Gazprom Hit with EU Antitrust Probe

Director’s Note: We had a rare confluence of interest among our scholars today, with Matt Lina’s and Mark’s pieces arriving on my desk basically simultaneously. This is a big enough story for the region and Europe as a whole, and both stories are so good and from different angles, that I have decided to break from normal practice and run both pieces today.

The European Commission in Brussels announced that it would open a formal investigation into allegations of anti-competitive practices by Russian natural gas giant Gazprom.  The investigation will focus on Gazprom’s dealings in Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, and Slovakia, all former satellites of Soviet Russia.  The commission alleges that Gazprom has imposed artificially high gas prices, sought to prevent Eastern European countries from diversifying their supplies of natural gas through increased integration of their distribution systems, and tampered with its own supply of gas to the European market.

Natural gas supply shortages have become an annual rite of winter in Eastern EU member states in recent years, as Gazprom has battled with Ukraine over supply.  Gazprom accuses Kyiv of diverting the flow of gas intended for wider Europe for domestic use.  Kyiv, in turn, counters that the flow of gas into its transit network has been sharply cut back by Gazprom.  Independent analysts back Kyiv’s account, blaming supply disruptions on Gazprom’s decision to cut back on gas purchases from Central Asia, and the recent Russian presidential election among other factors.

Gazprom supplies over a third of the natural gas consumed in Europe as a whole; but in the countries of the former Soviet bloc, it is effectively a sole supplier.  Poland, the largest and most Western-looking of the former bloc states, imports two-thirds of its natural gas, most of it from Gazprom through Ukraine.  Last winter’s supply interruption – which coincided with an historic cold snap in Europe – were blamed for more than 100 deaths in Poland alone.

According to the European Commission, one tactic Gazprom has increasingly employed involves forcing countries to sign long term contracts for gas at rates tied to the price of a barrel of oil.  The Commission alleges that this practice essentially cheats EU member states out of the benefits of recent drops in the price of natural gas due to new supply discoveries and new technologies for extracting gas such as fracking.  Poland in particular has been a victim of inflated Gazprom rates paying one of the highest rates of any of Gazprom’s European customers; up to twenty percent than its Western European counterparts pay.

Eager to divest itself from Moscow’s control over its energy sector and further integrate with the West, Poland recently announced a joint venture with Lithuania to study a planned link to the countries’ distribution systems.  If deemed feasible, the proposal would form the first link in the planned North-South Energy Corridor in Europe, eventually connecting distribution systems in nearly all of the countries covered by the EU anti-trust investigation and breaking Moscow’s stranglehold on Eastern European energy markets.

European Commission spokesman Antoine Colombani said that if the investigation finds the allegations credible, Gazprom could face stiff penalties.

“The commission has the power to impose sanctions, including fines in cases of violations of EU competition rules, but today it is completely premature to prejudge what the outcome of the investigation is,” Colombani said. Unless a settlement is reached, those fines could reach as high as ten percent of Gazprom’s global profits.  Gazprom dismissed the announcement in a terse statement.  “Let them investigate,” the company said.

The European Commission’s action is fraught with geopolitical implications at a time when nostalgic Russian president Vladimir Putin is seeking to reestablish Moscow’s dominance over the former Soviet Union’s once vast empire.  It will surely increase tensions between Moscow and Brussels, and should help to draw Eastern Europe away from Russia’s orbit.  The former Eastern Bloc nations should see the move as chance in the short term to negotiate better deals for themselves with Gazprom.  They should also take the long view and follow Poland and Lithuania by seeking to open up their own distribution networks to their Western neighbors.  Each step toward less reliance on Russia for energy is a step toward greater prosperity and opportunity in Eastern Europe.

Image Copyright Shutterstock/ Bas Rabeling