Turkey and Russia Fail to Resolve Pipeline Dispute

Turkish and Russian energy officials have failed to resolve a pricing dispute concerning the Blue Stream pipeline. Turkish sources indicate the two sides remain far apart. The deadlock could cause a shake-up at Gazprom, the Russian concern responsible for exporting gas via Blue Stream, according to media reports in Moscow.

A Russian delegation headed by Alexei Miller, the Gazprom CEO, visited the Turkish capital Ankara on July 10 seeking to break a negotiations stalemate. [For background see the Eurasia Insight archives]. According to Turkish sources, Miller could not secure a commitment from Turkish officials to resume gas imports that were suspended in March. The two sides agreed to continue talks, however.

In suspending Blue Stream energy deliveries, Turkish officials complained about high costs and weak demand. They have sought reductions in both the price and volume of gas deliveries. "There has been a lot of material [that came out of the talks] for both sides to examine individually," Turkish Energy Minister Hilmi Guler said after the July 10 discussions. Guler added that the existing Blue Stream agreement was "made against the interests of Turkey [and is] being tried to be rectified. We aim to get natural gas on improved terms."

Meanwhile, pressure in Moscow seems to be building on Miller. A commentary posted on the Strana.ru web site said "the current situation can be described as a dead end," thus threatening Russia's investment in the $3 billion Blue Stream project. Meanwhile, an editorial published by the Izvestiya daily suggested that government officials are blaming Miller for strategic mistakes. "Within the [Russian] government there is talk that the idea of building such an expensive pipeline for only one customer was too radical, and hints at the possible resignation of Miller," the Izvestiya editorial said.

Turkey's semi-official Anatolia news agency reported July 11 that continuing negotiations would be conducted via "communication lines." Political analysts in Turkey interpret this as meaning that substantial differences continue to separate the two sides. The agency added that Turkish and Russian representatives would "assess" proposals exchanged during the July 10 talks. Both sides have threatened to take the Blue Stream dispute to international arbitration, even though the process could prove complicated, costly and potentially unfulfilling.

Turkey is reportedly interested in using barter deals to pay for Blue Stream energy. Russian negotiators have rejected the barter proposal, citing the fact that Gazprom must repay its bank creditors in cash. Meanwhile, Gazprom supposedly expressed an interest in helping to finance the construction of gas distribution networks in Turkey. Such infrastructure improvements in Turkey have been hampered by the country's financial struggles in recent years. [For background see the Eurasia Insight archive]. Gazprom assistance could hasten the pace of network expansion, which could have the net effect of stimulating demand. Turkish officials did not appear enthused about the proposal. In addition, Turkish officials indicated that earlier concessions by Gazprom, including a moderate price cut, were insufficient to break the deadlock.

Complicating the search for a Blue Stream settlement is the fact that the pipeline issue has become enmeshed in Turkish domestic politics. The incumbent government, dominated by the Justice and Development Party (AKP), seems determined to use Blue Stream to expose allegedly corrupt practices by the previous government. A Turkish parliamentary commission has launched an investigation into whether former government officials personally benefited from agreeing to Blue Stream terms that were unfavourable to Turkey.

The corruption probe has proven popular with the Turkish electorate and some political observers in Turkey suggest the AKP – which has struggled to promote economic reforms, while presiding over strained bilateral relations with the United States – may take try to take political advantage of Blue Stream outrage to move local elections forward. Those elections are now scheduled for April, 2004.

Another factor prompting Turkey to drive a tough bargain is Ankara's desire to diversify its energy sources. The AKP government would prefer to reduce its dependency on Blue Stream and obtain power from other sources, including solar energy, hydro stations and nuclear reactors. "We cannot ignore [building] nuclear power stations," Guler said July 13.

In his July 13 comments, Guler stated that Turkey has experienced an "overdependence on a single [energy] source [Russia]." He went on to say that the Blue Stream issue "is not easy to resolve."

In the aftermath of the July 10 talks, two powerful constituencies appear to be growing anxious and have started to exert pressure on Turkish authorities. One is the Turkish business community, which is concerned that the Blue Stream dispute may damage overall trade between Turkey and Russia.

Another is the Italian government, which currently holds the European Union's rotating presidency. One of Blue Stream's investors is the Italian energy company ENI. Some Turkish media outlets have reported that Italian Prime Minister Silvio Berlusconi has asked Ankara to quickly settle the pricing dispute. Turkish officials have not confirmed that discussions with Berlusconi on Blue Stream have taken place. However, Turkish political analysts point out that Rome has plenty of potential leverage due to its current EU position. Turkey has expressed eagerness in recent months to hasten the process of joining the EU, and Ankara is striving to fulfil requirements for the start of accession talks.