Behind the scenes maneuvering
So, last week’s meeting in Sochi has come and gone, and the general impression among pundits and politicians is that it was an anti-climax – even a failure. Presidents Vladimir Putin of Russia and Recep Tayyip Erdogan of Turkey met in person and, in spite of expectations, failed to come up with a renewal of the deal that, early in the Ukrainian war, had guaranteed passage for grain from two of the world’s biggest producers across the Black Sea and thence, through the Bosphorus, to the world’s poor and hungry. A serious failure, surely? And a sign that the Putin-Erdogan double-act isn’t working as harmoniously as it seems to have done over the last year or so?
Well, I have my doubts. For a start, the meeting lasted three hours, which it wouldn’t have done if it had been fruitless. But there’s a more important point. The orthodox view assumes that the main agenda item was the “grain deal” and that the point of the meeting was to revive that deal as quickly as possible. That’s doubtful. Obviously grain is what is being emphasised to the global audience – both the Global South and Mr Putin’s Western adversaries – and, once a deal is reached, it will make him and Mr Erdogan look concerned and humane. But the positive outcome is being delayed until the final details of a much more critical deal – the deal concerning gas supplies and the “Turkish Hub for Russian gas”, in Mr Putin’s words, have been agreed upon. Relief and applause at the “grain deal” will provide a useful distraction from what is (or should be) a much more controversial bargain between Russia and Turkey, one that could seriously weaken the effect of Western sanctions against Russia.
Now, Analyses and Alternatives (A&A) has explained the Turkish Gas Hub concept several times in the past, so the briefest of reminders should suffice in the present context. With the “Northern Route” for Russian gas to Germany and Western Europe (primarily the Nord Stream pipeline) shut down for the foreseeable future, and Ukraine recently talking about blocking gas supplies across its territory, the Kremlin is desperately looking for an alternative route. Taking the gas south to Turkey and then West across Bulgaria and beyond is that alternative. But there are reputational – and perhaps future sanctions – problems for Turkey and for Western companies if the gas supplied is perceived simply as “Russian gas”. So the plan is to sell it as a sort of “Turkish mix”, blending it in Turkey with gas from other sources. Hence the “Turkish Gas Hub”. Mr Putin and Mr Erdogan are currently working hard to put the necessary arrangements in place.
And there are figures that suggest things are coming along very nicely on the gas front. Specifically, figures for the volumes Russian gas entering Bulgaria via the Strandzha and Strandzha-2 interconnection points, where Bulgaria’s transmission system meets Turkey’s. Gazprom’s direct supplies to Bulgaria, under its contract with Bulgarian national gas company Bulgargaz, were unilaterally suspended by the Russian giant in April 2022, and suspended they remain. And yet the pipeline’s maximum entry capacity is booked. Almost 50 million cubic metres (mcm) per day are being transported – more than Gazprom transits through Ukraine.
In August, Bulgarian transmission system operator (TSO) Bulgartransgaz had conducted tests at the Strandzha entry point with Russian gas volumes that showed that the entry-exit point of the Trans-Balkan Pipeline (TBP) could work in reverse mode. And, since the beginning of September, the gas quantities entering have steadily stabilised at 27,800 MWh (or 2.6 mcm) per day, which is just the beginning, adding credence to Putin’s words at the beginning of the negotiations with Erdogan: “I hope that in the very near future we will complete our negotiations.”
Erdogan calling Putin a “dear friend” at the end of the talks is further proof that the two presidents are simply postponing the public announcement of the results of their negotiations. They are waiting for the right moment to package the attractive part of their exchange – the “grain” deal – with the component that is rather more challenging to “sell” to the West: namely, the laundering or “whitewashing” of Russian gas by passing it through the Turkish Gas Hub.
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The Laundering of Russian Gas through Turkey
Now, as we have seen, the process of laundering Russian gas through Turkey has been in full swing since early September. The only constraint on this process is the ability of Turkish national gas company Botas to provide the “laundering agent” – non-Russian gas. But, as constraints go, that’s a pretty serious one.
There are several options, but Azeri gas is the only credible and immediate one.
Some combination of Iranian, Iraqi and indigenous Turkish gas production – plus LNG – may eventually be a useful, if marginal, supplement to supplies for the Gas Hub. But they can hardly be a workable substitute for Azeri gas, since quantities are uncertain and there are no direct supply contracts with EU buyers. Botas’ only contract for LNG supplies at Turkish LNG terminals with an EU company – namely Bulgargaz – and that is not a direct supply contract either.
However, by no means all Azeri gas is available for “laundering” purpose. The Azeri output that is shipped to the EU by the Shah Deniz 2 consortium cannot be diverted from its existing route – the TANAP transit pipeline and then TAP.
And that doesn’t leave much other Azeri output. Unfortunately for the would-be launderers, the volumes of gas that Azeri national oil and gas company Socar exports to the EU are not impressive. In fact, they only amount to around 2 billion cubic metres (bcm) for 2024. And most of that is Socar gas contracted for direct delivery to Central and Eastern Europe – Serbia, Romania and Hungary. Hence, it can hardly be used to whitewash Russian gas. In fact, the only way even these modest quantities of Socar gas can be used for whitewashing purposes is if EU companies buy the Turkish gas mix in Turkey.
And there’s another difficulty. Baku is almost certainly aware of the political risk that would be associated with the use of Azeri gas as a front for increased Russian gas sales to the EU. After all, Azeri gas does not need intermediaries, it is well enough received in the EU and, most importantly, has every chance of being very much in demand long-term. But any involvement in Russian gas laundering schemes will inevitably reflect poorly on the ‘diversification’ creed of the Azeri gas and might well force European buyers to look elsewhere for diversification solutions.
An Armenian Interlude
Now, that little problem may shed some light on another aspect of the Sochi meeting. It marked – or reflected – a potentially significant shift in regional balances. Specifically, there has been a striking convergence between Mr Putin and Mr Erdogan on the question of whether Armenian prime minister Nikol Pashinyan should be removed from power either by provoking Azerbaijan to military action or by a coup organised by the Russian and Turkish secret services.
This degree of policy coordination between Russia and Turkey would have been unthinkable only a few years ago, and its consequences go far beyond the Caspian and Black Sea regions. If the two regional giants go ahead with such a move, Armenia will have little chance of resisting since, even if it wanted to, the West could not project sufficient force to counter combined Russian-Turkish pressure. By pushing forward and encouraging nationalist tendencies in Azerbaijan, Russia and Turkey are actually seeking to achieve two things at once. First, to remove Mr Pashinyan from power. But also, second, to discredit Baku as an alternative to Russian energy.
Any violence against Armenia will inevitably provoke a reaction from the EU, which – while Brussels will consider this a “lesser evil” – will have consequences for future contracts for direct Azeri supply to the EU. And that is exactly what both Turkey and Russia needs to implement its Turkish Gas Hub project, in which both Azeri and Russian gas will exit the country as “Turkish gas”.
Turkey’s Russian Gas Laundering Scheme
Back to the gas-laundering scheme itself, however. Now, maybe the scheme lacks a little in sophistication. But it’s probably robust enough to stand up to European scrutiny. And the main reason for saying this is that it has worked before. Specifically, it was tested in Germany after Nord Stream 1, and most notably with the Nord Stream 2, when Germany was planning to re-export almost half of its imported gas from Russia to neighboring countries –guaranteeing the German intermediaries involved hefty commission revenues.
In the case of the Turkish Gas Hub, only companies that the Turkish and Russian parties approve are allowed to participate in the scheme and deliver gas to the EU via Bulgaria. Russian gas is currently being offered at significant discounts – of €7-10/MWh, although it is still not competitive to Azeri gas, which is, however, in short supply Appointed intermediaries can rely on this margin, which is more than the average profit margin on the market.
The bulk of the transactions occur through regional gas exchanges, which do not require certificates of origin, and on which nobody delves deeply into what gas is being bought or sold – especially as it is always some mix anyway.
A few figures suggest that this might be very good business indeed for the chosen EU companies – which might, accordingly, not choose to ask too many questions about where the gas came from: At the initial stage of implementation of the (now-agreed) Putin-Erdogan scheme – and excluding gas supplied under Gazprom’s existing long-term contracts with Serbia and Hungary – the “new” volumes of Russian gas that to be sold in 2024 could amount to around 63 million MWh. Which means that the intermediary benefits could amount to over half a billion euros for that year alone.
And that is excluding discounts on the existing gas supply contracts, because Gazprom gives traditional “commissions” on roughly the same scale to politicians and company executives. And Gazprom and Botas hand-pick a whole network of intermediaries to perform follow-up services of, shall we say, a different nature.
Bearing all that in mind, I will make the following rather confident prediction:
Later this month, or possibly in October, Mr Putin and Mr Erdogan will announce the resumption of the grain deal in one form or another. And this will happen when the details of the Russian gas laundering deal have been worked out; when the volumes of gas in transit coming through the Strandzha and Strandzha-2 entry points have become sustainable; and when the chain of intermediaries has been decided and put in place.
As for the actual deal on the Turkish Gas Hub – depending on the EU’s sensitivities and willingness to look the other way – we may have to content ourselves with getting next to no detail. Nothing more, perhaps, than a short statement from Mr Putin that the parties have reached an agreement which is being implemented. And everything will then pass under the EU and NATO radars, and remain wrapped in the traditional thick layer of “commercial” secrecy.
In other words, the Putin-Erdogan double act is still intact. The show goes on. And, most likely, it will just run and run.