Anna Tikhonova's Blog

Turkey’s price arbitrage with Gazprom over Turkish Stream

April 7, 2016

Turkish Stream was conceived in 2014 following Russia’s cancellation of South Stream which became a casualty of Russia-Ukrainian conflict and faced high opposition from the EU with regard to its anti-monopoly laws. The original plan for landfall in the EU (Bulgaria) will now occur in Turkey, while the distribution hub for Europe will be located at the border of Turkey and Greece. Being a strategically important transit point for Russian gas going to Europe and bypassing Ukraine, Turkey tries to increase its bargaining power and engages into price arbitrage with Gazprom: 10.25% discount offered by Gazprom is deemed insufficient and Turkey does not want to receive anything less than15%. Under the tightened atmosphere of the Syrian military theatre, Turkey threatens to cut off imports should her conditions be not satisfied.

Gazprom’s interests in Turkey

Turkey’s growing population and business already make it world’s top-20 economy, promising higher energy demand in future. By going into Turkish market Gazprom avoids passing Ukraine which is no longer ruled by pro-Russian president and whose unreliable behavior (such as recent refusal to buy any gas from Russia) threatens Russian exports to the EU. Given that the deal with China can’t solve Russian over-supply issues, it would be quite logical to increase exports to those countries which already are Russia’s customers. Today Turkey accounts for 17% of Russian export outside of FSU and gives hopes to increase this chare due to its 98% reliability on foreign gas. Overall, lower post-2008 crisis demand from EU accompanied by Gazprom’s increased production capacity makes it have a “take-it-all” stance on Turkey what would also help compensate loss of profit due subsidized low domestic price. Turkish stream will help deliver gas to Europe while making Russia avoid pressure from EU with regard to its Third Energy Package.


Despite ambitious gas deals which could be largely beneficial for both parties, Russia’s relations with Turkey are not in the best shape after the downing of the Russian airplane. But even though the Kremlin immediately levied sanctions on Turkey (and even went as far as to close Russian-Turskish research center in Moscow), it is clear that Russia is in desperate need of this partnership. Today Russia is trying to get Israeli word on not supplying any gas to Turkey in return for Russia’s abstention from supplying Iran with anti-aircraft missiles.

Will Turkey stop buying Russian gas?

While Ukraine already stopped buying Russian gas (it is doubtful whether Putin won’t cut gas exports first in retaliation for shutting Russian plane. However, neither Russia (receiving from Turkey $10bln last year alone), nor Turkey (whose 57% demand is catered for by Russia) have real interest in offsetting gas trade relations. By and large, Turkey has no viable alternative supply options: while exports from Nigeria, Azerbaijan and Algeria remain marginal, Turkey’s second largest supplier, Iran, won’t increase exports should Turkey conflict with Russia. Iran also supports Assad’s regime, and today Russia is its closest ally helping Damascus not to become a Saudi puppet. Swap deal transporting gas from Turkmenistan through Iran seems more viable.


At the same time, the current situation is not as easy as it seems to be. Russia indeed has a Memorandum of Understanding with Iran regarding their respective shares on the international gas market, however, as was said by one of the IEA’s representatives during the conference on Russian foreign Policy which took place on 1st December 2015 in Paris, “memorandums are worth nothing.” Indeed, when Iran finally got out of the economic entanglement with sanctions which were directly targeting its energy sector, the Islamic Republic is doing its best to monetize its hydrocarbon in order to welcome the ‘wind of change’ in the form of FDI. Given that a lot of international oil companies had to abandon their blocks (which stood idle for a few years and, thus, are underdeveloped) when sanctions were in fool bloom, Iran’s safest bet is to increase supply to its former clientele- and Turkey is the one who had been receiving almost 90% of Iranian gas for years. The only issue is that Turkey clearly lacks infrastructure (and cannot afford relying on the Italian one) to receive LNG from Sabine Pass. It also hasn’t reached an agreement for gas exports from Kurdish areas of Iraq, while the issue remains very sensitive and can become a sparkle in domestic Kurdish discontent in Turkey. Should Turkey cut imports through Turkish rather than Blue stream, it will receive strong opposition from those EU members who profit from it and who advocate for cancellation of sanctions on Russia in the European Council.

Arbitration: is it normal?

Turkish Stream reaches the same objective as South Stream project but costs Russia less royalties to transit states. For this reason Turkey tries to exploit momentum of decreased Gazprom’s bargaining power what indeed might have been very well expected by Gazprom in advance. The fact that EU supports TANAP-TAP and is responsible for infrastructure of Turkish Stream will make it press Russia to comply with EU regulations and finally come to consensus with Turkey over price. Price arbitration does happen (2006 and 2009 between Russia and Ukraine), however, it has to be resolves in the framework of business ethics in order to avoid supply interruptions and deterioration of trust relationship.


Since gas is a geopolitical energy source, logistics plays a vital role. According to Turkey, unbundling production from distribution will increases security of supply. Indeed, it can help Russia avoid the problems it encountered due making Baumgarten its final destination point in Europe rather than giving infrastructure to European jurisdiction. Gazprom faces the choice of price or volume maximization fearing that Turkey will impose alternative tariffs or will export Russian gas elsewhere (similar to what was done by EU and its reverse flows). Vertical supply chain control on Turkish territory could help Gazprom maximize profits and build additional leverage vis-à-vis EU, however, by passing ownership to Turkey it can essentially create a joint venture pipeline which would mitigate conflict (over controlling profits rather than costs) and help share the risks. Passing ownership to Turkey can become Gazprom’s new strategy to improve its image in anticipation of EU’s commission decision about its alleged non-compliance with EU competition regulations.

All the ways lead to… Syria

Russian actions in Syria considered by Ankara as “grave mistake” since, as is knows, Turkey provides Syrian rebel groups with weapon and training. However, adding Syrian events into equation only makes us come back to the question of Turkey’s alternative gas sources and supply cuts discussed above. It will be difficult to reach an agreement but Turkey doesn’t have additional leverage in asking for discount and threatening to find other suppliers. For now, Tukey only tacitly complains about EU not being able to manage refugees (of which Turkey took 2mln), same as it did when Russia annexed Crimea and cracked down on the rights of Tatars (who are Turkish ethnic minority). The mediation provided by the EU is unlikely to become a panacea in complicated Russian-Turkish relationship, however, the EU (that is an interested party since it is entitled to receive gas and is obliged provide expertise) can hopefully help the parties find a common denominator.

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