EU to Gazprom: Play by the Rules

The European Union charged Russian energy giant Gazprom on Wednesday with using unfair competitive practices in the natural gas business in Central and Eastern Europe, opening up another contentious flank between Brussels and Moscow at a time of heightened tension over Russian aggression in Ukraine.

The EU commissioner for competition, Margrethe Vestager, unveiled the formal “charge sheet” against Gazprom after almost three years of investigation into the Russian firm’s dominant behavior in European energy markets. The EU charged Gazprom with impeding the free flow of gas among eight EU member states as well as charging potentially discriminatory prices by linking natural gas prices to the price of crude oil. The EU had been investigating a slate of possible market abuses by the Russian titan since 2011. (More detail on the technical nature of the competition allegations is here.)

“I am concerned that Gazprom is breaking EU antitrust rules by abusing its dominant position on EU gas markets,” Vestager said in a statement. Gazprom has three months to rebut the charges. The two sides could resume talks on a settlement of the issues — though that’s doubtful in the present climate — but if no solution is reached, the EU could impose hefty fines on Gazprom and force it to change its business practices.

If the charges against Gazprom were proved, the firm could face fines of up to 10 percent of its annual revenue, or a penalty of about $5 billion. Generally, though, Brussels imposes smaller fines based on the size of the markets where the anti-competitive practices occurred.

Gazprom shot back at the European Commission in a statement, calling the antitrust allegations “unsubstantiated.” Gazprom went even further in the same statement by requesting that “special attention” be paid to the fact that Gazprom was established “outside of the jurisdiction of the EU.” But Vestager saw that line coming and blasted it with a reiteration of Brussels’s determination to make EU laws binding on all firms that operate inside the 28-nation bloc.

“All companies that operate in the European market — no matter if they are European or not — have to play by our EU rules,” Vestager said in her statement.

Tellingly, Gazprom appeared in its news release to acknowledge its role as the spearhead of the Kremlin’s energy diplomacy. While many analysts and government officials in Europe, the United States, and Asia have long viewed Gazprom as one of Russian President Vladimir Putin’s foreign-policy bludgeons, the company has insisted that it is a commercial player like any other energy firm.

Gazprom “is a company which in accordance with the Russian legislation performs functions of public interest and has a status of strategic state-controlled entity,” the Russian company said in its statement.

“In essence, Gazprom all but admits to being the foreign-policy arm of the Kremlin,” said Sijbren de Jong, an analyst at the Hague Centre for Strategic Studies. “I read three magic words: ‘strategic,’ ‘state,’ and ‘controlled.’ If you really want to worsen your case before it even begins, then this is the way to go,” he said.

The two sides could still reach a negotiated settlement, as Western European energy firms did when confronted with similar antitrust charges in the past. But many analysts see that as unlikely given the geopolitical tensions between Europe and Russia over the annexation of the Crimean peninsula and continued aggression in eastern Ukraine. If Gazprom does not satisfactorily address EU concerns, Brussels can force it to abandon its illegal practices and can levy fines. Gazprom would have a chance to appeal the European Commission’s decision before the courts.

The charges released Wednesday, April 22, focus in particular on Gazprom’s alleged abuses in eight EU states: Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Poland, and Slovakia. Countries in Central and Eastern Europe are much more dependent on Russia and Gazprom for natural gas supplies and often face tougher pricing and resale terms than countries in Western Europe, such as Britain, that have a smorgasbord of energy options.

But beyond those eight countries, the antitrust charges could complicate life for Gazprom on another front. On April 21, just before the EU’s announcement, Gazprom chief executive Alexey Miller met with Greek Prime Minister Alexis Tsipras to discuss the construction of a natural gas pipeline in Greece. The $2 billion project would help make Russian dreams of a new pipeline to Europe via Turkey more realistic, but given Gazprom’s apparent difficulty in abiding by EU laws, could also spell years of more headaches and legal challenges.

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