Bulgaria’s Schizophrenic Energy and Defence Policy

Alternatives & Analyses has, on frequent occasions, criticised Bulgarian President Rumen Radev for his pro-Russian activities. And it would be so nice if, just once in a while, he did something that made us doubt our consistency on this subject. But we’re still waiting. In fact, if you want further proof, you need look no further than the Memorandum of Understanding (MOU) that was signed on Friday (September 15) between Bulgarian national gas supply and trading company Bulgargaz and its Hungarian counterpart MVM.

But surely that is a good deal, one “opens the doors of the European market” to Bulgargaz? Well, so President Radev claims. But of course, it does no such thing. Bulgargaz itself has no gas. All it has is a contract with the Turkish national gas firm Botas. And Turkey has neither its own natural gas to export nor, at present, significant volumes of Azeri natural gas to resell. There’s only Russian gas — in abundance.

That’s certain. What’s not settled is who should run the scheme to launder Russian gas through the Turkish Gas Hub (TGH), who should do the laundering and collect the price premiums.

Should it be Botas, with its idea of a “Turkish Mix” offered at the Epias gas exchange, with Botas collecting the bulk of the brokerage fees? Or Russian giant Gazprom, which its real CEO – President Vladimir Putin – thinks should be free to offer its gas directly on the new gas “e-commerce platform”, with anyone who wishes (and has the resources) to do so allowed to buy it and export it from Turkey?

Mr Putin and his Turkish counterpart Recep Tayyip Erdogan are still locked in a struggle over the two concepts. The stakes could be more than just financial. If Mr Putin has his way, Mr Erdogan will have to bear the brunt of responsibility for allowing Gazprom to undermine the EU’s resolve to end Russian gas imports and for providing the only entry point for Russian gas to Europe. Although the Turkish President is known for pursuing his own interests and maintaining an ‘independent’ line on Russia, he does not enjoy infinite leeway with the West. If his moves are considered too blunt a challenge, their costs might prove too high. If Botas buys Russian gas and then sells it onwards, then Turkey will be able to claim that the mix is multisourced and that the volumes exiting Turkey do not exceed the amount of non-Russian gas that enters the country – and hence, nominally, that the mix coming out of the country is not Russian in essence. Although such claims could not hold water for too long, they would have at least some superficial credibility.

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Incidentally, the limits to Mr Erdogan’s ability to ignore and flout the West by going his own way should be emphasised. Various “warning shots” have been fired lately. For instance, he has been pointedly reminded that EU membership is not on the agenda for Turkey. And something interesting occurred at the recent G-20 meeting in India. The host, Indian leader Narendra Modi, proposed a new route for Indian manufactured goods to Europe, via Israel and Greece. Now, the striking thing is not that this is an alternative to China’s Belt and Road Initiative – Mr Modi (and India in general) is not shy of expressing rivalry for China – but that it is designed to bypass not only India’s traditional enemy Pakistan but also Turkey. Mr Erdogan is being reminded that Turkey is not indispensable, that there are EU and Western-oriented geopolitical and geoeconomic alternatives to his country.

Meanwhile, returning to the Gazprom-Botas friction over the precise shape of the TGH scheme, one “little” detail should be noted: Only Botas, Gazprom subsidiary Gazexport and Socar Enerji – an affiliate of Azerbaijan’s national oil-and-gas concern Socar – have exit capacity booked to ship gas via the Malcoclar-Strandzha interconnection. That’s the crossing point for gas between Turkey and Bulgaria, and the crucial one for TGH access to the EU. This means that, in both variants, Turkey and Botas hold the trump card of controlling the exits of the Turkish gas transmission system. Which in turn means that Gazprom still has to earn that right for additional quantities on top of those shipped via the Turk Stream pipeline.

The final touches are being put to the Botas-Gazprom gas-laundering scheme receives. However, there might be some hiccups as Europe focuses on the gas flows across the Turkish-Bulgarian border – and in particular wakes up to the fact that their volume is already greater than that of gas being transited across Ukraine.

Bulgargaz, for its part – given that its gas supply contract with Gazprom was terminated last year – has no gas for resale other than that coming from either Botas or Socar Enerji. Yet it acts as Botas’ agent for Botas gas destined for Europe, affirming its “junior partner” status in the whole scheme. Furthermore, the Bulgarian state gas trader seems to put all its eggs in the Botas basket, at the expense, of LNG sourced from Greek terminals.

What exactly is going on?

Meanwhile, the expert community needs help in understanding what exactly is going on in Bulgaria just now. For it is a little mystifying, and more than a little contradictory.

On the one hand, Bulgaria’s Minister of Defence, Todor Tagarev, is trying in every possible way to protect the country’s interests against what amounts to a Russian naval blockade of Bulgaria’s exclusive economic zone (EEZ). This is being carried out by way of almost continuous drills by Russia’s Black Sea Fleet, including parts of Bulgaria’s EEZ, and hindering commercial traffic, fishing, and oil & gas exploration.

On the other hand, Bulgaria’s public repeatedly gets news of MOUs like last Friday’s, that expedite Russian gas sales to the EU and allow Mr Putin to refill his coffers and fund new aggression, threats, and hybrid warfare against Bulgaria, including the aforementioned naval blockade!

One has to ask two questions:

• First, whatever happened to co-ordination within the government? Aren’t the energy and defence ministers talking to each other?
• And, second, who is in practice running the Bulgarian energy sector? Is it the government? Or is it President Radev?

It is no secret to the Bulgarian expert community that this MOU amounts to an upgrade of the previous Turk Stream gas pipeline roadmap, which vanished mysteriously. That project had untied the hands of President Putin to invade Ukraine. Now the old Kremlin enablers – politician-businessman Delyan Peevski and former prime minister Boyko Borissov – have joined President Radev’s team to deliver the geopolitical lifeline that Mr Putin desperately needs at present. And have simultaneously reinforced existing – and created new – mechanisms of corruption to incentivise provision of a backdoor route for Russian gas into the EU.

Austria’s Schengen veto

Apart from that MOU, last week brought another piece of news. Austria rejected a call from Ursula von der Leyen, President of the European Commission (EC), for Austria to lift its veto on Bulgarian (and Romanian) inclusion in the Schengen Zone, a visa-free area that incorporates most EU states – and that Brussels has been pushing to enlarge at the turn of this year.

This wasn’t much of a surprise: Vienna has been conspicuously awkward on this matter for some months. And, at first sight, Sofia can’t do much about it. But that’s not actually true. For one of the few arguments Vienna would listen to is a threat that Bulgaria, having being denied Russian gas under its Gazprom contract and complying with the common EU drive to limit funding for Mr Putin’s war machine, could interrupt Russian gas supply to Central Europe via the only remaining route from Russia to the EU.

Austria, like its ancient imperial junior partner – and current EU soulmate – Hungary, has very close ties to Mr Putin’s Russia. Both states would receive a very nasty shock from the cessation of Russian gas supplies via Ukraine and via Turkey, effectively shutting off Russian pipeline gas to the EU. And the two countries enjoy a well-established shared political and business network that revolves around Russian natural gas and serving the Kremlin’s business interests. It is not by chance that Mr Orban and his Serbian ally, President Aleksandar Vucic, have declared that they would consider the termination of Russian gas supplies an act of war.

To negotiate with Austria over Schengen, Bulgaria needs to play a relatively weak hand aggressively. It is, therefore, incomprehensible that Sofia is denying itself the option of playing the strongest card it has – its critical role for the transit of Russian gas. After all, Austria continues to import the bulk of its gas from Russia via Ukraine, having brought in no less than 7 billion cubic metres between the outbreak of war and end-July 2023. If Ukraine goes ahead with its promise to shut down all Russian gas transit after 2024, then Bulgaria’s role as an alternative transit route will skyrocket. Yet Bulgaria is showing no sign of exploiting this formidable leverage.

For such self-denial is pretty much written into Friday’s MOU and the Bulgargaz contract with Botas. There’s no requirement for proof of origin – for the Certificate of Origin (CoO) that would provide assurance that the gas being transmitted and sold is not Russian. If such CoOs were presented in Turkey, it would be an exception to the general rule, especially as CoOs are definitely not required for gas trading deals conducted on the TGH’s e-trading platform. But that is a conspicuous departure from normal EU practice, under which the CoO in a gas contract is deemed a safeguard clause that protects contracting parties from accusations of playing ball with Gazprom and helping it whitewash Russian gas.

Bulgartransgaz – the mastermind

Another odd thing about this MOU is the Bulgarian firm whose CEO signed it. If it was simply contract for the transit of gas, as it is claiming to be, through Bulgaria, the Bulgarian party should have been Bulgartransgaz, the country’s transmission system operator (TSO). However, it was Bulgargaz. Which, on reflection, isn’t so surprising: the contract – the exclusive contract – of Bulgargaz with Botas is being used to bypass the objections of all other European energy companies. And the primary “mastermind” role of Bulgartransgaz remains in the shadows.

Now, the main details in the Bulgargaz-Botas contract are no secret for the expert community, but attempts to wrap up in “commercial secrecy” the different bits and pieces of the Russian gas whitewashing scheme for the benefit of EU audiences are rather conspicuous and confusing. It’s as if we were still in the Good Old Days of the contractual relationship between the Russian gas export monopoly (Gazexport) and the domestic gas monopoly (Bulgargaz). Well, in a sense we are, since precious little has changed in Bulgargaz. But the environment couldn’t be more different: the war in Ukraine has changed everything. Gazprom had no commercial justification whatever for shutting down gas supplies to the contractually compliant Bulgargaz – yet the Kremlin’s overriding strategic considerations forced the Russian gas giant to forego its ability to reason like a company. This triggered the EU’s energy-security alarm systems, dramatically reducing Brussels’ normal (and rather excessive) propensity to be lenient and to appease Moscow. The “Austro-Hungarian axis” will probably turn out to be an exception within the Union, while Germany, France and the EU mainstream are visibly shifting in Ukraine’s favour, as German Chancellor Olaf Scholz and France’s President Emmanuel Macron are giving up their flirtations with a separatist track in talks with Mr Putin.

Which is why there’s less and less room for “middle-of-the-way” policies that accommodate transit for Russian gas into the EU. And that includes moves by the Bulgarian president and Hungary’s prime minister to front the Kremlin’s interests via clumsy gas diplomacy.

Is all about LNG from Turkey for MVM?

One more point. The MOU’s central claim is that it is about the supply of liquefied natural gas (LNG). However, in the contract between Bulgargaz and Botas, there is no direct link between gas volumes delivered to an LNG terminal and the volume of gas coming out of Turkey. The gas exiting could, therefore, as easily be Russian gas that is already present in Botas’s gas transmission network as it could be regasified LNG. And physically importing gas that had previously been received at an LNG terminal in or near Turkey just wouldn’t make sense for Budapest. Hungary receives the bulk of its LNG from the Krk gas terminal in Croatia and it would be nonsensical for it import LNG via faraway Turkey, unless it were doing so “virtually” – by engaging in gas swaps with Russian gas, which is precisely what the Bulgargaz contract with Botas provides for.

And, by a rather convenient coincidence, start-up of the Alexandroupolis Floating Storage Regasification Unit (FSRU) has been delayed until mid-2024 (previously it was due by end-2023). Now, that FRSU – in northern Greece but quite close to Turkey – is potentially a prime source for Bulgargaz and Bulgarian consumers, and potentially for Serbian and Hungarian consumers. So that will mean several extra months during which Alexandroupolis LNG will be “unfortunately” unavailable and Bulgargaz will “reluctantly” have to make do with whatever gas the TGH happens to provide. And those are months during which Russian gas can pass through Turkey without too many questions being asked, months during which the system for ensuring such passage can be fine-tuned and cleared politically – transacted via diplomacy – in Brussels and Washington.

Is there a pilot on the plane?

No wonder the Bulgarian energy minister – confusingly named Rumen Radev like his president – and Bulgartransgaz CEO Vladimir Malinov will be visiting the US shortly! Presumably they will come with yet more declarations of loyalty and offers of business for US companies – an encore of the transactional diplomacy used at the time of the Turk Stream.  Bulgartransgaz’s CEO Mr Malinov, after all, is good at that sort of thing. A notable survivor in his current office – and something like an eminence grise in the energy sector – he was the one who deftly steered the Turk Stream pipeline scheme through in the latter years of the last decade. And there are signs that he’s been doing the same with its follow-up, the TGH, more recently.

As to the energy minister, he’s a bit of a mystery. While Defence Minister Tagarev is making serious and thoughtful efforts to protect his country, Energy Minister Radev has just opened the door to Bulgaria and the EU for Russian natural gas (even though, incidentally, the Kremlin formally, explicitly and consistently says it considers Bulgaria an ‘unfriendly’ country). And, in some sense, opening that door has certainly been Mr Radev’s decision.

To sign that MOU, Bulgargaz CEO Denitsa Zlateva will need to have received clearance from her firm’s parent company, the state-owned sectoral behemoth Bulgarian Energy Holding (BEH). And BEH’s line ministry is the energy ministry. So Minister Radev has greenlighted the MOU one way or another. And yet he was appointed earlier this year as a representative of a seriously reformist party in a seriously divided coalition – the same party that nominated Mr Tagarev. So what has happened?

Whatever the truth, this schizophrenia in Bulgarian politics does not bode well. Particularly at a time of such dire existential threats.

Ilian Vassilev