EU Antitrust Charges Open New Front Against Gazprom

6 MINS READApr 24, 2015 | 09:01 GMT
EU Competition Commissioner Margrethe Vestager
EU Competition Commissioner Margrethe Vestager speaks about the Russian energy company Gazprom in Brussels on April 22.

The European Commission started the process of filing formal antitrust charges against Gazprom on April 22, over the Russian energy giant's practices in eight European countries. While the charges could eventually result in a hefty fine for the company, they will take several years to resolve. One important aspect to watch for will be changes in Gazprom's behavior in countries affected: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia.

More broadly, however, the legal challenge represents just another step in an ongoing process: Europe finding ways to further erode Grazprom's already-waning influence on the Continent. The case also highlights a more fundamental aspect of the Russia-Europe relationship in light of the crisis in Ukraine — the power of the Russian and Gazprom lobby in Brussels to impact the outcome of the charges — as well as the energy giant's diminishing influence at home.

Europe's antitrust charges are unlikely to be politically motivated. The European Union has long been willing to use legal tools to prevent or limit antitrust activity. Entering her seventh month in office, EU Competition Commissioner Margrethe Vestager is moving forward a number of other antitrust cases, such as the litigation reopened last week against U.S. tech giant Google. With Gazprom, the charges stem from an investigation into the company's practices that began in 2012. Nevertheless, the case comes amid Moscow's standoff with the West over Ukraine, creating another pressure point on Russia at a time when the country is under heavy sanctions.

The statement of objections sent to Gazprom by the European Commission listed a number of accusations, including:

  • Gazprom may be limiting natural gas sales between European members states. This is achieved by clauses in natural gas contracts that ban the export of the commodity; state that the buyer must consume the natural gas; or require Gazprom's approval to do either.
  • Gazprom has an unfair pricing policy, charging significantly higher rates in five countries — Bulgaria, Estonia, Latvia, Lithuania and Poland — than elsewhere.
  • Gazprom made access to its natural gas supplies contingent upon various stipulations regarding transport infrastructure. In Bulgaria, for example, Gazprom made wholesale natural gas supplies conditional upon the country participating in the since-cancelled South Stream pipeline project, despite the poor economic terms of the project. In Poland, supplies were conditional on the country allowing Gazprom control over the Yamal-Europe pipeline. 

At face value, at least, each of these accusations appears true. Gazprom indeed includes stipulations in its contracts that make it difficult for Eastern European countries to trade natural gas to other users. And Gazprom's prices in Bulgaria, Estonia, Latvia, Lithuania and Poland are higher than those it charges elsewhere. Hungary, by comparison, received lower prices than its neighbors largely because of the relatively close relations between Moscow and Budapest. Meanwhile, the Czech Republic and Slovakia are tied into the Central European natural gas market and thus have ample access to alternative sources of natural gas.

Gazprom's Weakening Hand in Europe

For the next stage of the investigation, the ball will firmly be in Gazprom's court. The company has 12 weeks to justify its business practices, until the EU Energy Commission hands down a decision — which could include punitive measures such as fines and the banning of past practices. Of course, Gazprom will have the right to appeal the commission's decision to the European General Court, and the loser of that appeal would be able to appeal it to the European Court of Justice. In short, the case will likely take years to work through Europe's legal system before a final, legally binding outcome is reached.

The process is most likely to result in the banning of some of Gazprom's business practices — namely the placing of conditions on what customers can do with the natural gas provided. However, this issue is expected to be addressed through the EU Energy Union package of proposals unveiled in late February and intended to develop the bloc's energy market and security. As part of the package, Brussels plans to ban certain clauses in contracts and monitor compliance among member states. One such clause would implement conditions limiting the movement of natural gas.

Meanwhile, the European Commission has taken several other steps to encourage Gazprom to adopt "fair" pricing practices. In particular, Europe has been integrating its natural gas markets more tightly so that every country has the physical infrastructure in place to trade natural gas with one another — and trade a greater amount of natural gas not sourced from Russia. 

These trends will continue. Already, they have forced Gazprom to change some of its operating procedures. The company is slowly but surely giving its natural gas contracts more-flexible pricing mechanisms. For example, its 2014 contract with Italy links natural gas to spot market rates, abandoning Gazprom's long-held practice of indexing natural gas to oil prices. Gazprom has also become more flexible on its "take-or-pay" contractual clauses, where customers were charged for fuel they did not use.

Western European countries are experiencing the most benefits from these changes, but these gains are spreading slowly to former Warsaw Pact countries as well. The natural gas interconnections between Germany, Austria, Czech Republic and Slovakia have limited Russia's pricing dominance, and Hungary will soon join them. Meanwhile, Poland and Lithuania are commissioning LNG import terminals that will enable them to import the commodity by sea, rather than piping it in from Russia. Estonia and Latvia are exploring similar options.

A Test for the Gazpromians

Regardless of the outcome of the antitrust case, Gazprom will continue to change its behavior in the future. However, the company will have a good chance at defending some of its practices. For example, the natural gas price disparities stem in part from Europe's fragmented natural gas market. At the time of the investigation into Gazprom's activities, none of the Baltic States had access to non-Russian sources of natural gas, whereas the Czech Republic and Slovakia did. Since Gazprom is essentially serving discrete natural gas markets, the company believes that differing supply and demand balances — i.e. market forces — should allow for differing prices. Gazprom CEO Alexei Miller made this case in an April 14 speech in Berlin. 

Gazprom and Russia also have at their disposal a giant lobby in Brussels, known colloquially as "Gazpromians." This lobby has successfully campaigned to ease pressure from the European Commission in the past. Speaking on behalf of Gazprom will be public relations firms, key politicians — such as former German Chancellor Gerhard Schroeder — and their advisors. Also included are the CEOs of major energy and industrial companies that have strong relationships with the Russian energy giant. Moscow has also typically leveraged its relationship with the more politically powerful countries in Europe, such as Italy and Germany, to aid its cause.

That said, many of Gazprom's relationships in Europe have become strained because of the standoff over Crimea and Ukraine. Over the past year, German Chancellor Angela Merkel and her government have taken a more assertive stance against Russia. The final document and the findings of the European Commission's case will therefore reveal how powerful the Gazpromians truly are in the context of Moscow's weakening relationship with Germany. Given Russia's inability to escape sanctions — and the fact that the Europeans are still considering strengthening sanctions — Gazprom will be playing a weaker hand.

The outcome of the antitrust case, along with the broader trend of Gazprom's weakening utility as a political tool for the Kremlin in Europe, impacts the relationships between various Russian energy firms, particularly Gazprom and oil giant Rosneft. Gazprom's importance and political power in Russia has always been tied to its importance in Europe, particularly considering that the company is much less of a cash cow for the Kremlin than Rosneft. Thus, as Gazprom's political importance wanes, so too will its power within Russia. Already, former Gazprom board chairman and current Prime Minister Dmitri Medvedev has seen his political potency subside. This will make it easier for certain Kremlin factions, like those connected to Rosneft, to further erode the political power underlying the natural gas giant.

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