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Strained Turkey-Russian Relationship Impacts Both Countries Negatively

Strained Turkey-Russian Relationship Impacts Both Countries Negatively

Some have suggested Vladimir Putin's first retaliation for the Turkish shooting down of a Russian fighter jet would be to cut off gas supplies. With Russia Defense Minister stating that the "downing of the Russian warplane is a 'hostile act'," adding that the defense ministry is "devising a set of measures to respond to the incident," it seems taking the 'nuclear option' of cutting off 20% of Erdogan's entire energy supply would be a strong first non-lethal non-World-War-3-starting step.

Turkey gets 57% of its gas from Russia (and Turkey is Russia second biggest non-domestic market for gas). Turkey's alternative supply routes include Iran, which of course just signed a $5 billion trade deal with Russia and is unlikely to come to Turkey's aid. As we ominously predicted recently, although Moscow and Ankara have thus far kept it civil in order to preserve and expand trade, it now looks as though each country may be willing to Plaxico themselves all because they disagree over what the fate of Bashar al-Assad should be... It appears we have moved on from 'civil'.

As we detailed previously, Turkey-Russia energy relations are tense at best

In June, we noted that Russia had signed an MOU with Shell, E.On and OMV to double the capacity of the Nord Stream pipeline, the shortest route from Russian gas fields to Europe.

Here is a helpful visual:

What you’ll note from the above is that the Nord Stream allows Gazprom to dodge Ukraine, which is desirable for obvious reasons.

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Of course that’s not good for the Eastern European countries (like Ukraine) who derive revenue from the flow of gas. Late last month, Slovak PM Robert Fico had the following to say about the Nord Stream project:

“They are making idiots of us. You can’t talk for months about how to stabilize the situation and then take a decision that puts Ukraine and Slovakia into an unenviable situation.”

To which we said the following:

When it comes to making grand public declarations about “stabilizing” unstable geopolitical situations and then turning around and doing something completely destabilizing, the West (and especially the US) are without equal, as evidenced by all manner of historical precedent including Washington’s efforts to help sack Viktor Yanukovych whose ouster precipitated the conflict in Ukraine in the first place. And make no mistake, to the extent there’s energy and money involved, that’s all the more true which is why it isn’t at all surprising that Western Europe would facilitate a deal that lets Gazprom bypass a war zone if it means getting natural gas to countries that “matter” in a more efficient way.

In an interesting, if predictable twist, Western Europe may need to step up its cooperation with Gazprom even further going forward because now, the conflict in Syria has strained the energy relationship between Moscow and Ankara. Specifically, several purported Russian violations of Turkey’s airspace have made President Erdogan "irate" and more generally, The Kremlin’s support for the Assad regime has angered Turkey, which has long supported and worked to facilitate his ouster. Here’s a bit of color from FT:

Last year, Recep Tayyip Erdogan, then Turkey’s prime minister, was one of the only western statesmen to attend the opening ceremony of the 2014 Winter Olympics in Sochi. On the sidelines he met President Vladimir Putin and hailed the strong ties that bound Russia and Turkey.

Such warmth seems a distant memory today.

The two men are at loggerheads over Syria, and their spat threatens an important energy relationship: Turkey is the second-largest consumer of Russian natural gas. A new pipeline across the Black Sea was supposed to cement the partnership. Its future is now murky.

Last week, an irate Mr. Erdogan, now Turkey’s president and still the country’s unquestioned leader, warned that, because of its military intervention in Syria, Russia risked forfeiting a $20bn contract to build a nuclear power plant on Turkey’s Mediterranean coast. Ankara could also source its gas from elsewhere, he warned.

But that's where things get tricky because as Bloomberg noted on Monday, "Russian gas keeps the lights on in Turkey":

Nearly 75 percent of Turkey's energy use is derived from outside sources, with Russia alone accounting for one-fifth of Turkey's energy consumption, more than any other. Russia's Rosatom is scheduled to start building Turkey's first nuclear plant next year and the two countries are also partners on a major new natural gas pipeline, known as TurkStream, which will eventually allow Russia to send its natural gas into the heart of Europe via the Turkish-Greek border rather than through embattled Ukraine. Gazprom, the world's largest natural gas producer and a TurkStream signatory, recently announced that the project would be delayed and capacity cut. Turkey represents Gazprom's second largest market after Germany.

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Read the last bolded passage there and then, referring back to the map shown above, follow the Nord Stream right into ... Germany. Once again, here's Bloomberg:

Putin feels able to change tack on Turkey, the second-largest customer for Russian gas, because in September he agreed to expand the Nord Stream pipeline that links Russia directly with Germany.

“Putin is betting on Nord Stream, but that bet is risky," Sijbren de Jong, energy security analyst at the Hague Centre for Strategic Studies, said by e-mail. "Can Gazprom really afford to annoy Turkey and forgo gas revenues? Hardly."

Europe receives about a third of its gas from Russia with a third of that volume flowing through Ukrainian pipelines. Gazprom aims to end or at least cut its gas transit through the former Soviet republic after the current transit contract expires in 2019.

Putin said last year that the new Turkey route would help Russia to meet this goal. After talks on the link stalled over the summer, Gazprom said that the Baltic Sea link directly to Germany known as Nord Stream-2 was a priority.

Putin’s bet on Nord Stream-2 is risky as the project may face opposition in the EU, De Jong said. EU Energy Commissioner Miguel Arias Canete said last week the link risked concentrating 80 percent of the bloc’s Russian gas imports on one route while eastern European nations have also warned of the risk of circumventing Ukraine.

Gazprom said Tuesday that key markets for Nord Stream-2 are boosting gas purchases from Russia, with total European exports in early October gaining almost 36 percent from last year’s level.

There are two takeaways here. First, all of this underscores the degree to which geopolitics and energy are inextricably bound up and that serves to strengthen the thesis that part of what triggered the conflict in Syria were energy disputes between the two regional axes of power. Although Moscow and Ankara have thus far kept it civil in order to preserve and expand trade, it now looks as though each country may be willing to Plaxico themselves all because they disagree over what the fate of Bashar al-Assad should be.

Second, Turkey needs to be careful here. If Erdogan effectively kills the Turkish Stream because Russia is bombing anti-regime forces in Syria, then Ankara had better hope Moscow and Tehran don't succeed in restoring Assad, because then, there'd be no hope for the Qatar line either.
And as for Erdogan's contention that because Turkey can get gas from sources other than Russia, Moscow should "think well," the following pie chart suggests that in the current geopolitical environment, it is actually Ankara that should think twice before adopting too brazen a position...

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But, of course, this is not a 'simple' decision since Turkey has become a notably important market for Russia... and with The Saudis pressing for market share in Europe's crude market, losing another such major source of national revenue will not be such a slam dunk.

By Zerohedge

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