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The “third energy package” becomes a roadblock for South Stream

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Gazprom’s South Stream

Russia’s gas major Gazprom is set to start building a major gas pipeline, South Stream, which would run from the Black Sea to Austria in Europe.

South stream project rout map

A month after the European Parliament voted against the South Stream pipeline, officials in Brussels, the de facto capital of the European Union (or EU), insisted that South Stream offers the European Union a weapon against Russia as the crisis in Ukraine deepens. They are considering the use of law to limit the volumes of gas that Russia’s Gazprom can export via the pipeline.

Gazprom is the largest extractor of natural gas in the world and is headquartered in Moscow, Russia. The company alone makes up 72% of the Russian gas reserves, and so, it accounts for 74% of Russian gas output. Gazprom, certainly, has near monopolistic control over Russia gas reserves.

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The talks in Brussels are centered on the European Union policies called the “third energy package.” The European Union competition laws called “the third energy package” are intended to break monopolistic supply chains and would require Gazprom to grant other suppliers access to South Stream, possibly to a point where it could be restricted to providing only half of the pipeline’s gas. The intention is to foster greater competition in the European energy markets.

The third energy package law would weigh heavily on the project’s profitability. Though Russian officials have sought some leeway from the European Union in the form of exemptions, Brussels seems tight on its spot.

Moreover, the European Union’s inflexibility over the third energy package is an obstacle for Gazprom as it needs to arrange financing for South Stream. Moreover, with the Ukraine crisis hardening the European Union’s stance, banks can be deterred to lend to South Stream as they wouldn’t want to instigate a negative response from the European Union on the regulatory front.

“The European Commission is determined to help Ukraine, and to make sure that Ukraine has all the support it needs, in the short and long-term,” said the Commission in a statement.

While Russia strives to get a green signal on its South Stream gas pipeline from the European Union, raised sanctions by the U.S. have led to flight of funds from the nation’s capital markets.

While prices of ETFs with exposure to Ukrainian and Russian securities, like the iShares MSCI Emerging Markets Eastern Europe ETF (ESR) and the VanEck Vectors Russia ETF (RSX) have bottomed out amidst the rising tensions between Russia and Ukraine, the spill-over effect has been felt even by broad market indices like iShares S&P 100 Index Fund (OEF), with companies like Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM) in its portfolio.

Read the next part of this series to learn about the state of Russia’s capital markets.

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