Russian Prime Minister Vladimir Putin received two diplomatic gifts in Sofia last weekend. The first was an agreement for Russia’s state-owned energy giant Gazprom to work with Bulgarian Energy Holding (beh) to build and run the Bulgarian section of the South Stream pipeline. The second gift was a puppy.

The $34 billion pipeline is planned to transport Russian gas through the Black Sea, and over Bulgaria to arrive in Europe’s Balkan region. It will transport 63 billion cubic meters of Russian natural gas each year, and the project’s construction is scheduled to begin in early 2011.

The new agreement stipulates that Gazprom and beh will each hold 50 percent stakes in South Stream, marking a failure for Bulgaria to achieve its key goal of attaining 51 percent ownership in the project. (So far, Moscow has successfully prevented any South Stream partner nation from holding 51 percent of shares on that country’s own turf.) Analysts say that, in its negotiations with Moscow, Bulgaria also failed to exploit its pivotal geographic position for the project, and that it neglected to capitalize on Moscow’s deep political interests in the pipeline.

But, despite its failures, Bulgaria didn’t leave the negotiation table empty-handed.

Moscow, which supplies virtually 100 percent of the 3 billion cubic meters of natural gas Bulgaria consumes each year, is due to sign a new energy supply agreement with Sofia by June 2011. Hours before the November 13 signing, Russian media published a statement from Moscow promising Bulgaria a price reduction of 5 to 7 percent for gas it buys from Gazprom.

Putin, who denied any link between the gas discount and Bulgaria’s cooperation with South Stream, left Bulgaria’s government headquarters holding and kissing the Bulgarian shepherd puppy that Prime Minister Boyko Borisov personally gave to him, in an apparent sign of pleasure with the outcome of his visit.

The Polish “Precedent” and a Troubling Trend

Russia’s South Stream agreement with Bulgaria is Moscow’s most recent victory in a rapid expansion of Kremlin-operated energy firms into the countries of the European Union. In October, Gazprom signed a long-term contract with Poland, which both Moscow and Warsaw acknowledged was a violation of EU energy market legislation. The deal marks an unprecedented shift by Warsaw, as it sided with the Kremlin and dismissed cautionary advice from the EU. Russia had sought an illegal deal to look back on, and cite as “precedent” as its quest for expansion continues. Now it has established such an example in the agreement with Poland.

With Bulgaria following Poland’s example—teaming up with Russia to circumvent the EU’s anti-monopoly legislation—it’s clear that the Polish “precedent” is already paying dividends for the Kremlin.

Also last month, Russian-owned Rosneft took control of 50 percent of Germany’s largest oil refiner, Ruhr Oel. On November 3, Moscow asked the EU to stand behind Russian-owned Surgutneftegaz’s predatory acquisition of a large share of Hungary’s mol energy company. Since then, Rosneft has made significant gains in its quest for oil assets in Lithuania and Poland.

The EU’s Response

European energy officials have expressed concern over the Russian-Bulgarian deal because it doesn’t comply with EU law dictating that other European nations have third-party access to the South Stream pipe.

Putin criticized the EU legislation, saying, “Big players such as Gazprom and some European companies would not be allowed to build new gas infrastructure projects and infrastructure development would stall.” Putin cautioned against permitting small firms to “wedge into the major transit pipelines, putting an additional burden on the current prices.”

In addition to the worry spawned by the unapologetic stance Russia and Bulgaria have taken on violating EU legislation, some in Brussels also view South Stream as a rival to Europe’s ongoing Nabucco project, which would break Russia’s grip on the European energy sector by linking Middle Eastern reserves to Europe via Turkey, bypassing Russia altogether. Some analysts believe that a primary aim of South Stream is to hinder the progress of Nabucco. The Jamestown Foundation’s Eurasia Daily Monitor wrote this about the Russian-led pipeline project:

The intent [of South Stream] is to discourage investment in the EU-planned Nabucco and Southern Corridor, as well as to preempt Turkmen gas volumes potentially available for export to Europe in the years ahead.

But a deeper analysis reveals that Germany is not just another bystander waiting to see how Europe’s energy supply question is answered.

German ex-chancellor Gerhard Schröder holds a senior executive position with Gazprom. His ex-foreign minister Joschka Fischer holds a similar high-level post with Nabucco. Both German spd leader Frank-Walter Steinmeier and Bavarian Governor Edmund Stoiber are entrenched with Putin. Though it is often behind the scenes, German interests are profoundly embedded into the negotiations involving Russian overtures to Bulgarian oil interests, as they are with Caspian, Ukrainian and Polish deals.

The German element in this equation cannot be overstated.

History reveals that Germany and Russia often enter into a season of cooperation, such as with the Treaty of Rapallo or the Molotov-Ribbentrop Pact, before one or both parties wage an imperialistic war. And it appears that another such agreement is currently being brokered between Russia and Germany, and the energy supply question will be at its heart.

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