Ripple effects

Bulgaria’s new energy tax on Russian gas could have profound consequences. And it’s a welcome step.

This isn’t a sentence you’ll hear very often from Analyses & Alternatives (A&A), but here goes anyway: let’s hear it for Bulgaria’s parliament and government! Last week they delivered on their earlier promise to introduce an energy levy – an excise tax – of 20 BGN/MWh ($103/1000 m³) on Russian gas. That means both imported Russian gas that is sold on the Bulgarian market and Russian gas that is transited through Bulgaria on its way to other countries. And the effect of this levy – let’s refer to it as the “Energy Tax” or “Energy Levy” – is immediate. In fact, it came into force last week.

This is a bold strategic move. It amounts to nothing short of detonating a shock bomb on Russia’s monopoly on the regional energy market. And it goes some way to restoring Bulgaria’s national honour, washing away the shame of Sofia’s role in the Turk Stream project.

Late in the last decade, Bulgaria – and in particular the government of Boiko Borissov – was a key accomplice in that project, which was Russian president Vladimir Putin’s device for bypassing Ukraine as a route for supplying his country’s gas to Europe (and a fitting prelude to his invasion of Ukraine in 2022). That is, Sofia stabbed Kyiv in the back. Now Bulgaria is making amends.

Now, there are legitimate doubts as to just how effective this step will be. But one effect is already clear: it has shaken up the agents of Russian influence and the advocates (and hangers-on) of Russian gas in Central and Eastern Europe (CEE).

Most notable among these are Hungarian prime minister Viktor Orban and Serbian president Aleksandar Vucic, who are the primary conduits of the Kremlin’s interests in the energy field. These two are already squealing loudly, warning on retaliatory measures and urging Vladimir Putin to take punitive action against Bulgaria. It will be very instructive for EU public opinion to see who else joins in the squealing: the Energy Levy, that is, could be rather effective rather soon in “outing” Russian agents of influence.

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The Kremlin badly misjudged Bulgaria’s elite

Bulgaria can expect a period of intense information and psychological warfare from Russia, because more Russian gas is currently being transported through Bulgaria than through Ukraine and Mr Putin will no doubt feel obliged to restore his shaken reputation as a credible supplier of Russian gas and as a shrewd and successful player in the high-stakes game of international gas poker.

For that reputation certainly has been shaken. In particular, it now turns out that Mr Putin badly miscalculated the risks of alienating Bulgaria while depending on Bulgaria’s transit system.

That alienation came in April 2022, when Gazprom (or, rather, its trading arm Gazexport) unexpectedly cut off supplies of gas under its contract with Sofia’s state-owned gas trader Bulgargaz, previously responsible for the vast majority of Bulgarian gas imports.  With Ukrainian transit now apparently set to dry up after the current Russian-Ukrainian transit contract expires at end-2024 – and Kyiv refuses to renew it – Mr Putin is faced with the prospect of an aggrieved and newly assertive Bulgaria becoming the only gateway for Russian pipeline gas into the EU.

The failure of Mr Putin’s strategy of bypassing Ukraine by means of alternative pipelines is now exposed, as it turns out that the exporter, Gazprom, is many times more vulnerable than the importers of its gas and the operators of the transit systems it flows through. This is especially true of Bulgaria, as Bulgargaz is – through the Kremlin’s choice – no longer importing Russian gas, and Gazprom has to rely on smaller importers. Which means Moscow has one less way of exercising pressure on Sofia’s energy policy.

The new Energy Levy puts Bulgarian gas policy back where it should be, aligning it with European energy policy, which prioritises limiting dependence on Russian gas. And it might be a powerful force for persuading others within the EU to limit dependence: for the Energy Tax should have an immediate effect on prices, undermining the business case for Russian gas imports into the EU – and thus forcing diversification away from Russian gas.

The timing is also indicative

Bulgaria has made its move at the time when it’s most likely to work.

Volumes of gas in underground gas storage facilities (UGS) in EU countries – including Bulgaria’s UGS at Chiren – are now at record-high levels: EU-wide they are 97% full, partly for seasonal reasons, partly because EU storage policy has been sound. And alternative supply contracts are now in place which, in practice, ensure regional energy security as sufficient supplies of non-Russian gas are already available.

The step comes at the start of the new gas year and the beginning of the winter season, when consumption will grow, which will add to the pressure on buyers to mitigate their Gazprom risk and diversify away from Russian gas.

One could question the timing, too, in terms of the build-up of uncertainty globally and the dynamics of the gas market. i.e. rising prices. Risk factors are piling up, including geopolitical risks that affect energy prices in general for Europe, which is over 83 % dependent in gas imports. All good reasons for EU gas traders to mitigate the Russian gas risk by looking for alternative supplies.

Orban at bay

Reactions in Hungary and Serbia have been in line with expectations. Belgrade has resorted to diplomatic action and direct Vucic phone calls in Moscow, while Budapest has publicly criticised the Energy Tax. That’s no surprise: Russian gas is a key resource of Mr Orban’s policy of defiance towards the EU – and a key source of direct and indirect enrichment for much of the Orban-era elite – so the Strongman of Budapest isn’t going to take lying down any threats to Russian gas flows and revenues.

And there are a couple of things he might do about the threat posed by Bulgaria’s new Energy Tax:

• First, he could challenge it at EU level, either via the European Commission (EC), or in the European Court of Justice (ECJ), or both.
• Second, he could take a more hardline approach and exercise direct pressure on Bulgaria by stopping it from joining the visa-free Schengen Zone, long-coveted membership of which is finally on the cards for Bulgaria (and its neighbour Romania) at end-2023—provided that no Schengen member state blocks it. Hungary (itself a Schengen member since 2007), could threaten to join the remaining hold-outs, Austria and the Netherlands, in blackballing the two Southeast European (SEE) countries. Being in the ‘illustrious’ company of Orban, might convince both The Hague and Vienna to reconsider or modify their veto. If Gazprom doesn’t have leverage over Bulgaria, even less so will Victor Orban, considering Gazprom’s nuclear option – cutting off gas supplies via the Turk Stream.

As to using Brussels to overturn Bulgaria’s Energy Levy, there are two reasons to suppose that won’t happen – one general and one very specific.

The general reason is that, to exert that sort of pressure on Brussels, the Hungarian leader would need to have greater political capital at his disposal than he actually has. He is a maverick, and – certainly lacks popularity in EU circles – so he would need leverage if he is to secure the interests of Gazprom in the EU. He doesn’t have it.

The more specific catch is this. To have a case against the Energy Levy under EU law and regulations, Mr Orban would need to prove that it harms the interests of Hungarian consumers. This would be difficult, because Gazexport’s contracts are for the delivery of natural gas to the Hungarian border – that is, to the entry points of the Hungarian transmission system – and the price specified in those contracts is unaffected by fluctuations in Gazexport’s transmission costs. The only prices that matter in those contracts are front-month benchmark prices on key EU gas exchanges.

So, unless Mr Orban orders Hungarian state-owned gas trader MVM (Gazexport’s counter-party in those contracts) to assume this charge – a step which, in fact, he did take in an analogous situation regarding imports of Russian oil by pipeline via Ukraine – he has no valid reason to complain about Gazexport paying an energy charge in Bulgaria.

In legalistic Euro-speak terms, Hungary does not have a “material interest” in the matter. So it’s hard to imagine that anyone in the EC or ECJ would pay attention to Mr Orban, because that lack of material interest means that, in objecting, he is protecting the interests of a third party – Gazexport.

Of course, Hungary isn’t the only state that, in theory, might object. Romania or Greece, in theory, as recipients of Russian gas, could logically have an issue with Bulgaria’s energy tax. But it is in practice highly unlikely that they will do so, since all the move does is to level the playing field between Gazprom/Gazexport and their competitors (LNG and other pipeline gas suppliers) at their respective border entry points.

Counting the cost to Putin

The energy excise tax dramatically reduces the chances of Russian gas being re-exported from SEE to a wider Europe without substantial price discounts by Gazprom – which, of course, would affect the Russian gas giant’s revenue stream and its contribution to Mr Putin’s war chest.

By how much? Well, that’s tricky to estimate, because there are some contingencies – not least the fact that that prices on gas on Europe’s gas-exchanges make a big difference. At current price levels of around €52/MWh, the energy levy represents about one fifth of the total price. But if the price were to rise above €100/MWh, the percentage represented by the energy levy would fall, and Russian gas could regain part of its competitiveness and market shares.

However, at current prices and current volumes of Gazexport gas transiting Bulgaria, the energy levy would generate about $2 billion in revenue in the Bulgarian state budget. Meaning that Gazprom (and Mr Putin) would be deprived of that amount. And even if it turned out to be rather less than that, it would still be good news for the regional gas market, where Gazprom still holds disproportionately high, to EU averages, market shares.

The Bulgarian context

In the Bulgarian context, things are relatively straightforward. The Kremlin has tried to replace state gas trader Bulgargaz, as the gateway for Russian gas into Bulgaria, with a company – Sustainable Energy Supplies (SES) – which is jointly owned by Litasco, an affiliate of Russian oil giant Lukoil, and Bulgarian energy oligarch Valentin Zlatev. Gradually, the volumes of Russian gas imported through the Turk Stream pipeline and SES’s exclusive imports grew well above the needs of Lukoil Neftochim, the Bourgas-based oil refinery that is owned by the Russian company and used to be managed on its behalf by Mr Zlatev. This has led to a takeover by SES of a significant chunk of the remaining client base of Bulgargaz on the Bulgarian gas market (“remaining”, that is, after the April 2022 gas cut-off, which had already shrunken that client base drastically). And that posed a threat to Bulgaria’s energy security and made it vulnerable to Russian political pressure.

The Energy Tax is a direct challenge to President Putin, who is the real CEO of Gazprom and extends his personal political guarantees to the company’s operations abroad. The tax seems a powerful tool to counter this threat and to reassert Bulgaria’s interests and control over its own energy market. It is a strong signal to Russia that Bulgaria will not be intimidated and will not tolerate Russian attempts to undermine its energy security.

No wonder the first to criticise the energy tax internally have been companies directly or indirectly importing Russian pipeline gas. Gazprom’s local lobbyists have already unleashed a campaign to discredit the Energy Tax, calling on Bulgaria’s president Rumen Radev to intervene both internally and at an EU level.

However, they haven’t much chance of success – whether or not they know it. Mr Radev’s chances of reversing Parliament’s decision are slim. And his chances of engaging the EC are even slimmer, since he’s unlikely to win any popularity contests in Brussels – not after his uncooperative stance on the question of arms for Ukraine and his unseemly and un-European antics regarding gas contracts with Turkey.

And it’s possible that Mr Radev also lacks motivation to help Gazprom out. Once straightforwardly Russophile and Putinophile, he may now have divided allegiances – or another primary allegiance altogether.

Mr Radev was highly visible in bringing about the deal between Bulgargaz and Turkish national gas company Botas, signed in January this year, which has been key to the emerging “Turkish Gas Hub” (TGH) scheme.

The TGH, A&A readers will recall, is to involve “whitewashing” of Russian gas – by relabelling or dilution – and its export in a nationally non-specific “TGH mix”. This rather upstages, or at least de-emphasises, direct exports of Russian gas through the Turk-Balkan Stream pipeline – which was the pet project of former prime minister Boyko Borissov, in which Mr Radev played a relatively minor part.

And it’s a fair assumption that President Radev’s political (and possibly other) interests are tied up in the TGH. But presumably “TGH mix” gas, not being avowedly Russian, would not be liable to the new Bulgarian Energy Levy. If so, Mr Radev might turn out to take a rather relaxed view of that levy.

And there’s more to this than Mr Radev’s interest. The Energy Tax comes at a moment of rising conflict between Russian and Turkish concepts of how the Turkish Gas Hub should work (and corresponding disagreement as to how the spoils should be divided between Moscow and Ankara). If the Energy Tax applies to Russian pipeline gas but not to TGH mix, the calculus may shift in Turkey’s favour and the TGH gain ground at the expense of Turk-Balkan Stream. Russian gas will still be flowing west, but Mr Putin will be getting less of the proceeds. Which will be good news for Ukrainian civilians – whatever your reaction to the corollary that Mr Erdogan will be getting more!

Some doubts

Despite all the intentions, it is still unclear whether the Energy Levy will have the expected effect. This is due not so much to the geopolitical and market considerations outlined above, as to the complexity of putting the Energy Levy into effect.

Firstly, success in this depends on importers and, above all, on Bulgaria’s system operator, Bulgartransgaz (BTG). These, especially BTG, have been doing little else but serving Gazprom’s needs for years, and their basic instinct is to continue doing just that. So they may take disruptive action or drag their feet – for instance by sabotaging implementation of the Energy Levy, creating “technical” or other obstacles. After all, these are the same people who financed and saw through Gazprom’s most important strategic project, Turk Stream. And now they will be expected to implement the most painful measure for Gazprom and Russian gas in decades. It will go against the grain.

Secondly, financial reasoning could also come to the fore. This would be especially likely to happen if Gazexport threatened to terminate its transit contracts with BTG, thereby critically jeopardising BTG’s revenues at a time when significant debt from the Turk Stream project, which carries 100 per cent Russian gas, is still outstanding and has to be serviced or repaid. That could put BTG into a tight spot and might even threaten it with insolvency. And, barring regime change in Moscow, there is no reason whatever why Gazexport wouldn’t exploit such threats for all they are worth – and maybe even carry through on them.

One other point. Gas isn’t everything. As an exception to an EU embargo, Bulgaria is still importing Russian oil for use in a refinery (Lukoil Neftochim) that is the most precious Russian asset in Bulgaria. The effect of the Energy Tax needs to be assessed in tandem with developments around the Lukoil refinery. Events there seem to be headed in the same direction, and that Lukoil Neftochim is joining Gazprom in a situation of escalating discomfort and waning Kremlin lobbying power in the region that has been the trend since the war in Ukraine broke out. But that’s another article.  

All that said, Bulgaria’s Energy Levy may turn out to mark a turning point, the start of dramatic changes. The regional gas market has, to date, been a tangled knot of interests and relationships that seemed immutable – as had Gazprom’s commanding market shares. The Energy Levy may not slice through that knot completely. But it could cut though enough of the strands to make it easier for the rest to unravel and to set the unravelling process in rapid motion.

In other words, the consequences of Bulgaria’s new Energy Levy could alter the landscape of the regional gas market – and, in the process, critically undermine Gazprom’s ability to fund Mr Putin’s war in Ukraine.

Ilian Vassilev