U.S. and Europe find Russian pipeline's weakest link: Bulgaria. Photographer: Andrey Rudakov/Bloomberg
U.S. and Europe find Russian pipeline's weakest link: Bulgaria. Photographer: Andrey Rudakov/Bloomberg

Conventional wisdom holds that Europe is so scared of economic blowback from any meaningful sanctions to pressure Russia over Ukraine that it is doing little if anything to help. That's not true. Bulgaria's decision to halt a sensitive Russian natural gas pipeline project is the result of concerted efforts by the European Union and the U.S.

The South Stream pipeline will probably still get built. The delay caused by Bulgaria's decision will, however, weaken Russia's position in talks with Ukraine on stopping the pro-Russian insurgency in its southeastern regions, and on future gas supplies.

The project to build a pipeline from the Russian coast to Bulgaria across the Black Sea, and from there to Italy, was conceived in Moscow as a way to bypass Ukraine's gas transit network. Once operational, South Stream would allow Russia's natural gas monopoly, OAO Gazprom, to shut off supplies to Ukraine without the risk that it siphons off gas destined for Russian clients in the EU, leaving them short. The resulting freedom to turn the gas tap to Ukraine on and off without fear of consequences in Russia's most important gas export market -- the EU -- is a strategic goal for Russian President Vladimir Putin.

There are always likely to be reasons for Gazprom to cut off Ukraine when Kremlin policy requires: The country is a massive natural gas consumer and has a hard time paying for supplies at the current inflated price of $485 per thousand cubic meters (about $13 per million British thermal units, compared to Gazprom's average export price of about $10).

The EU and the U.S. want to wrest this natural gas weapon from Putin's hands. So they have launched a successful two-pronged attack on the socialist government in Sofia, which had rolled out the red carpet for Gazprom.

The Europeans made their move on June 3. Internal Market and Services Commissioner Michel Barnier sent the Bulgarian government a lengthy letter claiming that the project violated a number of EU regulations. These rules ban gas-producing companies from also controlling pipelines (which would be the case with Gazprom's South Stream project); forbid Bulgaria from giving Gazprom the tax breaks mentioned in its bilateral agreement with Russia; and call for an open tender for contractors from all EU countries.

Bulgaria, the EU's poorest country, held a questionable tender for the contract to build its section of South Stream: It gave prospective participants just 10 days, over the Christmas period, to submit their bids. Russia's Stroytransgaz Group, which is controlled by Putin's billionaire friend Gennady Timchenko, won the contract in partnership with politically connected Bulgarian businessmen.

"Now is not the time for business as usual with Russia," said U.S. Ambassador to Bulgaria Marcie Ries, pointing out that the U.S. has active sanctions against Timchenko and Stroytransgaz. "We advise Bulgarian businesses to avoid working with entities sanctioned by the United States."

Timchenko's Bulgarian partners, including Delyan Peevski, heard the message. Peevski was elected to parliament from the small, predominantly Turkish Movement for Rights and Freedoms, the junior coalition partner of the ruling Socialist Party. On June 5, the Movement's leader, Lyutvi Mestan, demanded an early election, saying the Socialists should heed the EU's warnings about South Stream. Other Bulgarian partners in the Timchenko consortium are close to Socialist Party leaders, and they may have followed up with Prime Minister Plamen Oresharski. After a meeting with U.S. Senators John McCain, Christopher Murphy and Ron Johnson on Sunday, he said pipeline construction would stop until the government cleared up all the misunderstandings with the EU.

That will not be until the EU brokers some kind of deal between Russia and Ukraine. "In the current situation, with civil war-like conditions in eastern Ukraine and without Moscow's recognition of the government in Kiev, we will certainly not arrive at a political conclusion of our negotiations," EU Energy Commissioner Guenther Oettinger said last week.

The Russian energy ministry intends to bring up the Bulgarian hurdle with Oettinger during talks about Ukraine's natural gas situation. With Bulgaria in their pocket on the South Stream issue for now, EU negotiators will step up pressure on Russia to lower the gas price it charges Ukraine. A compromise looks imminent, and if one is reached, Ukraine will have its Western allies to thank for pressuring another, less politically important, poor country.

To contact the writer of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: Marc Champion at mchampion7@bloomberg.net.