European regulators on Wednesday issued an expected announcement that they would pursue antitrust charges against Russian natural gas giant Gazprom for abusing its dominance of the European market by shutting out competition and imposing discriminatory pricing. However, the formal “statement of objections” issued by the European Union’s commissioner for competition, Margrethe Vestager, applies to only about 14 percent of the gas the company sells in Europe.
The investigation is focused on the state-owned company’s practices in five countries: Poland, Bulgaria, Lithuania, Latvia and Estonia. The announcement surprised some, because accusations regarding Gazprom’s operations in Austria, the Czech Republic and Hungary were all dropped from the investigation. Including them would have effectively doubled the percentage of Gazprom’s business in Europe that will go under the microscope.
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The challenge to the company, a major source of revenue for Russia, is also a challenge to the government of Russian President Vladimir Putin, which has consistently used the pricing and delivery of natural gas as an economic and political tool.
There is little question that Gazprom dominates Europe’s natural gas market. Its 2013 annual report, the most recent available, pegs market share at 30 percent. However, there are plenty of questions about how the Kremlin will respond to having the business practices of a state-owned company challenged.
In a statement released Wednesday, Gazprom called the charges unsubstantiated. As they have in the past, Russian officials objected to the investigation, ongoing for several years, on the grounds that as a state-owned company, Gazprom is not under the jurisdiction of European regulators. In a 2011 raid on Gazprom-affiliated offices in Europe, investigators obtained huge amounts of information about the company’s practices. Putin subsequently signed a decree making it illegal for Russian companies to turn over information about their operations to foreign regulators without the Kremlin’s permission.
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Russian Foreign Minister Sergey Lavrov said in a radio interview, "All contracts in effect now that Gazprom signed with its partners were signed with full respect of the legal regime that existed in the EU at the time.” The EU subsequently changed its rules, he said, and is trying to apply the new rules to old contracts. “That is absolutely unacceptable.”
Kremlin spokesperson Dmitry Peskov told a group of reporters, “We are looking forward to an absolutely impartial attitude towards the Gazprom Company. Of course, Gazprom will defend its interests. And the state, as a major shareholder in the company, will also defend the interests of Gazprom.”
"We hope that a compromise will be found,” He added.
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Under EU rules, the competition commissioner can levy fines of up to 10 percent of a company’s worldwide revenue – in theory up to $11 billion. In the end, however, the more painful penalty might be in requiring changes to Gazprom’s business practices, which would make pricing more transparent and force the company to accept more competition. It would also reduce the ability of the Kremlin to use gas pricing as a political lever.
The issuance of the statement of objections comes at an extremely tense time in Eastern Europe. Russia’s invasion of Ukraine’s Crimean peninsula last year and its continued support of armed rebels in eastern Ukraine has triggered both condemnation and harsh economic sanctions from its European neighbors.
At the same time, both sides in the dispute need each other’s continued business. Europe could not abide a 30 percent cut in the amount of natural gas delivered to its constituent countries should Gazprom stop doing business there. Gazprom, and by extension the Russian government, cannot afford the loss of such a large and lucrative market.
Expect much bluster from both sides in the next 12 weeks, the time allowed for Gazprom to prepare its response. However, if ever an international incident were to be resolved with a large dose of Realpolitik, it’s likely to be this one.
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