Sunday, August 31, 2014


Russia

Endgame Nears In EU's Antitrust Showdown With Gazprom

Gazprom CEO Aleksei Miller attaches a Russian flag to a pipe of the Nord Stream pipeline near Vyborg, Russia. The EU is now looking to make the gas giant play by its rules in Europe.
Gazprom CEO Aleksei Miller attaches a Russian flag to a pipe of the Nord Stream pipeline near Vyborg, Russia. The EU is now looking to make the gas giant play by its rules in Europe.
By Charles Recknagel
The Russian natural-gas giant Gazprom has long had its way in Europe, dominating the continent's energy market and, according to critics, flaunting its rules with impunity. But that all might be about to change.

A long-standing showdown between Gazprom and the European Union over alleged price fixing and monopoly practices -- a dispute pitting Russia's post-Soviet business model against the EU's standards of free-market competition -- is quickly coming to a head.

The dispute is expected to heat up considerably this spring when the European Commission is due to release the findings of a two-year investigation into Gazprom. And the findings are not expected to be pretty, analysts say.

"I think we are going to see, first of all, a spectacular lump of bad publicity for Gazprom, because the complaints will list all of the bad things that Gazprom has been doing, then we will have fines, which may be very substantial, and there will also be the opportunity for the companies that have been overcharged for gas to launch lawsuits against Gazprom over the extortionary prices that they have been charging," says Edward Lucas, international editor at the British weekly "The Economist" and author of the book "Deception: Spies, Lies, and How Russia Deceives the West."

Lucas, who has followed the dispute closely, says he expects the commission's findings to be published in May. After that, he adds, things should move quickly, because Energy Commissioner Guenther Oettinger and Competition Commissioner Joaquin Almunia, who are pressing the case, want to wrap it up before they leave office in November.

A negative report could have deeply unpleasant consequences for Gazprom, including hefty fines, bad publicity, and evidence competitors can use in lawsuits against the gas giant. It could also force the state-controlled company to change its long-standing practices on the continent.

Seeking to avoid this, Moscow is furiously trying to reach a preemptive settlement with the European Commission. Russian delegations have visited Brussels several times in recent months but the details of the negotiations have been shrouded in secrecy.

Busting Up The Monopoly

Brussels for years has let Gazprom operate with monopolistic practices in Central and Eastern Europe due to both historical and market realities that have been hard to change.
Workers weld together two giant pipes in Serbia, north of Belgrade. Brussels will expect EU-applicant Serbia to enforce its antitrust laws retroactively.
Workers weld together two giant pipes in Serbia, north of Belgrade. Brussels will expect EU-applicant Serbia to enforce its antitrust laws retroactively.

The main pipeline that brings Siberian gas across Ukraine to Eastern Europe was built in the Soviet era and is wholly owned and operated by Gazprom. The gas giant alone decides which providers in addition to itself can export gas through the trans-Ukraine pipeline and through the Nord Stream pipeline under the Baltic Sea to Germany.

That monopoly allows Gazprom, not free competition, to set the price its European customers pay. It also makes the gas giant tough to challenge, because it is the sole provider in much of its market and supplies a quarter of the European Union's gas overall.

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So why is Brussels so ready to challenge Gazprom now? Agata Lokot-Strachota, an energy-policy analyst at the Warsaw-based Center for Eastern Studies (OSW), says one factor is a new sense of confidence within the European Commission's offices for energy and competition. "Brussels wants its law to be enforced, including in the gas sector," she explains. "And it does not really want an exceptional relation with any actor if it means that would require that some laws are not enforced."

Specifically, the EU wants to enforce its "third energy package" legislation, which went into force in late 2009 and aims to protect third-party access to pipelines. The legislation also aims at "ownership unbundling," or separating companies that produce energy from companies that transmit it.

East To West, Then Back Again

There are also economic reasons for Brussels to take a harder line with Gazprom. Thanks to its monopoly position in EU members states that once were Soviet satellites, customers there pay an average of 1 1/2 times more for their natural gas than do EU states farther west. The western EU market has multiple gas sources, including the North Sea, North Africa, the Middle East, as well as Russia. Transport includes both pipelines and liquefied natural-gas (LNG) import terminals.

Stephan Meister, a Russia expert at the European Council on Foreign Relations in Berlin, says that the EU would like to open Eastern Europe to similar competition among multiple suppliers. "If there would be more liberalization there could be other companies, there could be Azerbaijani companies or Turkmen companies, or from elsewhere in Central Asia that send gas through [the Gazprom] pipelines," he notes. "So there are several possibilities to use the pipeline system [to promote competition] and other options are LNG terminals, which are discussed in Poland and in the Baltic states."
The South Stream gas pipeline has opened a new front in the dispute between Brussels and Moscow.
The South Stream gas pipeline has opened a new front in the dispute between Brussels and Moscow.

In one immediate measure to break Gazprom's stranglehold on Eastern Europe, Germany is planning to send Russian gas it buys relatively cheaply from Russia thanks to competition to countries like Poland, which are locked into higher Russian gas prices due to Gazprom's monopoly. The idea of any "reversed flow" of Russian gas from west to east infuriates Moscow, but the first such Polish imports of gas from Germany are due to start on April 1.

An Unstable Equilibrium

Finally, Brussels is pushing now to tame Gazprom because the EU wants to keep it from expanding its monopoly still further in the future via its planned South Stream pipeline under the Black Sea to Southeastern and Central Europe.

Moscow already has angered Brussels by concluding bilateral transit agreements with numerous new and prospective EU member states for South Stream. The bilateral deals, which pay no heed to EU antitrust legislation, have also strained relations between Brussels and the states that have signed them: Bulgaria, Hungary, Serbia, and Slovenia.

Edward Lucas says Brussels still expects the EU states served by South Stream to enforce antitrust laws against Gazprom retroactively, no matter what the bilateral accords say today. "If Gazprom wants to spend a lot of shareholders' money on building a pipeline in Europe at vast expense, that is fine, but it will be subject to EU law and any agreements with governments that contradict EU law will be illegal," he says. "South Stream isn't built yet, so no law has actually been broken. What [Brussels] will say is that if you go ahead and build this pipeline it will operate according to EU law."

The European Commission has become increasingly assertive in enforcing its antitrust laws against powerful foreign companies of late, most recently with the U.S.-based Internet-search giant Google. In an effort to avoid a heavy fine, Google was forced accept several antitrust measures, including agreeing that whenever it promotes its own search services on its pages in the EU, it will display the services of rival companies in a comparable way.

Will a similar approach work with Gazprom? The OSW's Lokot-Strachota says the problem is that in this case, the two sides have fundamentally different approaches to business. "Both the EU and Russia represent completely different ways of thinking, there is a systemic difference between them," she explains.

"We can say that we will be living in equilibrium because both sides need each other, but it is quite an unstable equilibrium because both sides will try to persuade the other to make deals according to own rules. So it is quite hard to say what will be the final outcome of all that."

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