An agreement has been made between Russia and Montenegro that will initiate a study to deteremine the feasibility of the South Stream gas pipeline supplying the latter with Russian natural gas by a pipeline that will cross under the Black Sea. With Podgorica first expressing interest in joining the project toward the end of 2011, this deal means that Montenegro joins Austria, Bulgaria, Croatia, Greece, Hungary, Serbia and Slovenia in having signed agreements with Russia for the construction of South Stream.

Analysis

Approximately 80 percent of Europe’s gas (or 110 billion cubic meter per year) was transported through Ukraine last year. Moscow’s repeated disputes with Kiev has led the Kremlin to seek alternatives. Its solution has been to diversify its European energy transport routes. One step was the recent rerouting of gas to the Nord Stream pipeline, transporting across the Baltic to Germany. Another alternative is to develop the South Stream pipeline, crossing the Black Sea.

Coupled with the recent agreement between Gazprom and the Turkish Pipeline Corporation, which permits the South Stream gas pipeline permission to cross under the Black Sea and through Turkish waters, Montenegro’s joining South Stream has added further momentum.

Montenegro is sometimes known as “Moscow on the sea.” Indeed, Moscow’s political influence in Podgorica and substantial investments have contributed to an economic boom and resulted in Montenegro receiving more foreign direct investment per capita than any other nation in Europe. South Stream further enhances Russia’s grip over Montenegro with little protest from either side due to their cultural affiliation. Nonetheless, for certain policymakers in Podgorica and among those who fear Moscow’s growing influence, cooperation over South Stream could lead to potential difficulties should Montenegro change course.

Wikistrat Bottom Lines

Opportunities

• Serbia has a fence-mending opportunity here with Montenegro as its only access to the project is via Serbia.

Risks

• Should South Stream become a reality, it would not only cement Russia’s role as sole energy supplier for Europe’s already heavily dependent nations on Russian gas; it would also help consolidate Russian political influence over Europe and the traditional transit states, resulting in ensuring Gazprom’s monopoly over Europe’s lucrative energy market for the foreseeable future.

Dependencies

• South Stream appears to be a Russian reaction to the proposed rival, and EU-backed, Nabucco pipeline which is planned to transport natural gas from the Caspian region and Central Asia to Europe. The construction of South Stream, therefore, would not only put the future of Nabucco in doubt, and consequently ensure that Europe continues to source its gas from its traditional supplier but it would also reaffirm, if not strengthen, Russia’s geopolitical clout in the region.
• However, considering that Nabucco’s future has been looking uncertain in recent months as investors have failed to identify a suitable gas reserve to supply the 32 billion cubic meter per year pipeline and justify its high construction costs and that relations with Kiev have improved (thanks to pro-Russian Viktor Yanukovich being elected president), the need for Russia to build South Stream, and thus outmaneuver its opponents in the regional battle to supply Europe’s energy market, may not materialize.

Marinko Bobic, T. Michael Lutas, Matthew Malarkey and Lorenzo Nannetti contributed to this analysis.