The relationship of Russia and the European Union suffered another low point, as the European Commission proceeded to declare a number of gas supply contracts that the Russian government made with a host of Eastern European states that were members of the European Union as illegal. The intergovernmental agreements at issue were made for the South Stream pipeline that is to carry Russian natural gas to Europe bypassing the transit countries of Ukraine and Belarus.

The E.U. Commission’s decision came right after the European Union accused Russia of derailing the consummation of a trade agreement with the country of Ukraine. The Commission sent a letter to Russian authorities informing them that the agreements Russia made with Eastern European countries violate E.U. law and are subject to rescission.

According to Ms. Marlene Holzer, who spoke on behalf of the Commission, while the European body cannot physically prevent the laying of the pipeline, it could seek legal remedies through the courts. The attendant lack of certainty about the project is likely to undermine existing funding arrangements for the Russian pipeline, which comes with the price tag of USD20 billion.

According to Ms. Holzer, the contracts that Russia entered into with a number of E.U. member-states are illegal, which means that the terms they contain have to be completely renegotiated. According to Ms. Holzer, Russia’s intergovernmental memoranda are legally insufficient for building the South Stream pipeline and ensuring its continued function.

The South Stream pipeline, whose underwater segment will be the longest and the deepest ever constructed, is to stretch from Russia to Italy. The pipeline will go under the Black Sea, emerging on Bulgaria’s shore. South Stream will then pass through Serbia, branching off into Croatia, Bosnia, and Herzegovina. After passing through Serbia, the pipeline will stretch into the territory of Hungary and then Slovenia. The pipeline’s terminus will be in Italy. The states whose governments and private companies have so far entered into agreements with Russia include Bulgaria, Croa tia, Greece, Hungary, Serbia, Slovenia, and Austria. The construction of parts of the South Stream’s infrastructure has already begun in a number of those countries.

Russia provides over a quarter of the gas the E.U. consumes. A commission that authorities in Brussels convened in December was looking into allegations of market manipulations at the hands of Gazprom within several E.U. member-states. One of the accusations was that the Russian gas company set prices at unreasonably high levels. Joaquin Almunia, the head of the Commission on Competition, saw officials at Gazprom in connection with the antitrust investigation in early December.

Energy prices in the European Union are upwards of 30 percent higher compared to American prices. The European Commission has asked the United States to commence LNG exports within the framework of the Transatlantic Trade and Investment Partnership Agreement in view of supply insecurity and the rising energy costs.

The E.U. letter that went out to the Russian authorities in early December explained that all exporters of energy to the member-countries are bound to honor E.U. unbundling laws. Those rules do not allow a utility operator to control the transportation, production, and distribution of electricity, oil, and gas. These unbundling laws were endorsed by E.U. authorities in 2008 to promote competition on the energy market.

According to the European Commission, the South Stream pipeline is required to provide access to gas companies other than Gazprom. In addition, European Union law mandates placing an independent company in charge of setting rates for gas delivery.

The Russian government is adamant as to its position that E.U. unbundling rules are inapplicable to South Stream. The issue as to whether Russia is subject to E.U. regulations has come to the forefront in a heated exchange between E.U. Commission President Jose Barroso and the President of Russia Vladimir Putin.

According to the statement of Anatoly Yanovsky, the Deputy Minister of Energy of the Russian Federation, made in an address to the European Parliament, Russia does not consider itself bound by E.U. laws because South Stream is a trans-border project that is in significant part located outside the European Union.

At the same time, the European Commission’s belligerence towards South Stream is contradicted by that body’s decision not to take a similar stance vis-a-vis the Nord Stream pipeline, constructed by Gazprom to supply gas to Germany. In defense of the Commission’s acquiescence in the construction of Nord Stream, Ms. Holzer explained that unbundling rules did not apply to the northern pipeline in one part because it crossed the Baltic Sea and in another part because of specific exemptions that the Commission granted.