Putin says Europe killed South Stream pipeline. Did oil play a role too?

The Russian president blamed European intransigence for his decision to end the gas pipeline, which would have circumvented Ukraine via Bulgaria and Serbia. But the decision also comes as dropping oil prices put the squeeze on Russia's budget.

Vladimir Putin bowed to mounting pressures Monday and canceled a prize project, the $40-billion South Stream pipeline that was designed to do an end run around the "unreliable" transit zone of Ukraine and secure the hegemony of Russian gas supplies to southern Europe for decades to come.

The apparently final end to South Stream, which was to run under the Black Sea to carry Russian gas directly to southern Europe, deeply complicates Mr. Putin's plans and would seem to be a painful blow for the Kremlin. It will probably have the effect of accelerating Russia's turn away from the West amid the acrimony and sanctions war over Ukraine. Russia has already concluded major new gas deals with China this year, and Putin offered to re-route the canceled pipeline to Turkey, which could become the main onward distribution hub for Russian gas to Europe.

Experts say that early in his presidency, Putin personally authored a dual-route plan to end Russia's dependence on Ukrainian pipelines to ship gas to its biggest customer, Europe. The $12 billion Nord Stream line under the Baltic Sea was opened in 2011, and now carries most gas exports to northern Europe.

"South Stream was Putin's idea, and now he's had to concede that it won't work," says Mikhail Krutikhin, a partner with RusEnergy, a Moscow-based energy consultancy. "This will have big consequences. For one thing, Ukraine remains the necessary link to European markets for the foreseeable future. There will be no getting around that."

Whose fault?

Putin blamed the European Commission for letting political considerations get in the way of economic imperatives. EC opposition to the Russian project caused Bulgaria to halt construction of its leg of the pipeline last June. Speaking to a press conference in Turkey, where he was meeting with President Recep Tayyip Erdogan, Putin accused Bulgaria of not asserting its "independence," and warned that Europe will lose a reliable natural gas source. He also said countries such as Bulgaria, Serbia, Hungary, and Austria will forfeit the major economic benefits that would have flowed from the pipeline.

"We will focus our energy resource flows on other regions of the world, including through promotion and accelerated implementation of liquefied natural gas projects," Putin said. "We will promote them in other markets, and Europe will not receive those volumes."

But South Stream also appears to have fallen victim to the falling price of oil – Russian gas prices are calculated based on the oil price – and Europe's own efforts to wean itself from dependency on Russian gas by cultivating other suppliers.

It was never clear that Russia would be able find enough of its own gas to pump the projected 60 billion cubic meters to southern Europe annually, despite all the brave talk in Moscow. Nabucco, an American-sponsored rival to South Stream that would have avoided Russian pipelines to carry central Asian gas to Europe, was finally admitted to be economically non-viable and killed off last year.

South Stream's demise may cause some consternation among the countries of southern Europe that had been set to benefit from pipeline construction and transit fees. Putin said that Bulgaria alone had forfeited $500 million in annual transit fees alone; losses would be similar in downstream countries Serbia, Hungary, and Austria. If Russia succeeds in placing the blame on European leaders, it could deepen political rifts within the EU over how to handle Russia as the Ukraine crisis deepens.

"Canceling South Stream was a purely rational decision on our part," says Andrei Klimov, deputy chair of the international affairs commission. "But one can only imagine the faces of our partners in southern Europe, who had been awaiting all this economic development. But we can't wait endlessly for the EU to make up its mind. I'm afraid this decision will change a lot in Europe."

Turkey swinging east?

On his trip to Ankara, Putin inked deals to increase Russian energy exports, build a nuclear power station in Turkey, and boost trade from the current $32 billion to $100 billion by 2020. Some experts say that Turkey, which has encountered difficulties in its own bid to join the European Union, may be willing to move closer to Russia amid East-West tensions.

"Turkey has already been defying Western sanctions against Russia, and is stepping up its food and other imports to Russia," says Sergei Karaganov, a senior Russian foreign policy expert. "This situation may strengthen Turkey's own turn away from Europe."

He says short-term political considerations over Ukraine in the US and Europe could drive Russia into an eastward pivot that could ultimately create Washington's "strategic nightmare" of a united Eurasian economic and political bloc that's beyond Western influence.

"It's not just about the cancellation of South Stream. All these shifts are adding up, and they may well have incalculable geopolitical consequences down the road," he says.