Mr Radev looks East—Part 4: Of nuts, bolts and grand strategy

The first three ( 1, 2, 3) parts of this four-part article have looked at Bulgaria’s energy dependence on Russia, at its history and politics, and at recent developments in its three main areas or “dimensions” – nuclear fuel, oil and natural gas.

We saw in particular how the current caretaker government, appointed by president Rumen Radev, has done its best to reinforce that dependence and, in the process, to keep money flowing eastwards, thus supporting the war effort of Russian president Vladimir Putin against Ukraine.

In the most recent instalment, we analysed the clutch of gas-supply tenders launched by the government and, in particular, the tender for a long-term contract (LTC), which we criticised as inappropriate and ill-advised on various counts – and as making most sense as a “stitch-up”, designed to produce a produce a predetermined outcome.

Namely: a situation in which a contract with a Turkish or Greek intermediary acts as a front for a ten-year supply arrangement with Russian state-owned gas giant Gazprom, the monopoly (or near-monopoly) purveyor of gas to Bulgaria for decades past.

Nuts and bolts

But aren’t we jumping the gun a little here, in talking of Gazprom and of a contract via a proxy? Is such a contract plausible, feasible? And how precisely would it work?

Well, of course, no-one is making it explicit that an LTC would involve exclusive delivery of Gazprom-origin gas or that it would be, in effect. an indirect contract with Gazprom. But the recent activities of DEPA and Mytilineos, each of which has a long-term pipeline gas supply contract with Gazprom and has won the November-December tender, rather suggest that might be the pattern.

As to how it would work, that takes a little more argument. Would there not be legal or political difficulties getting such a contract past the European Commission (EC)? Might it be contrary to sanctions?

In a sense, probably not, as sanctions to Russian gas, analogous to those on Russian oil, are unlikely to be adopted at EU level. Hungary has vowed to block them. And for good reason: if such sanctions came into force, Viktor Orban would lose his perceived political premium in dealing with the Kremlin.

There have been attempts to cap the prices of Russian gas or to introduce an EU-wide single-buyer model (SBM) for gas to enhance the EU’s bargaining leverage. But these efforts have been futile so far.

The EC and the EU Council in general are pushing for further forced diversification steps in the light of Kremlin threats to “freeze Europe”. Given that the Kremlin has made gas trade a casus belli, all EU countries, including Bulgaria, are expected to minimise direct imports of Gazprom gas (in Bulgaria’s case, indeed, this had already happened, as Gazprom had cut off all supplies in April). So direct transactions, if not downright impossible, at least entail a high political and business risk, and their costs can therefore be considered, for practical purposes, politically and economically prohibitive, when you add to the price the cost of further political risk insurance. Hence the attempt to bypass restrictions via brokers in Turkey and Greece.

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And, in practical terms, a situation in which Gazprom was the covert (or semi-covert) beneficiary of such a tender on a stable basis would not be difficult to set up. It would be achieved by means of back-to-back contracts: when a Turkish or Greek company won the LTC, it would sign a contract with Gazprom, possibly for an equivalent timespan or possibly for a shorter period.

However, an indirect but publicly acknowledged LTC with Gazprom would be politically embarrassing for the Bulgarian government; and might even become more than just embarrassing, against possible litigation in arbitration court. Unless, that is, Mr Radev and his new political allies (and old accomplices) – Boyko Borissov’s GERB party and the Movement for Rights and Freedoms (DPS), dominated though not led by sleazy oligarch Delyan Peevski – want to put Bulgaria on a level with Viktor Orban’s Hungary. Which they presumably don’t, since it would mean saying goodbye to their cherished plans to join the Eurozone, the Schengen bloc and the OECD.

And this principle goes, not just for gas supplied to Bulgaria, but also for Russian gas exported to the EU generally. That is why the “EU Gas Energy Hub” idea is so important to Mr Putin and Mr Erdogan: entering Turkey, Russian gas ceases to be nationally identifiable (or at any rate can be claimed not to be so). It’s mixed with Azeri, Iranian, Turkish, Iraqi, and possibly even Israeli gas – not to mention some LNG – becoming an element in a “Turkish Gas Hub blend”, which can then be sold on to Europe without undue fuss. How significant an element, it would be difficult to tell. Turkey uses more than 50 bcm annually, so a lot of Russian gas could be discreetly ‘laundered’ within that total and exported as “part of the Turkish internal mix”.

In the end, it’s a matter of certification: the process allows the intermediaries to provide the buyer, Bulgargaz, with cover in the form of a non-Gazprom certificate of origin. This scheme has been already tested, in October and November this year, with Gazprom’s LNG being “whitewashed” in Greece, via the intermediary Mytilineos, which resold the gas to Bulgargaz as “non-Russian”, i.e. with a Norwegian certificate of origin from a prior delivery. And it seems to have worked.

Now, how does this all translate into politics?

Acting local, thinking regional

What’s visible is just the tip of the geopolitical iceberg Bulgarian politicians would have to deal with. The Unholy Trinity of Messrs Radev, Borissov and Peevski will not be satisfied with ensuring that Russian gas supplies have a respectable but not overwhelming share – say 50% – of the Bulgarian domestic market. This would hardly be enough of a foundation for the edifice of corruption that’s been keeping politicians, oligarchs and top energy sector managers happy so far. For a start, they will want a much bigger market share than at present. But, more important, they will want to be part of the Putin-Erdogan scheme of an “expanded Turk Stream”, whose significance extends far beyond Bulgaria – and whose potential for sleaze is correspondingly greater.

Now that Mr Putin and Mr Erdogan have agreed ‘in principle’ to build, in Turkey, the Energy Hub that is to take tens of billions of cubic meters of new Russian gas to Europe, ‘little’ Bulgaria has moved centre-stage. It is the indispensable link, without which all the plans of the Tsar and the Sultan will come to nothing. That means there’s mounting Russian and Turkish pressure on Bulgaria. But it also means that the rewards on offer for Bulgarian enablers are much greater. And on both counts, the struggle on the Bulgarian political scene will become even fiercer in the next couple of years.

The Kremlin is now pouring enormous financial and political resources into Turkey and Bulgaria to ensure implementation of its new “Super Hub” plans, which it sees as the only option for exporting Russian gas to the EU after the Nord Stream debacle.

So Mr Putin is effectively betting everything on Turkey, swallowing his pride and containing his hubris. There has been a notable change in the Kremlin’s tone, in line with its pull-out from Kherson and its sudden harping on the theme of peace talks. Before, that tone was imperious and direct: “You will pay me only in roubles!” with undisputable ban on the re-export of Russian gas. Now the message is conciliatory and implicit: “You will have no problem selling Gazprom gas as Turkish, Azeri, Iranian, Nigerian….”.

Meanwhile, the Kremlin is quite correct in its assumption: there is in fact no alternative to this sort of “identity change” for Russian gas in Turkey, given the total breakdown in energy relations between the EU and Russia. And Bulgaria is the key to the success of the Putin-Erdogan backdoor plan, because the detailed scheme for circumventing EU sanctions – and thus providing finance for the Kremlin’s war – must secure a free pass for Russian gas into Europe via Bulgaria. So Mr Radev and Mr Borissov are back in business, turning sanctions evasion into a lucrative enterprise worth billions in commissions that could massively inflate the scale of corruption in Bulgaria and all other countries along the route of Gazprom’s gas. The level of grand corruption implied, calculated at net benefit basis for those involved, at any rate, would dwarf the proceeds from aid available under EU programmes.

Mr Borissov has the necessary credentials in circumventing European and American vigilance, which is why both Mr Putin and Mr Erdogan deem him essential for “selling” the upgraded version of Turk Stream as consistent with EU policies, rules and values. A sneak preview of the sort of line Mr Borissov will take might be provided by a quote from the press conference he gave in January 2020 on returning home from the Turk Stream opening ceremony, which he attended with Mr Putin, Mr Erdogan and Serbian president Aleksandar Vucic. “The opening of the Turk Stream is a great day for Bulgaria-US relations,” declared Mr Borissov to reporters – who couldn’t believe their ears. That was indeed a pretty striking statement. Even more striking, perhaps, was the fact that no one contradicted him. Not even the US Embassy in Sofia.

Now, it’s pretty obvious that the Borissov-Radev-Peevski troika has no interest in these schemes coming to light under parliamentary or international scrutiny. However, they may not have to worry too much, at least domestically. Political instability in Bulgaria and stalemate in its parliament will probably leave Mr Radev to rule through caretaker governments, without parliamentary scrutiny, for some months to come. And that will help the plan. But even when (and If) a regular cabinet is formed, it’s well-nigh certain that the energy portfolios will be under the shared control of those “Terrible Triplets”, ensuring political protection for Gazprom’s gas corridor from Turkey and Greece.

Conclusion: it all depends on us

In conclusion, President Rumen Radev, in tandem with Delyan Peevski and former Prime Minister Borissov, is implementing a series of measures to help Russia circumvent European sanctions on the sale of energy raw materials to finance its war in Ukraine. These measures also aim to preserve (or restore) the highest levels of Bulgarian energy dependence on Russia that are possible under the circumstances, in all three of the areas identified – oil, gas and nuclear fuel – along with the corrupt flows of money associated with them. The resultant damage is measured not only in the billions burnt on the altar of “eternal brotherly corruption” with Russia, but also in Bulgaria’s ruined reputation in the EU and NATO.

The West has for some time been excessively tolerant of the deviant behaviour of Mr Radev and Mr Borissov. The war in Ukraine gives this an entirely different context, given what is at stake for NATO and the EU. Nevertheless, it would be a mistake to expect the EU and NATO to do the work of Bulgarian society and the pro-European portion of Bulgaria’s political class. That has been tried – repeatedly and over many years – and it hasn’t worked. Bulgarians must do the job themselves.

POSTSCRIPT: Not-so-dire Straits for Lukoil Neftochim?

Recently announced insurance-based restrictions, by the Turkish authorities, on traffic of Russian crude oil transit via the Bosphorus Straits will strengthen the market position of Lukoil Neftochim as almost unique and definitely the largest Russian crude oil refining capacity, in operation and with access to the EU market, in the Black sea basin.

In Part 2 of this four-part article, we dlscussed at some length the position of the Russian Lukoil Neftochim near Bulgaria’s Black Sea port of Burgas, and the questionable steps by which the caretaker government is attempting to buttress its position, to boost its profits, and to use an EU derogation to circumvent restrictions on exports of products derived from Russian oil.

We can now report a slight update to this saga.

The Turkish government has made clear that, from December 1, “valid insurance” will be required for the transit of Russian crude oil through the Bosphorus. Now, this is not a new requirement. In fact, the possibility of oil spills in this extremely busy and sensitive waterway means that all such cargoes – Russian or otherwise – need to be so insured. But the fact that this is being spelled out at present is very significant.

“Insurance” includes valid re-insurance. And, while Russian insurers regularly give coverage to Russian crude cargoes, re-insurance is a different matter: over 95% of the world’s re-insurance in this area takes place in London, on the London Insurance and Reinsurance Market. That’s a market from which Russian firms are now debarred by Western financial sanctions imposed after Mr Putin’s invasion of Ukraine. Worth noting, that under EU and UK sanctions, Russian oil carrying tankers will still be able to get standard insurance cover, in the event that the oil transported is purchased below the price cap, that is yet to be determined by the EU, the US and the UK.

It follows that, henceforth, it will be impossible – or at least, very difficult and extremely expensive in insurance or oil price terms – to export Russian oil with Russian tankers via the Bosphorus, one of the main routes hitherto used.

Now, that’s good news, at least for those who love Ukraine and democracy, and approve of the general principle of not invading neighbouring countries without provocation.

It’s part of a general process of tightening the noose on Russian oil exports that’s been going on for some months. For instance, US pressure and, eventually, cooperation from the Greek government have curbed (though perhaps not entirely eliminated) the unsavoury habit of certain Greek shipowners of using ship-to-ship transfers to disguise the Russian origins of oil. And, in early December, tighter restrictions on sea-borne imports of Russian oil and refined products by EU countries come into force. Exports via the Bosphorus, which is very handy for the Suez canal, had been important for Russian sales of heavily discounted oil to non-EU markets like India.

That Turkey should, on this occasion, be moving in the same direction as the West should be a matter for approval – though how, precisely, it fits into the rather complicated and ambiguous overall game being played by Mr Erdogan is not clear.

However, it’s not obvious that the move hurts Lukoil Neftochim – or reduces the reasons why Bulgaria’s Russophile elites should seek to defend the anomalous privileges and loopholes discussed in Part 2 of this article. Quite the reverse, in fact.

Lukoil Neftochim’s market position will be strengthened because it is now pretty much the only European refinery outside Russia that can process Russian crude, and is certainly the refinery with the biggest capacity for doing so in the Black sea basin. And this market position is strengthened still further by the current international shortage of diesel fuel and the obvious appetite for such fuel on the huge Turkish market. Which, incidentally, may be one reason why the Turkish authorities are keen to keep Russian crude from leaving the Black Sea.

But, where such commercial potential exists, you can be sure that Bulgarian politicians will be alive to the possibilities of brokerage, of easing the path of Russian energy products to lucrative destinations – and perhaps into the EU itself. Mr Putin will no doubt regret the closure of the Bosphorus to him and his oil. But, proverbially, it’s an ill wind that blows nobody any good.

However, the wind will, as usual, be ill for the Bulgarian people. The stakes are so high that fierce struggles – domestic and proxy – centred on Lukoil Neftochim can confidently be predicted.

Ilian Vassilev