Gazprom’s Empire strikes back

The report of the “Mitov Commission” on April’s cut-off of gas supplies by Russia’s Gazprom is due to be published tomorrow. If the draft is anything to go by, it will be a triumph of one-sidedness and Russophilia.

It will be all over the front pages, so brace yourselves. Tomorrow (Tuesday July 26) will see an open session of the 14-person Special Gas Commission set up by the National Assembly (parliament) on May 11 to investigate the circumstances surrounding the cut-off of gas supplies to Bulgaria by Gazprom Export, the exporting arm of state-owned Russian behemoth Gazprom. Chaired by Daniel Mitov, a former foreign minister and member of parliament (MP) for the quaintly-named Citizens for the European Development of Bulgaria (GERB, in its Bulgarian-language acronym), the session will discuss and finalise the draft of the Commission’s Report. I’ve read the draft closely, and can honestly say that it’s a real masterpiece – a masterpiece of Kremlin propaganda and Russophilia.

Defining “Russophilia”

Now, let’s have a qualification, a clarification and some definitions. I’ve said “Russophilia”, but maybe “Kremlinophilia” or even “Putinophilia” would be more accurate. They are a bit of a mouthful, however, so let’s stick to “Russophilia” and be clear that we are using it as shorthand and in a very specific sense.

This sense has nothing to do with liking Tolstoy, Chekhov, Tchaikowsky or any of the other towering figures of Russian culture: by that criterion I must admit to being quite a Russophile myself. It’s not even a question of having faith (or at any rate hope) that the considerable and distinctive potential for good in Russian society will one day, some day, in however remote a future, be realised – though I must confess that hope has been wearing very thin indeed recently.

No: by “Russophilia” I mean the propensity to put first the interests of Russia – as defined by Russia’s normally malignant and toxic rulers – ahead of those of one’s own country, and to benefit handsomely from doing so, in terms of both power and wealth.

Russophilia in this sense is not primarily a question of sentiment. Yes, it’s a state of mind, a religion, but it also has an economic logic, an economic psychology, an economic modus operandi, and a set of economic assumptions and economic arguments.

One feature distinguishes the economic logic behind Russophilia from the standard motives – market, individualistic motives – that drive ordinary people.

Most people seek personal and family welfare gains, not at the expense of collective wealth, but on the basis of their own initiative, entrepreneurial risk and responsibility. Our Russophiles, by contrast and without exception, seek to achieve their individual or collective well-being through grand corruption in large public-funded projects or state companies’ contracts.

The rationale is not complicated, and it delivers effectively enough to justify spending BGN 8 billion on various projects involving Kremlin interests, with no visible public result. But in the interim, the missing cash has been parked in the pockets, in desk drawers and in the offshore bank accounts of prominent Bulgarian politicians, magistrates, MPs and state officials. Therefore, from the standpoint of individual or group cost-benefit analysis, Russophiles are second to none in translating power into personal wealth. And our Bulgarian Russophiles are probably the most convinced and effective Russophiles in the world. 

The Russophile economy: two key features…

So what are the distinctive features of the economy of Russophilia? I would point to two.

The first feature is that, at the inception phase, there has to be a Grand Design, a big idea, something to excite the imagination, a large-scale, one-stroke solution to a problem assumed to permeate Bulgarian society as a whole. It is hard to find a better example of such a Grand Design than the Belene nuclear power plant (NPP) – big, expensive, and risky. In one fell swoop, the Grand Designers proposed to solve a non-existent problem of supposedly imminent electricity supply shortages, which evolved later into a Southeast European regional echo of the Kremlin’s energy imperialism in the deeds of Russian proxies in the Bulgarian energy sector.

And the second feature of Russophilia? A near-total disregard for financial and geopolitical risk in committing to and pursuing the Grand Design du jour. To consider such risk is just common sense. When committing long-term to the Kremlin as a strategic partner, it would have been rational for Bulgaria to assess and mitigate the geopolitical risk of doing business with Vladimir Putin’s Russia. That would have meant taking measures to ensure that Moscow acted within the confines of natural self-restrictions, precluding destructive and disruptive acts for at least long enough to allow Bulgaria’s investments in the project to be recouped. And it would also have meant avoiding any project for which this was impossible to insure against non-performance risk.

But this just wasn’t done. Consider two projects.

…two key projects…

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One is the Turk Stream pipeline, which takes Russian gas to Bulgaria and Southeastern Europe via the Black Sea and Turkey, bypassing Ukraine. The outstanding debt owed by Bulgaria in connection with the financing of this project amounts to BGN 3 billion. But the revenues that would allow its repayment are, to put it mildly, uncertain. This geopolitical risk directly relates to Russia and, today, it is entirely unmanageable, imperiling any business transaction involving the Kremlin as long as Russia is at war with Ukraine. 

The other example is the Belene NPP project, which we’ve already mentioned. This has run into exactly the same problem. Bulgaria has invested over BGN 3.5 billion in the project, in the form of equipment bought and construction expenditure incurred. And, as a result of the war, all of it is now a write-off, with none of these assets having any chance of becoming part of a going concern. Even an extreme optimist will find it impossible to imagine how exactly Russia’s Rosatom will be capable of operating in an EU country. 

This just should not have happened. The last attempt to involve a Western investor in Belene NPP ended when Germany’s RWE pulled out because it could neither satisfactorily assess nor acceptably mitigate the Russian geopolitical risk involved in the project. That should have set alarm bells ringing in Sofia: the fact that a sober and substantial company like RWE was walking away from the project was a pretty good sign that the project itself was a bad idea. But no: shortly after the German company left, Bulgaria’s Russophiles invoked their classic adage – that the state should invest whenever private capital is not interested. In this way, when a project proves economically unfeasible, the “national interest” comes into play – justifying billions in planned losses.

…and one predictable disaster

And now there’s war. So could this all have been foreseen five or ten years ago? Most certainly it could.

Not only was the war in Ukraine preceded by the invasion of Crimea in 2014 – which, let’s be frank, was a bit of a giveaway. Besides this, the long-term trajectory of Mr Putin’s policy was pretty clear from Russian behaviour as early as the first decade of this century – at least to those whose eyes were open and who bothered to pay attention.

But we digress. Let’s stop crying over spilt milk, it might be said, and concentrate on what is to be done now. Before Mr Putin set his tanks rolling, one agenda item had been a new long-term gas supply contract with Russia’s Gazprom. And, believe it or not, manoeuvring around that is currently at its peak. The draft of the “Mitov Report” features the claim that continuing to negotiate and ultimately signing such a contract would have been a rational step for the government back in April.

Towards a new Gazprom contract – or contracts?

Which raises the possibility that it might also be a rational step in the near future. And also raises the same old (perfectly legitimate) question: why are public money and public companies so quintessential for Russophiles? 

After all, no one has banned those politicians who are so enthusiastic about Russian gas, as individuals or as a group, from importing Russian gas through one of Bulgaria’s more than 35 licensed gas traders. Not GERB’s long-serving prime minister (and Mr Mitov’s boss) Boyko Borisov; not Delyan Peevski, business guru of the Movement for Rights and Freedoms (MRF); and not Korneliya Ninova, chief of the Bulgarian Socialist Party (BSP). 

By their own account, in fact, doing so should be a no-brainer. The existence of demand for additional gas is an axiom for them, needing no additional proof. And they all agree that Russian gas is cheaper than the alternatives. So the two essential elements for profitable business are in place and, even without long-term sale contracts, importers would presumably have no problem in disposing of almost any quantities of natural gas on Bulgaria’s two gas exchanges. 

In fact, Gazprom is doing something a little like that itself: Russian gas is now being traded in increasing volumes via Gazprom proxies. The Russian giant is concerned that, after its own action in cutting off the gas when Bulgaria refused to pay for it in roubles, it will be difficult to recover its lost market share in Bulgaria, Hence a back-door strategy of selling more gas via the likes of WintershallErdgas Handelshaus Zug AG(WIEE) – a joint venture between Germany’s  WintershallHolding AG (majority owned by BASF Group) and OAO Gazprom. 

Gazprom’s game plan in manipulating the EU gas market is to discredit former strategic partners like Bulgargaz and replace them with more than one backup contract. 

Until the Kremlin chose to cut off gas supplies to Bulgaria, Gazprom had enjoyed a monopoly status. However, given the efforts of the government of (now outgoing) prime minister Kiril Petkov to diversify in terms of both routes and sources, Moscow decided to get ahead of events before Gazprom’s market share withered, preempt the worst-case scenario and topple the Bulgarian government while challenging Bulgargaz both logistically and financially. Pro-Gazprom lobbyists saw in the gas supply cut-off a unique opportunity to attack the Government on charges of incompetence and negligence with respect to national energy security interests. 

One thing is sure: Gazprom has destroyed its reputation as a trustworthy gas supplier. Moreover, German Chancellor Olaf Scholz has publicly named Russia and Gazprom as “unreliable” partners, triggering a chain of events in the related risk-mitigation and insurance businesses. As a result, the EU’s strategic detour away from Russian gas is a foregone conclusion.

Bulgaria should have known better after three unilateral and unprovoked suspensions of natural gas supplies in the past 13 years. It is next to impossible to convince anyone today that Gazprom will not do it again and again. Insuring a gas supply contract with Gazprom is a mission impossible. The war in Ukraine has further blurred the line between corporate and commercial decisions on the one hand and politics on the other in Gazprom’s work, and has placed it squarely alongside the Russian army as an instrument of President Putin’s military ambitions. 

No Bulgarian or European politician today can claim the ability to guarantee an uninterrupted supply of Russian gas. It is even harder to convince the public in the EU that the gas money paid to Gazprombank – the bank that is deliberately spared EU sanctions in order to be able to service gas transactions – is not directly sustaining the Russian army’s operations financially. Moreover, it can’t be “business as usual” anymore, as gas payments translate into hundreds of new deaths daily, including the deaths of children, women and the elderly.

In Miti-gation

In short, Gazprom’s top managers – or its second echelon, anyway, since the real top manager sits at the end of a very long table in the Kremlin – must contend with the fact that their company has a bit of a reputational and credibility problem. They will, however, have some consolation when the final version of the Special Gas Commission’s report is out: at least Daniel Mitov and the majority of his colleagues love them.

The report’s draft, in fact, shows just how far current MPs’ capture by, and subservience to, Russian and Gazprom interests has gone. 

The report’s purpose is to substantiate the opposition’s narrative that the Government and Bulgargaz could have averted the gas crisis by agreeing to pay in roubles (regardless of the penalties threatened by the European Commission) and by resuming negotiations with Gazprom on a new contract, and signing that contract. The Mitov Commission’s remit was also, incidentally, defined in a way that restricted its consideration to the events of April and the gas cut-off – excluding, for instance, the question of why next to nothing had been done in the preceding decade or more (for most of which GERB had governed) to reduce Bulgaria’s vulnerability to Russia’s gas blackmail. 

Now, it is difficult to reconcile the claims to “Atlanticism” by the draft’s main sponsors – GERB politicians led by Mr Borisov and Mr Mitov – with the lack in that draft of a single word of criticism of the Kremlin’s use of Gazprom gas cuts as a weapon. More remarkable still is the contrast between the treatment received at home and abroad by the Bulgarian government and Bulgargaz. They experienced an overwhelming display of solidarity and support from across the EU and NATO, including emergency supplies from the US and other partner countries. But from the ostensibly pro-NATO opposition they received not even a semblance of solidarity in the heat of confrontation with an adversary dedicated to inflicting damage and additional financial pain on Bulgarian consumers.

In fact, when one reads the draft, it’s difficult to avoid the impression that was written in the offices of Gazprom Export, so undisguised is its hostility to the Petkov government and Bulgargaz. It’s as if Gazprom’s termination of natural gas supplies at the end of April and the recent criticism by the Bulgarian parliamentary opposition have been to some extent coordinated and serve overlapping ends.

Which should be no surprise. So thorough is Bulgarian public life’s infiltration by Russian agents of influence, following the greatest geopolitical gift ever made by Bulgaria to Russia – the Turk Stream pipeline – that Bulgarians can hardly expect to have a functioning state capable of uniting against an adversary. 

The draft of the Mitov Commission serves as an opening for the electoral campaign of GERB, the MRF and the BSP, whose aim is a restoration of the status that existed before the gas cut-off and the subsequent mass expulsion of Russian diplomats (or “diplomats”). In turn, this would ensure the sustained level of corruption that provides the resource base for the reproduction of the oligarchic model underlying the Kremlin’s capture of the Bulgarian state. It would, in other words, mean a country once more fit for Russophiles.  

Ilian Vassilev