Putin and Erdogan’s Pre-Deal Show

Politics is always about money, piles of cash. And money is what Russian president Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan always talk about; politics and principles come second. The question now is when and under what conditions Mr Putin will agree to Mr Erdoğan’s terms for his strategic mediation in selling Russian natural gas. “When”, not “whether”: for Turkey may soon become the only valid exit point for Russian gas into Europe and a major gas exporter.

The Kremlin’s problem is not only the commercial terms on which this is to be done, but also Mr Erdoğan’s aspiration to limit Mr Putin’s ability to use Russian gas as a political weapon. Once Turkey pipes Russian gas through its network and the “Turkish Gas Hub”, it will enter Europe as Turkish gas. In other words, everything will depend on the Turkey’s state-owned national oil and gas company Botas – and on the Turkish government that will shape its decisions.

In fact, quite a lot seems to have been quietly decided already.

Witness a recent statement by Péter Szijjártó, Hungary’s Minister of Foreign Affairs and Trade. Referring to the possibility that Ukraine might stop the transit of Russian gas through its territory, Mr Szijjártó said that, if that happened, Russian giant Gazprom could use the Turk Stream pipeline to ship the entire volume currently going through Ukraine – about 42 million cubic metres (mcm) per day.

The interesting thing was that, though this would involve transit through Bulgaria, Mr Szijjártó spoke, sounding quite confident, without referring the matter either to the Bulgarian government or to Bulgartransgaz. the country’s gas transmission system operator (TSO). By implication, both transmission through Bulgaria and the likely reaction of the European Commission (EC) are issues that have been discussed and are closed. The relevant commitments have been made by Bulgartransgaz – though for some reason the TSO has neglected to reveal this fact to the general public!

The same conclusion is suggested by statements of Serbian President Aleksandar Vučić who – in Budapest at the same time as Mr Erdoğan – also eagerly volunteered to ensure the transit of Russian gas to Central Europe if Ukraine terminated Gazprom’s transit contract. He did not consult with the Bulgarian government or Bulgartransgaz either, sounding confident after talking to Mr Erdoğan and his host, Hungarian strongman Viktor Orbán.

The pieces of the puzzle come together. 

Recent moves by Botas shed light on the overall context needed to understand the bigger picture. Botas has been licensed to trade natural gas in Hungary and Germany. It relies on gas surpluses that emerge in its internal market balance after increased imports of Russian gas and secured transit via Bulgaria and Serbia. 

The gas volumes Hungary currently imports via Ukraine – and claims it could transport via Turk Stream – exceed 1 billion cubic metres (bcm). The entire volume transited through Ukraine is a bit less than 16 bcm annually. Such volumes could only pass through Turk Stream if the pipeline’s transit capacity were booked for “Russian-Turkish” gas – effectively denying competitors access to Bulgaria’s gas transmission network. That sounds like a controversial conclusion. But it’s purely a matter of logic and arithmetic.

My findings on the Turk Stream project

My research into the Turk Stream project suggests that Gazprom’s European legal advisers are now helping Mr Erdoğan and his accomplices in the EU to steer the project through the EU market and regulatory framework – a feat comparable to sailing between Scylla and Charybdis. The plan to bring Russian gas into the EU through Turkey and Bulgaria is in its final phase, that of implementation. We are witnessing manoeuvres that should test the limits of the West’s tolerance, its reactions, and the determination of the EC and Western governments to end the EU’s dependence on Russian gas.

The likes of Mr Orban and Bulgarian president Rumen Radev will always argue that each EU member state has the sovereign right to define and achieve its own energy security. Hence, should Bulgaria and Hungary decide that it is in their interest to secure Russian (or “Turkish-Russian”) gas, the EC will have no right to deny them the opportunity. Put bluntly, if you’re a Kremlin stooge, considerations like the war in Ukraine – and EU sanctions against Russia for starting it – just don’t matter.

So a massive gas deal between Mr Erdoğan and Mr Putin is looming, with Bulgaria as the gateway to the EU. Presidents Radev, Vučić and Orbán have all played an active role. Russian influence and corruption will enter the European gas market through this back door, and substantial financial flows in the opposite direction will aid Mr Putin’s regime. This “Turk Stream corruption-cash route” – Turkey, Bulgaria, Serbia, and Hungary – has emerged as the weak link in the European gas market, beyond the control of the EC and NATO, through which the Russian leader can exercise leverage to destabilise not only that market but also the Balkans.

The Erdogan-Putin game plan is being put into effect, as evidenced by recent Bulgartransgaz tenders for entry capacity to Bulgaria’s natural gas transmission network.

These, for practical purposes, offered said capacity only to Botas, since (aside from Azeri-owned Socar Enerji) Botas is the only company enjoying a crucial pre-requisite for participation – namely, booked exit capacity from the Turkish gas network.

The quantities involved are moderate. They amount at present – the first auction governs capacity for the month of September — to 3.6 mcm per day per month via Strandzha 2, the original Turk Stream route, plus an almost token “starter” capacity of 114,000 cubic metres/day/month via Strandzha (or Strandzha-1, if you prefer), the old entry-exit point of the Trans-Balkan Pipeline (TBP).

(It will be remembered that the portion of the Turk Stream pipeline that is in Turkey – stretching from Kıyıköy on Turkey’s Black Sea coast (where it comes ashore) to Markoçlar, on the Bulgarian border – is jointly operated by Botas and Gazprom affiliate Gazexport, and that only Russian gas is flowing through it. As to the TBP, its main function was once to take Russian gas, with technical capacity of approximately 22 bcm/y, southwards to Turkey via Romania and Bulgaria, but the Putin-Erdogan scheme envisages some repurposing, with the flow reversed to furnish Central Europe with Russian gas supplied anonymously via Turkey.)

Small initial volumes are no accident. They are a tentative method of testing how strong Western reaction will be and what form it will take. If and when the Turkish Gas Hub is seen to be attracting too much attention – and provoking grumbling from Brussels – the Hub’s masterminds can resort to alternative routes or moderate volumes, at least till the fuss dies down.  If, on the other hand, the Strandzha and Strandzha-2 total flies under the radar, they can ramp up volumes. Indeed, they probably are doing so already, even now, as Bulgargaz and Botas are talking in Sofia of 16 mcm/day/month in 2024.

At this interconnection point of the Bulgarian and Turkish gas transmission systems, Botas will be able to realise fully any intention to transit natural gas through Bulgaria to Central European gas markets. They have the physical capacity. And how they go about it is a matter of tactics. They will do whatever is necessary to see the project through. If long-term capacity booking looks possible, they will try to ensure that. If not, they will content themselves with quarterly or even monthly booking. But at this point, the main thing for Mr Erdogan is to have his trump cards in place when he meets Mr Putin.

The script of the game plan is multi-layered, multi-pronged and by no means linear – let alone leading to a clear and definitive end. There are high-level frictions and the final distribution of the benefits of the gas deal between Mr Putin and Mr Erdogan has yet to be negotiated. With each passing moment, however, the cost of this deal grows. The proof lies in the discernable sparks between Ankara and Moscow.

The cooperation framework is in place: Mr Radev has secured a contract between Botas and Bulgarian national gas company Bulgargaz that can act as a framework for a gradual increase in volumes and capacities; and Messrs Vucic and Orban are in line to ensure transmission and provide political cover.

The term sheet signed between Botas and Bulgargas is currently expanded into a full-blown sales and purchase agreement (SPA), and secret negotiations are underway both in Turkey and in Bulgaria. The quantities discussed are well above the meagre 1,9 billion cubic meters, in the initial term sheet – 160 000 MWh/d/m or 15 mcm/d/m. New routes are considered, in case Strandzha entry point attracts too much attention. An alternative route is considered through Greece – “Turkish gas” entering at Kipi into DESFA gas network and exiting at Siderokastro-Kulata, with the BTG’s CEO playing the lead role.

But it remains for Mr Putin to agree that a substantial chunk of the benefits of selling Russian gas as “Turkish gas” should stay in Turkey. For a Russian leader who, until just a year ago, considered himself Europe’s “energy emperor” and refused to allow any European company to resell Russian gas, such a step cannot be easy, nor will it be quick. But Mr Putin is cornered. And Mr Erdogan wants to make money and earn prestige. Yet he has to earn his piece of the pie before meeting Mr Putin in September.

The Bulgarian angle

As for Bulgaria, the Putin-Erdogan-Radev set-up is working – for now. The Botas-Bulgargaz contract is in place and provides the necessary legal framework. The problem is that it needs to be more balanced regarding the distribution of costs and benefits; and hence it cannot offer a long-term horizon for realising the grander scale of Russian or Turkish ambitions. It’s vulnerable to political and geopolitical shifts. This explains the enormous penalties provided for in the contract, penalties that would effectively bankrupt Bulgargaz, which is already in serious financial trouble. In fact, in explaining the situation to the managements of Bulgargaz and Botas, Presidents Erdogan and Radev were quite frank about the political purpose of such ferocious penalties: they were meant as a guarantee against the contract’s cancellation by future Bulgarian governments. 

So far it appears to be working. Though aligned to the reformist grouping in the disparate coalition government that emerged in June, Bulgaria’s new energy minister – confusingly also called Rumen Radev – appears reluctant either to make personnel changes at Bulgargaz and Bulgartransgaz or to challenge the Bulgargaz-Botas contract. This is not only because of those huge penalties, but also because of his reluctance to confront his presidential namesake on the subject of Russian gas interests. It is no coincidence that, since September last year, when President Radev’s caretaker ministers took control of the energy sector, the regulated price of natural gas in Bulgaria has consistently remained higher than the benchmark Dutch TTF price – a sure sign that Gazprom is making good use of this traditional corruption niche. 

September: The Crucial Month

In April, the Russian and Turkish sides announced that the Turkish Gas Hub project would start in September. This has promise has been remembered, and is now creating raised expectations for the upcoming meeting between Mr Erdoğan and Mr Putin – for which, incidentally, a date has just been proposed, namely September 8.

While the main topic is expected to be the Black Sea grain deal, the Turkish Gas Hub and the redirection of Russian gas to Europe on EU routes closed to Gazprom will certainly be high on the agenda. Readers will have noticed that, on August 28, a Botas delegation was in Sofia for talks with Bulgargaz management (and, one might plausibly guess, a word or two with Bulgartransgaz officials too). This can be seen as technical preparation for the Putin-Erdogan summit, giving Sultan Recep an accurate idea of what he can offer Tsar Vladimir –and demand in return.

Both Moscow and Ankara give the impression that talks in advance of the September meeting are proving tense and strenuous. Its date, despite creative leaks to the press, seem uncertain, and it looks as if venue is being considered carefully. Since Mr Putin is the party who has more at stake, the original plan was that he would visit Turkey, which has been confirmed by his spokesperson. However, calculations could shift, with fear that the gas deal could fail if Mr Putin was seen to take the initiative and play the leading role in this way. Instead, he seems willing to let Erdoğan do his job and provide the political backing for the project through Bulgaria, Serbia, and Hungary. In return, Erdoğan would capitalise on his brokerage role and receive the exclusive right to sell Russian gas as “Turkish” gas.

Erdoğan’s Dilemma 

What are Mr Erdoğan’s strengths in this context? To push through his ambition to sell more Gazprom gas as Turkish gas to the EU, Mr Putin must agree that a significant portion of the revenues from Russian gas sales will stay in Turkey. This scenario would guarantee the Turkish leader financial benefits of more than $5 billion a year, which would seem to be a very acceptable result for him.

However, Mr Erdoğan has two problems.

First, such political dividends as he could extract from an extension of the grain deal or support for Ukraine would hardly be enough to persuade the EU and NATO to turn a blind eye to his gas deal with Mr Putin. The deferred payments for Russian gas delivered ahead of the Turkish presidential election – which effectively bought Mr Erdoğan a second term – are valuable in the context of Turkish domestic politics, but do not have the “international convertible value”, to say the least, that Mr Erdoğan would need to push through the Turkish-Russian gas swap in the West.

Second, and more significant, he cannot successfully play this balancing role if the EU and NATO perceive his backdoor deal with Mr Putin as an arrangement between two autocrats against the West. That’s why Mr Erdoğan has been making “accommodating” gestures to the US and the EU lately, such as dropping his veto on Sweden’s membership in NATO, advocating the continuation of the grain deal, and regularly voicing support for Ukraine as an “Atlanticist”. He also welcomed an American aircraft carrier, the USS Gerald Ford, into Turkish waters in the Aegean Sea.

Another element in this show is to demonstrate that he has an uneasy relationship with Putin. This recently included swallowing the public humiliation inflicted on him by the Russian leader when his navy intercepted and inspected a Turkish-flagged ship in international waters. Far from taking this badly, Ankara reacted by negotiating an attractive deal (brokered by Qatar) for the export of Russian grain in order to get Mr Putin’s approval for a new grain deal with Ukraine.

Mr Erdoğan’s backup strategy in negotiating the grain deal is to allow Ukraine to export grain to earn political capital with the US and the EU, which he can then convert and spend to cover political damage from the gas deal with Mr Putin—a classic example of transactional diplomacy.

The Pressure on Bulgaria

Pressure on the Bulgarian government, and the tensions to which it is subject, are likely to mount drastically. Bulgaria is becoming a critical crosspoint of the coinciding interests of Moscow and Ankara, and the West does not seem ready to address the geopolitical challenge this entails, which is adding a less-than-tuneful Orban-Vucic-Radev trio to the already dismal Erdogan-Putin duet.

To make things worse, there are also “geostrategists” in the West who do not want to see Russia and Mr Putin defeated in the war in Ukraine. They disregard sanctions and help Russian companies sell oil and gas, thus pumping up the Russian Tsar’s revenues – and buying him a new lease of life. And it’s not coincidental that calls for a ceasefire in Ukraine at any cost are so fashionable at present. Such a ceasefire would be a way of saving Mr Putin’s honour. And Mr Erdoğan’s deals.

Now, we should not exaggerate the extent to which things are contingent, “in the balance”. Whatever happens, the Putin-Erdogan gas hub project will be implemented in one form or another, openly or covertly.

But it matters a lot how easy and straightforward that implementation is. And that depends on three things.

• First, the reactions – and resolution – of the EC and NATO.
• Second, the ability of Ankara and its national champion Botas to secure large volumes of Russian gas that it can declare “Turkish” (which may not be such a problem, since Mr Putin has few if any alternative outlets).
• Third, Turkey’s ability to find willing buyers for this gas, which is largely a matter of how far Western companies are prepared to go along with the fiction that this isn’t Russian gas – and how forthrightly Western authorities are willing to call them out on this pretence.

In short, there’s a lot to play for. If the Turkish Gas Hub project just goes ahead smoothly and Botas finds itself able to re-export Russian gas to the EU without complications, that will amount to the single most crucial breach yet in NATO’s support shield for Ukraine – especially as it comes on the heels of Kyiv’s stated intention to terminate Russian gas transit via its territory.

And here’s a final thought for Bulgarian readers to consider. We shouldn’t feel too proud of ourselves and should do what we can to blunt and complicate the schemes and atone for the sins of our recent and current leaders. After all, the unsavoury duo of Boyko Borissov and Delyan Peevski was crucial in supporting and implementing the Turk Stream project – which untied Vladimir Putin’s hands to invade Ukraine. Now President Radev – through the Turkish Gas Hub project and the Bulgargaz-Botas contract – is busy enabling him to continue his aggression. The Russian leader is in a stronger position than, logically, he should be, and it’s partly the fault of Bulgarian politicians. In his most recent talks with German Chancellor Scholz and French President Macron, Vladimir Putin did not raise the subject of sanctions – and did not seem bothered at all. That’s a very bad sign.