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Scrapping of pipeline shows Putin has left Russia with very few friends

An employee works on pipes made for the South Stream pipeline at the OMK metal works in Vyksa in the Nizhny Novgorod region April 15, 2014.

Sergei Karpukhin/Reuters

For much of this year, Russian President Vladimir Putin has seemed to be playing one move ahead of the West in the showdown over Ukraine. But the cancellation of a multibillion-dollar pipeline project – one that would have delivered Russian gas to Europe while bypassing Ukraine – shows Mr. Putin's gamesmanship has left Moscow with very few friends it can rely on.

Mr. Putin announced Monday that his country was abandoning, mid-construction, the $40-billion (U.S.) South Stream natural gas pipeline, previously seen as key to Moscow's long-term energy strategy.

Its death leaves Mr. Putin's energy plans in tatters, and his country more reliant than ever on partners like China and Turkey. They are using the moment to extract better deals from the Kremlin, which can ill afford any more bad economic news.

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Hit hard by falling oil prices and Western sanctions over Ukraine, the Russian government admitted Tuesday that expects the country will enter recession in 2015, with the economy predicted to shrink by 0.8 per cent during the year. The ruble, meanwhile, continued a months-long plummet, falling 4.5 per cent Tuesday to 53.53 rubles to the dollar. The ruble has now lost almost 40 per cent of the value it held at the opening of the Sochi Olympics in February.

South Stream was a classically Russian megaproject: huge in scale and cost, and with the requisite attempt to make geopolitical gains on the side. Conceived in 2007, during another acrimonious period in Russia-Ukraine relations, the pipeline would have allowed the delivery of Russian natural gas to Europe, while bypassing Ukrainian territory by cutting under the Black Sea.

The financial incentive for Gazprom, Russia's state-owned energy giant, was obvious. Avoiding Ukraine meant avoiding the transit fees that country has always charged for Russian gas shipped across its territory. But the political motives were just as important: Creating another route for Russian gas to reach Europe would have made the delivery and pricing of Russian gas to Ukraine into a bilateral issue, rather than the international one it has become, since so much of Europe's gas supply currently crosses Ukraine.

South Stream would have allowed Russia to wield its energy weapon more effectively in Ukraine, where it has repeatedly increased prices – or cut off supply – to punish governments it doesn't like such as that of current President Petro Poroshenko and dropped prices to reward those it considers friendly like that of Mr. Poroshenko's disgraced predecessor, Viktor Yanukovych.

The project had the added benefit of strengthening Russia's economic ties with historic allies Hungary and Bulgaria (two European Union members) and Serbia (which is aspiring to EU membership), since South Stream was to traverse those countries on its way to the centre and west of the continent. That prospect caused consternation for some in the EU, who accuse the Kremlin of trying to increase its influence and sow discord within the 28-country bloc.

In announcing the cancellation of South Stream, Mr. Putin bitterly blamed the EU for heaping pressure on Bulgaria, which halted construction on the project in June, citing concerns that it violated competition laws. "If Bulgaria is deprived of the possibility of behaving like a sovereign state, let them demand the money for the lost profit from the European Commission," Mr. Putin said, noting that Bulgaria, one of the poorest countries in Europe, had lost the chance to make $500-million annually in gas transit fees.

While some in the EU were triumphant about the decision, the cancellation of South Stream leaves Southern Europe, in particular, reliant on gas shipped via an unstable Ukraine. Serbian Prime Minister Aleksandar Vucic complained Tuesday that "a conflict between big powers" had killed a project that would have benefited his country.

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"We believe that it does not coincide with Europe's economic interests and harms our co-operation," Mr. Putin said at a press conference in Ankara alongside Turkish President Tayyip Erdogan. "But such is the decision of our European friends. They are, in the end, customers. It is their choice."

Mr. Putin's setback is Mr. Erdogan's gain. Though Russia and Turkey are hardly friends these days – Moscow has backed Syrian President Bashar Assad throughout that country's three-year-old civil war, while Ankara has supported those seeking to topple him – Mr. Putin has nowhere else to direct the half-finished pipeline under the Black Sea. Mr. Putin suggested South Stream may now terminate at an energy "hub" on Turkish territory, near the country's border with Greece.

Mr. Erdogan, didn't immediately agree to the proposal, and Turkish media reported Tuesday that Turkey wanted a deep discount on the gas it buys from Russia for its own market. Mr. Putin reportedly offered a 6 per cent rate cut as part of the package, while Mr. Erdogan is holding out for a 15 per cent reduction.

It's the same type of bargaining Mr. Putin encountered earlier this year when, anxious to refute the notion that Russia was isolated following its March annexation of Crimea, he signed a massive 30-year deal to supply Russian natural gas to China.

For years it had been Beijing that had been asking Moscow to sign such an agreement to feed its rapidly expanding economy. But – sensing Moscow's weak bargaining position – Chinese President Xi Jinping got Russia to commit to a price $50 per thousand cubic metres below the price Gazprom had been seeking, and $30 below what EU members pay.

Mr. Xi, like Mr. Erdogan, is still willing to stand beside, and make deals with, the beleaguered Mr. Putin. But the Russian President's "friends" are making him pay for the privilege.

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