EU-Russia relations have been shaken in the past months after the opening of a formal investigation by the EU Commission into suspected market abuses by Gazprom – the Russian state-controlled energy giant. The main accusation is that the company abused its dominant market position by making central and eastern European countries pay an unfair price for natural gas. The charges faced by Gazprom concern practices used within the EU to restrict the interstate trading of gas, close the national gas markets and limit the possibilities of diversifying suppliers.
DG Competition (DG COMP – the antitrust arm of the European Commission) has been working on this investigation for several years, as was shown by the incursions organized on many of the Gazprom national offices in Central and Eastern Europe. The aim of these raids was to retrieve key documents in order to collect sufficient evidence to open a formal investigation against Gazprom. The opening of a formal investigation is one of the last phases in reaching a decision, hence eventually imposing billions of euros in fines.
The Russian giant is the main supplier of natural gas to Europe (around 25%). Gazprom’s market share varies across the different areas of the EU. Indeed, many states in Central and Eastern Europe depend almost entirely on Gazprom for their natural gas needs, while Western European countries have more flexibility in terms of suppliers and this is reflected in cheaper gas prices for these countries/customers.
Gazprom’s semi-monopolistic position is the result of a decade-long political and economic strategy based on strategically dividing the Eastern and Western countries of the continent, making some concessions to the latter (cheaper gas prices and personal favors to political leaders) in order to gain enormous revenues from the former. The lack of a common vision and position on the security of the supply of natural gas in Europe has been the cause of the fortunes of Gazprom. This enormous revenue has been paid by Central Asian countries and European consumers. The Central Asian countries (former Soviet Republic) need to sell the gas to Gazprom because this is the only way to put their gas on the market. Then, Gazprom resells the gas to the European consumer for up to three times the cost of which it was bought for.
This strategy has succeeded in delaying for more than a decade the construction of a single energy market at the European level.
Gazprom is both one of the biggest corporations in the world and one of the most powerful instruments of foreign policy for the Kremlin, and also its biggest taxpayer. However, the Russian giant does not have enough technological know-how to develop its most challenging and rich gas field in Siberia, so it needs to import and resell to Europe the natural gas of Central Asia. Gazprom is central for the state-capitalism economy around which President Vladimir Putin built his political power in the last decade. The depth of this link is demonstrated by the way many of the most important Russian politicians have directly worked in Gazprom. The most famous case is the one of Dmitri Medvedev, former CEO of Gazprom, former President of Russia and its current Prime Minister. From this perspective, the ongoing investigation of the EU Commission can potentially hit the most sensitive sectors of the Russian political and economical establishment.
On its part, Gazprom denies the accusation and states that the move of the DG COMP can be seen as “an attempt to pressure Gazprom and influence prices and the results of commercial negotiations, which is clearly in breach of market principles”. Indeed, the price of natural gas is the real bone of contention. In order to understand the recent trends, it is important to underline how the increased importance of shale-gas has changed the entire natural gas market.
The recent revolution of shale-gas discoveries and exploitation is enabling the US to achieve the prized goal of energy independence in the natural gas sector. It created a shock in the natural gas market and its spot price has decreased by more than 50% in the last two years, splitting the historical price correlation between gas and oil. Many gas-exporting countries have looked at Europe in order to sell liquefied natural gas in which they have heavily invested for several years and which is no longer needed in the US.
The consequence of cheaper natural gas prices has been the real game changer. The link between oil and gas is an essential part in all contracts signed by Gazprom regarding the supply of natural gas in Europe.
The Russian company has already renegotiated most of the contracts with its Western European customers including Germany, France and Italy. Gazprom had no other option than to renegotiate existing contracts because the customer companies in these three countries could easily access other suppliers.
In Eastern and Central Europe the situation is very different. These countries cannot have any other gas supplier except Gazprom because there is no alternative pipeline, or alternative networks based on LNG (liquefied natural gas) hubs, to the ones from Russia, even though the EU has been investing in projects to overcome this lack of alternatives (for instance Nabucco or LNG hubs in the Baltic and the Black Sea).
The Commission could not ask to renegotiate Gazprom’s contracts with Eastern and Central European countries but it could impose heavy fines in the range of several billion euros. The Kremlin has used the crisis to strengthen its grip on all the strategic Russian firms operating abroad. On the 11th of September, Putin signed a decree which makes it compulsory for all companies to receive governmental approval before releasing any information to any foreign authority, changing any contract or selling assets.
There is no doubt that Eastern European countries have strongly backed the European Commission in this investigation for their own national interests and to counterbalance Russia’s dominant position. The Russian energy giant has, for years, imposed unfair prices, abused its dominant and semi-monopolistic position and left these countries without supply during part of the winter in both 2009 and 2010. Lithuania, without waiting for the conclusion of the EU investigation, has already sought a compensation of 2 billion euros from Gazprom over pricing.
President Putin and Gazprom probably believe they can still win the legal battle against the EU Commission but the chances are not on their side. It is very likely that Gazprom will have to renegotiate several contracts, but this would be the end of Gazprom as we know it. The Russian company is a giant with feet of clay, as the enormous fortune gained in the past few years does not ensure a consistent cash-flow and was spoiled by the endemic corruption in Russia itself. Putin has already stated that Russia will sell its gas to Asia, but it is unrealistic in the short term and unlikely in the long term with the shale gas revolution also affecting Asia.
The investigation of the EU Commission, should it come down to a clear defeat for Gazprom, could give EU citizens cheaper gas with a better and more integrated internal energy market. However, it could also destabilize President Putin’s power, which in turn could have profound repercussions on the country’s future evolution. At a minimum, Gazprom’s influence is almost certainly bound to decline across Europe.