Turkish debts to Gazprom and Ankara’s alternatives

Published on slpress.gr

On June 15, in the midst of the Libyan crisis, where competition between Russia and Turkey was crystallizing, the Wall Street Journal decided to light up an additional thorn in the two countries’ relations: the accumulation of a significant debt to Gazprom for seven Turkish companies.

This debt amounts $ 2 billion and results from the “take or pay” contractual clauses. According to the rules of the long-term contracts concerned, the buyer must pay for all contracted gas, including volumes not consumed. This also works the other way around: If the supplier uses the capacity of the pipelines below the agreed amounts, transit and importing countries shall be compensated with the corresponding price difference.

The use of the above clauses was one of the legal foundations the Russian state giant relied on in order to expand the network of international pipelines that supply European markets. The reason is precisely because this mechanism ensured a flow of capital regardless of fluctuations in quantities of gas consumed – a good way to reassure infrastructure creditors. Russia has also used these debts to Gazprom in order to pursue diplomatic goals, first and foremost towards its neighboring former Soviet republics.

Route to Ankara

South Stream was one of the major international pipeline projects for Gazprom. In 2014, a series of events led to a change of the original route and its diversion to Turkey. First, the conflict in Ukraine which made the need to bypass that country more urgent. Then, European intransigence over competition rules governing the operation of international pipelines – an intransigence owed largely to Germany since South Stream was in competition with Nord Stream 2. Finally, the procrastination of the Bulgarian government towards the project. In this context, Turkey emerged as a creditworthy shore for receiving the pipeline – hence renamed “Turkish Stream”.

The new pipeline, with a capacity of 32 billion cubic meters per year, was inaugurated last January. Ironically, a new series of events did not allow its full operation. The reduced consumption in Turkey that explains a large part of the debt to Gazprom is due to the relatively warm winter, to the fact that the gas available on spot market was cheaper than the Russian gas and of course to the pandemic, that Turkish companies can invoke as ” force majeure “, thus weakening the position of the Russian exporter in the negotiations on recovering $ 2 billion.

Therefore, the Turkish energy debt can hardly become a diplomatic tool of the Russian government to use at will. In fact, this debt highlights the failures of Russia’s export strategy: The rationale for Ukraine’s southern bypass was precisely to avoid trade disputes with transit countries, which led to a complete cessation of flows to Europe during the winter of 2009. In addition to that, the ability of the once promising Turkish market to absorb increasing quantities of Russian gas, remains to be proven in the post-pandemic era.

Turkish advantages – Message to Greece

Despite poor domestic production, Turkey has a significant advantage in this trade relationship. Unlike Ukraine, whose gas supplies depend almost entirely on Russia, Turkey has become a physical hub. This has been an ambition at the highest political level since Erdogan’s first government (2003-2007). By expanding its network of routes and suppliers, as illustrated in the cartographic study we conducted at Cartopsis, during the last twenty years, Turkey has systematically reduced its dependence on Russian gas. In the first quarter of 2020, the share of Russian gas imports fell close to 20%, behind Azerbaijan.

The above situation sends signals that the Greek government must interpret properly. As usual, the public debate insists on trivial facts: East Med is an alternative transport corridor (non-German, non-Ukrainian, non-Turkish) for an alternative source of gas (non-Russian) to Europe. These are attractive attributes. However, it is also an expensive infrastructure at a time of low prices and high uncertainty.

EU support cannot be taken for granted. The natural gas distribution network in Greece is already at risk of cessation of funding from the European financial instruments. It should also be noted that East Med is a heavy commitment with a stagnating Western European gas market and therefore, the terms and guarantees for its operation will probably be stricter.

In the near future, these trends may lead some contracting parties in East Med to consider redirecting the pipeline route towards Turkey. This is for example the rationale adopted in a recent article from the Petroleum Economist: For Israeli gas reserves, Turkey is considered the cheaper solution in terms of transport infrastructure and the more secure in terms of market potential.

Turkish energy diplomacy

Such a choice, however, would be disastrous for the Greek side: it would further strengthen the Turkish energy hub, make Turkey a monopsony for Cypriot gas, and give Erdogan a drastic advantage in the balance of power that will determine the Eastern Mediterranean Exclusive Economic Zones.

In March 2015, at a conference hosted by the European University of St. Petersburg, Michael Lotem, Consul General of Israel, one of the architects of Israeli energy diplomacy, explained how Turkey became the first choice for Israeli gas exports, both for companies and relevant ministries.

When I asked him about the perspectives of this relationship after Mavi Marmara, his answer was clear and concise: “realpolitics beat politics”. Some may still hope that Erdogan’s neo-Ottoman upheaval impedes this option in the mind of Israeli decision makers.