Putin's Pipe Dreams-The South Stream pipeline becomes a casualty of the Ukraine crisis, and its demise shows the limits of Moscow's energy bullying.

BYKEITH JOHNSON-DECEMBER 2, 2014

Russian strongman Vladimir Putin threw in the towel on his $40 billion pet pipeline project on Monday, a sign that European resistance to Moscow is slowly wrenching the energy weapon from Putin's hand.

By pulling the plug on the South Stream pipeline, meant to bypass Ukraine and supply Europe with natural gas across the Black Sea, Putin seemed to acknowledge that European sanctions all but torpedoed the financial prospects of the massive project while continued pushback from the European Union and some key member states, such as Bulgaria, sealed its doom.

In a lightning visit to Turkey on Monday, Dec. 1, to announce talks on fresh energy cooperation, Putin abruptly conceded thatSouth Streamis virtually dead. "We feel Russia cannot continue implementing this project under the existing circumstances,"Putin said, blaming European foot-dragging for the pipeline's demise. "So we are forced to reconsider our participation in this project." Alexey Miller, the head of gas giant Gazprom, laterreiteratedthat South Stream is off the table: "The project is closed," he told reporters.Instead, Russia hopes to expand an existing pipeline and build a new one the same size as the apparently ill-fated South Stream to ship gas to Turkey. But despite Putin's grandstanding, Russia and Turkey havenot finalizedthe new energy deals, including the expanded pipeline and a discount on Russian gas. Turkey's energy minister described Monday's visit as only "the first step" in talks about closer energy ties with Russia.

For Russia, the likely cancellation of South Stream hurts its efforts to further isolate Ukraine while still dominating the European energy market. Turkey, if negotiations proceed apace, could move one step closer to realizing its long-held dream of becoming anenergy hubfor Europe, even if the rapprochement with Moscow threatens to move Ankaraeven furtherfrom Brussels. And for the European Union, Putin's withdrawal amounts to a victory for the rule of law as well as a win in the tug of war for influence over former Soviet bloc states in Central and Eastern Europe.

"Putting South Stream in question is a big deal," said Andreas Goldthau, an energy expert at Harvard University's Belfer Center for Science and International Affairs. After Russia waltzed into Ukraine early this year, EU officials put South Streamin the cross-hairsand have blocked its final approval on the grounds that it would violate EU competition rules."Putin is showing recognition of a new reality, where the EU is able to exert external power vis--vis dominant suppliers such as Russia," he said.

"If Putin indeed considers canceling the South Stream project, then I would hope that those gray-suited Brussels bureaucrats pop the corks -- big time.""If Putin indeed considers canceling the South Stream project, then I would hope that those gray-suited Brussels bureaucrats pop the corks -- big time."

Actually, like many others, the gray-suited bureaucrats are still figuring out whether South Stream is really dead or just on life support. EU officialssaidnext week they will discuss, as planned, the construction of the pipeline, even though Russia says it is no longer on the table.

Some individual European countries that would have been on the receiving end of South Stream, such asAustria, are also trying to read the tea leaves. And Turkish officials insist they have not reached a final agreement regarding an alternate pipeline.

But for Gazprom, South Stream's commercial logic was always a stretch, even in good times. It is a massively expensive project meant to provide extra export capacity to an already fully supplied market desperately trying to wean off Russian energy. Now, in the wake of U.S. and European financial sanctions that have poleaxed the Russian economy and Gazprom's ability to secure financing, it looks more a pipe dream than pipeline.

"Under these market conditions, construction of excessive export capacity was not a good idea," said Mikhail Korchemkin, head of energy consultancy East European Gas Analysis. He likened South Stream to other oversized but ultimately failed projects that have littered Russian history, including the never-used "Tsar Cannon" and the never-rung "Tsar Bell."South Stream deserves the name of the "Tsar Pipeline," he said.

Less clear is the scope of Turkey's deepening energy relationship with Moscow. Putin and Miller said Russia hope to ship about 63 billion cubic meters of gas to Turkey through a new pipeline, with most of that earmarked for re-exportation to Europe. Turkish officialssaidtalks have only just begun and nothing is finalized.

If Ankara and Moscow can reach agreement on gas pricing, a new pipeline route, and how to resolve ongoing disruptions in Russian gas supplies, it could offer Russia a backup plan to South Stream.

"If Turkey realizes its ambitions to establish a regional trading hub, then increasing supplies from Russia to Turkey in the long term may just turn out to be an alternative supply route for Gazprom to Europe," said Tim Boersma, an energy expert at the Brookings Institution.For now, South Stream's fate most clearly illustrates the growing divide between EU member states drawn toward Brussels and those leaning toward Moscow.

Hungary has repeatedly bucked the European Union and movedever closerto Putin and Moscow, especially when it comes to Russia's energy ambitions in Europe. In November, in defiance of Brussels, the Hungarian parliament approved South Stream's construction, even though the pipeline would do little to alleviate the country's energy woes.

Bulgaria, in contrast, where South Stream was to have emerged from the Black Sea, has repeatedlyblockedconstruction. The Bulgarian government backed EU concerns over South Stream's legality, even though nixing the pipeline could cost the Balkan country $400 million a year in badly needed gas-transit revenues.

Just days before Putin's surprise announcement, Bulgarian officialscriticizedRussia's attempts to tighten its energy stranglehold on former satellite states, especially by undermining Europe's search for gas resources.

That kind of public pushback, the Belfer Center's Goldthau said, was a Bulgarian signal meant for Brussels and Washington: "We don't side with Russia."