduce Bulgaria’s dependence on
Russian gas and would bring marginal economic benefit, but Mr. Babakov
had not come to debate the merits.
“In not so many words, he said he would make me very comfortable if I
would participate and help,” Mr. Stoyanov said, adding that he reported
the encounter to Bulgarian intelligence. “I was not pleased by his
presumption that I would just set aside and forget Bulgaria’s national
interests.”
Mr. Babakov did not respond to requests for comment.
Mr. Stoyanov’s skepticism about South Stream mirrored that of officials
in Brussels and Washington. European Union rules forbid the same company
that produces gas to monopolize the pipeline that delivers it. Europe
insisted that South Stream allow access to other gas producers in order
to safeguard against overreliance on Russia.
At one European summit meeting several years ago, Mr. Putin and the
European Commission president, José Manuel Barroso, argued over those
rules, according to C. Boyden Gray, an American diplomat who in 2008
served as special envoy for Eurasian energy. Two officials in the room
told Mr. Gray that the Russian leader exploded.
“If I hear one more word about competition, I’m going to freeze your
you-know-whats off,” Mr. Putin reportedly shouted.
Mr. Barroso, whose term expired in October, said he did not recall the
specifics of the exchange but confirmed that he and Mr. Putin had clashed.
“His point was always: ‘This is against us! This is against Gazprom!
This is against Russia!’ ” Mr. Barroso recalled.
By the time Bulgaria held elections in May 2013, Mr. Putin was in a
stronger position. He had proposed South Stream as an alternative to a
Western-backed proposal for a pipeline, called Nabucco, from Azerbaijan
to southern Europe. Nabucco would have reduced Europe’s dependence on
Russian gas, as well as Mr. Putin’s influence. But the project had died
by 2013 because of political and economic obstacles as well as
interference from Mr. Putin. Now only South Stream was left standing.
Moreover, the Russians had already invested heavily in Bulgaria. VTB
Capital, the investment wing of Russia’s second-largest state-owned
bank, had opened a Sofia office, placing Bulgaria’s former finance
minister, his deputy and the minister’s brother in major positions. VTB
Capital, which declined to comment for this article, then partnered to
buy stakes in a host of companies with Corporate Commercial, known as
the favored bank of Bulgaria’s energy oligarchs. VTB even took a 9.9
percent stake in the bank itself.
The Bulgarian elections also seemed to work to Mr. Putin’s advantage.
They produced an awkward coalition government between two pro-Russia
parties — the Socialists and the Turkish minority party. And since
together they could not achieve a parliamentary majority, they relied on
Ataka to achieve a quorum. Mr. Siderov, Ataka’s leader, was nicknamed
the Golden Finger because he tipped the balance.
The new prime minister was a technocrat, Plamen Oresharski, who found
himself caught between this Moscow-leaning coalition and growing
pressure from the European Union. Aleksei B. Miller, the man Mr. Putin
had chosen to lead Gazprom, was sent in July to bring the Bulgarians
into line. He promised to finance the €3.1 billion construction of the
Bulgarian leg of the pipeline and agreed to sponsor CSKA Sofia, the
capital’s top professional soccer team.
But Europe was pushing Mr. Oresharski, too. The European Commission had
begun an investigation into Bulgarian Energy Holdings, the state
corporation that was to be Gazprom’s partner in South Stream.
Three months later, Mr. Miller returned to Sofia, this time in secret,
for another session with Mr. Oresharski. It was supposed to last only 40
minutes, one official said. Months later, prodded about the lack of
transparency, Mr. Oresharski angrily responded that the “only
nontransparent thing with South Stream is my five-hour conversation with
the boss of Gazprom, the contents of which will never be revealed.”
Mr. Oresharski did not respond to requests for an interview. But Russian
interests clearly won out. The next day, Mr. Oresharski and Mr. Miller
watched by video link as workers welded the first two joints of the
pipeline’s Bulgarian leg.
A few months later, over the Christmas holidays and without public
notice, the construction contracts were awarded: Bulgarian news outlets
subsequently reported that the winners included companies with ties to a
Bulgarian media mogul and member of Parliament, Delyan Peevski. In a
statement, Mr. Peevski denied any ties to the project, calling the
reports rumors “spread by the yellow press in Bulgaria.” The
acknowledged Russian construction partner was Gennady N. Timchenko, one
of Mr. Putin’s most powerful allies.
All seemed ready. The only obstacle was the European pipeline rules —
unless they could be circumvented.
Pipeline That’s Not a Pipeline
On April 4, 2014, soon after Mr. Putin annexed Crimea, Bulgaria’s
Parliament gave initial passage to a bill that effectively exempted
South Stream from a number of European Union regulations, most
important, the one that would have forced Gazprom to allow non-Russian
gas to flow through the pipeline. Both parties in Mr. Oresharski’s
coalition supported the legislation, as did Ataka and its leader, Mr.
Siderov.
The bill accomplished this with a linguistic sleight of hand: The
initial Bulgarian section of South Stream was not actually a pipeline,
but rather a “gas-sea” interconnector. The European Union challenged the
proposed change, while opposition ministers filed a freedom of
information request for documents linked to the bill. A month later,
they announced that the documents — which have been obtained by The New
York Times — proved that Gazprom and the Kremlin were directly involved.
“This was a unique breach of national security,” Grozdan Karadzhov, a
Reformist lawmaker, said in an interview. “It was also a unique amount
of arrogance in how Russians see Bulgaria.”
The documents included passages of draft legislation suggested by a
Gazprom subsidiary and forwarded to Bulgarian energy officials.
In an interview, the energy minister at the time, Dragomir Stoynev,
called Gazprom’s suggestions a form of lobbying, insisting that “nobody
dictated the terms; these were all our suggested changes.”
But in a letter dated June 6, 2014, Mr. Stoynev acknowledged a direct
Russian hand. In it, he updated his Russian counterpart, Mr. Putin’s
energy minister, on where things stood. The “law amendments proposed by
the Russia side” were discussed in detail, he wrote, and a number of
them were approved by Parliament.
It was audacious, but it would not be enough. The bill would never be
brought up for a second, final vote, largely because of the escalating
conflict between Russia and Ukraine. In early June, the European
Commission told Bulgaria to stop work on South Stream, saying it was
investigating whether the pipeline construction contracts violated
European competitive-bidding rules. When the Bulgarian government
refused, the European Union cut off tens of millions of euros in
regional development funds.
By this point, Ukrainian government forces were battling pro-Russian
separatists in the east, and in the West there was talk of a new Cold
War. On June 6, the American ambassador, Marcie B. Ries, warned
Bulgarian companies against doing business with companies linked to Mr.
Timchenko, who is on American sanctions lists. On June 8, a
congressional delegation led by Senator John McCain, Republican of
Arizona, met privately with Mr. Oresharski.
In desperate need of the European funds, the prime minister announced
the next day that South Stream would be halted until it had full
European Union approval.
At almost exactly the same moment, an unexpected panic swept through
bank depositors in Sofia; a mysterious bank run had started at Corporate
Commercial, the bank that had partnered with the Russian investment firm
VTB Capital, and the financial institution of the state holding company
overseeing Bulgarian involvement in South Stream.
Some speculated that VTB Capital, with its nearly 10 percent stake,
would join other shareholders in riding to the bank’s rescue. But after
Mr. Oresharski’s decision to halt the Bulgarian leg of South Stream, the
Russian bank declined to participate in a bailout. Corporate Commercial
collapsed, and in the ensuing crisis so did Mr. Oresharski’s government.
The final, unexpected development came on Dec. 1 when Mr. Putin, on a
state visit to Turkey, announced that South Stream was dead. He blamed
Europe and, according to press reports in Turkey, said he was “fed up
with Bulgarians.”
Since then, Chancellor Angela Merkel of Germany, Europe’s most powerful
leader, has suggested that South Stream might yet be built. After
meeting with her, the new Bulgarian prime minister said he was confident
European Union objections could be overcome.
Even if they are not, some diplomats contend that Mr. Putin achieved
many of his goals.
While “he overreached, and he underestimated the response” to his
intervention in Ukraine, said Mr. Gray, the former American diplomat,
the Russian leader has been “quite effective” in countries like Bulgaria.
“He won a great deal by getting Nabucco stopped,” Mr. Gray said.
“Ultimately, his goal is to keep as much control over the former parts
of the Soviet empire as possible.”
Jim Yardley reported from Sofia, and Jo Becker from Budapest and New
York. Georgi Kantchev contributed reporting from Sofia, and Masha
Goncharova from New York.
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