Monday, 21 June 2010

Medvedev's Visit Marks New Stage in Russian-Turkish Energy Partnership

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By Richard Weitz (vol. 3, no. 12 of the Turkey Analyst)

From 11-12 May, Russian President Dmitry Medvedev visited Ankara and met with President Abdullah Gül, Prime Minister Recep Tayyip Erdoğan, and other senior Turkish officials. The trip coincided with the signing of 17 agreements between the two countries, with the ones dealing with energy potentially having the most importance for their relationship. If these deals are fully implemented, Turkey would become even more dependent on Russia for its energy supplies, perhaps for decades to come. Turkish officials have resisted some of Moscow’s demands, but Ankara’s ability to pursue polices strongly opposed by Moscow on important Eurasian issues remains questionable.

 

 

BACKGROUND: Shortly before arriving in Ankara on a visit that coincided with the 90th anniversary of the establishment of diplomatic relations between Turkey and Russia, Medvedev published an article in Today's Zaman, in which he wrote “that Russian-Turkish relations have advanced to the level of a multidimensional strategic partnership.” As if to mark their new level of partnership, Medvedev and Erdoğan used the occasion of their summit to chair the first session of the new Turkey-Russian High-Level Cooperation Council. Each country already has established several such councils with its most important partners, so the creation of the Turkish-Russian council was expected. According to the declaration signed by Medvedev and Erdoğan, the Council, which will meet yearly, will establish the main directions of future political, economic, and cultural cooperation between the two countries as well as coordinate their important bilateral projects in this area. Within the Council, the Turkish and Russian foreign ministers will head a strategic planning group, while a joint public forum will also be established. The Council will oversee some of the bilateral agreements signed during Medvedev’s visit. These included accords on air and sea transportation, higher education, food safety, combating drug trafficking, visa waivers, and a bilateral action plan on tourism and cultural exchanges. According to the Kremlin news service, Medvedev and Gul also discussed trade issues, terrorism, the Southern Caucasus, Iran’s nuclear program, the Middle East peace process, and the Black Sea region.

Many of these agreements aim to strengthen bilateral energy and economic ties. Russia already supplies over half of Turkey’s natural gas consumption (which provides most of Turkey’s electricity) and one fifth of its domestic oil needs. Turkish policymakers do not welcome their dependence on Russian energy sources, but have not yet developed an effective strategy to reduce it. Turkey’s leaders have sought to pursue energy projects not dominated by Russia as well. In particular, they have sought to support the troubled Nabucco pipeline, which would transport natural gas from the Caspian Sea region to European countries via Turkey. Turkish energy experts have called for greater use of hydroelectric power. Pending the development of alternative sources of energy, Turkish officials have sought to use their country’s unique geographic position to develop Turkey not only as an energy corridor, bringing gas and oil from the Caspian, Middle East and Russia to the European grid, but into an energy hub in which Turkish officials would have considerable influence over where and under what conditions to supply Eurasian energy to foreign countries. Not only would such a status enhance Turkey’s regional leverage, but it would allow Turkey to accrue greater revenue.

Due to Turkey’s growing consumption of imported Russian energy, Russia became Turkey's largest trading partner in 2008. Bilateral commerce peaked that year at some $34-$37 billion, with Turkish sources citing the higher figure. This total declined in 2009, to around $20-$23 billion, with Russian sources again using lower numbers. The reasons for the collapse are not difficult to determine: the worldwide recession reduced overall volumes of international commerce, while world prices for Russian oil and gas decreased from earlier record highs. But the quantity of Russian-Turkish trade appears to be rising again. In a joint news conference with Medvedev in Ankara, Gül set the goal of raising the bilateral trade level to $100 billion within five years. In his speech to representatives of the Russian and Turkish business communities on May 12, Medvedev likewise called for a major increase in bilateral trade during the next few years, including by establishing one or more joint banks and by using the two countries’ national currencies—the Russian ruble or Turkish lira—to cover bilateral transactions. Aware of Turkish complaints regarding the imbalanced nature of their bilateral trade, which heavily favors Russia, Medvedev added that the Turkish-Russian economic relationship should also involve the extensive exchange of high technology and mutual investment. He further noted that more than one hundred construction firms already operate in Russia, and that they have won a total of approximately $30 billion in contracts. Turkish firms currently own more than $6 billion of investments in the Russian Federation, while Russians have invested more than $4 billion in Turkey. Medvedev announced that the two governments had signed agreements that would generate more than $25 billion of new investment opportunities for their businesses.

IMPLICATIONS: Approximately $20 billion of that total could result from the unprecedented Turkey-Russia nuclear energy deal Medvedev signed in Ankara. Under its terms, a Russian consortium led by nuclear plant builder Atomstroyexport and the electricity giant Inter RAO UES—which are both units of the Rosatom nuclear energy holding corporation, a state-owned monopoly—will construct Turkey’s first nuclear power plant in the southern Mediterranean coastal province of Mersin, near the town of Akkuyu. The plant’s four reactors, which will be built in pairs, will have a planned total capacity of 4,800 megawatts, which would make it one of the largest in the world. It will take about seven years to complete the plant’s construction, which would begin following ratification of the deal by both national parliaments, Rosatom’s formation of a subsidiary to build the plant, and the securing of all the necessary construction permits—steps that might take several years to complete. What also makes the nuclear agreement unique is that the Russian firms under Rosatom will have a controlling stake in the plant, with only a minority of the shares being acquired by Turkish companies and other foreign energy investors from the originally wholly owned Russian consortium. In the other countries where Rosatom has built nuclear plants—China, India, and Iran—the company has not obtained an ownership or management role. “This will be the first case in which Russia not only builds a power plant, as we have in Iran and India, but will also owns it,” Rosatom head Sergei Kiriyenko told reporters in Ankara.

Medvedev said that the “nuclear energy deal opens a new page in cooperation between our states.” To overcome Turkey’s problem of not having $20 billion at hand to pay for the plant’s construction, the Turkish electricity company Tetas has committed to purchasing half of its electricity for at least 15 years at a fixed price. This arrangement, which will go into effect when the plant enters into commercial operation around 2016-2019, will allow Turkey to pay for its construction in installments and for Russia to secure a loan using these guaranteed payments as collateral. Rosatom intends to sell the remaining output on the unregulated electricity market. EUAS, a Turkish government company that generates electricity, will provide the land for the project free of charge. In signing the agreement, Kiriyenko said that, “This is a smart move for Turkey … because they don’t have to pay anything upfront, just provide the site.”

In turn, the Russian government deepened its support for the Samsun-Ceyhan 700-kilometer trans-Anatolia oil pipeline. This $3 billion project, which aims to deliver some 500 million barrels of oil annually, is currently being constructed by Turkey’s Çalık Holdings AS and Italy’s state-controlled Eni SpA corporation, which has long enjoyed close ties with Gazprom. During Erdoğan’s visit to Moscow in January 2010, the two governments agreed that Russian energy firms could also assume a role in its construction. Rosneft and Transneft, Russia’s state-owned oil and energy pipeline corporations, are negotiating to assume prominent roles in constructing and operating this pipeline. Once completed, it aims to carry up to 1.5 million barrels of Russian and Kazakh crude oil daily from Turkey’s Black Sea port of Samsun to its Mediterranean port of Ceyhan, where the oil would be loaded onto tankers—with the possibility of on-site refinement—for shipment to European markets. Ankara strongly supports the pipeline both to strengthen Turkey’s role as a major Mediterranean energy hub and to reduce the oil tanker traffic in the Bosphorous Straits. Instead of traversing the overcrowded Straits, which poses the constant risk of an environmental disaster if a major oil spill would occur near Istanbul, the largest tankers would transport the oil to Samson, where it would be offloaded and sent through the pipeline. “Our shores are under severe danger during the passage of the oil tankers through the straits,” Erdoğan said. “Once we realize the Samsun-Ceyhan pipeline, we would have the opportunity to reach out to the world from Ceyhan.” 

The Russian government had previously preferred to use an alternate Burgas-Alexandropoulos route to construct a 280-kilometer pipeline to bypass the Bosphorus. The three countries signed an agreement in 2007 to construct this so-called Trans-Balkan pipeline, in which Russian companies would own 51% of the shares, which would transport Russian and Caspian oil to the Bulgarian Black Sea port of Burgas, where it would be sent by pipeline to the Greek Aegean port of Alexandropoulos. But this proposed pipeline has been stalled since July 2009, when a new Bulgarian government took office and has been demanding a better deal. The Russian government has expressed interest in merging the Burgas-Alexandropoulos, if the Bulgarian government ever endorses it, with the Samsun-Ceyhan pipeline suggesting, as an enticement to the Turks, that the existence of both pipelines could even allow for ending the use of crude oil tankers in the Bosporus and Dardanelles Black Sea Straits altogether. Russian officials have nevertheless accepted Samsun-Ceyhan pipeline as an acceptable consolidation prize, since it would make Turkey even more dependent on Russian energy supplies, around 70% according to Erdoğan’s calculations.

CONCLUSIONS: Although Medvedev’s visit saw a further deepening in the Turkish-Russian energy and economic partnership, the Kremlin did not achieve everything it wanted from the trip. In particular, Turkish authorities have yet to approve construction of the South Stream pipeline long sought by Gazprom. This undersea pipeline project, supported by Russia’s state-run energy company Gazprom and Italy’s state-run energy corporation ENI, would complement Blue Stream by also running under the Black Sea, delivering natural gas from Russia and Central Asia directly to Southeastern Europe. The initial volume would be 31 billion cubic meters, a quantity that would eventually double to 63 billion. Gazprom needs access to Turkey’s territorial waters to construct the pipeline. In addition, the two governments continue their indiscreet lobbying of Azerbaijan over its Shah-Deniz natural gas field. Turkish officials are working with the EU, which Turkish officials still profess to be interested in joining, to make this gas available to supply the Nabucco pipeline, while Russian energy managers would like to use the gas to feed its own pipelines rather than bolster the competing Nabucco enterprise.

This maneuvering reflects the unease of some Turkish analysts about deepening their country’s already heavy dependence on Russian energy supplies. The Turkish government would also like Gazprom to eliminate or relax its “take or pay” provision, which require Turkey and other customers to import a minimum amount of gas, regardless of possible shortfalls in demand, or pay certain penalties. At the same time, the advent of a more Moscow-friendly government in Ukraine is leading some Gazprom analysts to reconsider their plans to rely so heavily on Turkey as an energy supply conduit to Europe. The depth of these Turkish-Russian differences should become apparent later this year since Erdoğan told Putin when he visited Moscow in January that his government would decide whether to proceed with South Stream by November 10, 2010, pending favorable results from an environmental impact assessment and geological and seismic studies.

Richard Weitz, Ph.D., is Senior Fellow and Director of the Center for Political-Military Analysis, Hudson Institute

© Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center, 2010. This article may be reprinted provided that the following sentence be included: "This article was first published in the Turkey Analyst (www.turkeyanalyst.org), a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center".

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.

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