European Commission vs. Gazprom

Last week was disastrous for the Gazprom joint-stock company. The Russian monopolist lost over 2 billion dollars in capitalization, as its shares showed a 2-percent drop in price. The Russian press says it is the European Commission that brought the price down by launching an antitrust investigation against Gazprom.

It will be recalled that the investigation is being conducted on the charges of three instances of unfair competition. The question is being put as follows: 1) Did the Russian monopolist re-divide the gas markets, thus hindering free supplies to EU member states? 2) Did it hinder diversification of gas supplies? 3) Did it charge unfair gas prices to its customers, linking them with the price of oil? The European Commission has not yet announced the dates of investigation but said that the case would be heard on a top-priority basis. European officials believe that the investigation itself, which concerns eight EU member states – Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Lithuania, and Latvia, – does not yet mean that Gazprom will be found guilty. But the persistency in collecting the compromising facts confirms that the European Commission is in no laughing mood. Last year Gazprom came under the commission’s fire over violations of the European antimonopoly law. The necessary information was found during a search at the headquarters of the monopolist and its European partners in Berlin.

This antitrust probe and the resulting share price drop stirred quite a ripple among players on the Russian stock market, where Gazprom shares have always been considered blue chips that set the overall trend. Andrei Vernikov, deputy general manager of Zerich Capital Management, believes that this investigation “hampers supplies to the end user in Europe – the goal Gazprom is pursuing.” Therefore, in the next few days the dynamics of shares will be “worse than on the market” because investors will be reducing the number of the gas giant’s shares in their portfolios. Russian analysts fear that if Gazprom is found guilty, this may cause the company to lose image and pay big fines (up to 10 percent of the annual earnings in the country where it committed a violation). Fines may be as high as 4 billion dollars. Besides, Gazprom will probably have to change the price formation system in its export contracts, which may also result in considerable losses.

So Gazprom’s number-one task now is to keep the market from panicking. They seem to be considering it possible to defy danger and even bluff so that their reputation remains untarnished. Is this not the reason why, in response to the European Commission’s announcement, Gazprom declared in a more than harsh way that it is a strategic state-run company that is subject to the Russian law and is not under Brussels’s jurisdiction? This means the monopolist is digging a grave for itself on the most attractive, European, market. But this does not seem to be something new for Europoean experts. “I think the major damage to the reputation of Gazprom and Russia has been done in the last Ukraine-Russian gas crisis. This is where the real things happened. In fact, I think Gazprom shot itself in the foot and it doesn’t have much leverage now because its reputation is not what it used to be,” Christian Egenhofer from the Centre for European Policy Studies told Euronews. Meanwhile, EU energy spokeswoman Marlene Holzner said the other day: “If in some months we see that there is a disruption of supply…, we are much better prepared for that than in the past.” Holzner said the EU is also negotiating with Azerbaijan and Turkmenistan to diversify gas supplies to Europe in the future.

“If there is any problem with one partner, we can turn to another one,” she added.

What impact will this situation have on Europe’s highest gas price which Ukraine has to pay to Gazprom? Will this help the Ukrainian government in the two-year-long fruitless gas talks?

Oleksandr NARBUT, independent energy expert:

“Unfortunately, Ukraine is taking rather a passive stand in the attempts to stand up to the Russian monopolist. I have never heard that our governmental officials, including the energy minister, have submitted any special materials to the European Commission or requested that the investigation should also take into account the contracts our Prime Minister Mykola Azarov and other Ukrainian top officials call enslaving and unfair. It seems to me some other process will perhaps affect the gas price for Ukraine. I fear that the weak Ukrainian leadership may finally give in to pressure and agree to join the customs union as well as make concessions in the course of the privatization of the facilities which Russia is interested in – from Turboatom to underground gas storages. I think our passivity practically rules out any positive results for Ukraine from the European Commission’s probe.”

Hennadii RIABTSEV, deputy director, Psykheia science and technology center:

“It is too early to say what effect this will have on the gas price for Ukraine, as the antitrust probe is still going on. But if it is proved that Gazprom overpriced the gas for European consumers, this can be used in the course of Ukrainian-Russian negotiations as proof of the fact that the monopolist also overcharged the price in the 2009 agreements with Ukraine. This can also be part of a lawsuit filed to an international court if, naturally, things go this way. It should be noted, however, that it is not the first antitrust probe against Gazprom, but there have been no serious consequences for the Russian monopolist. The point is that none of the European politicians is interested in quarrelling with Gazprom over some trifles. In my opinion, this inquiry is, by all accounts, an attempt to persuade Russia to reduce gas prices under long-term contracts.”

Dmytro MARUNYCH, director, Institute of Energy Studies:

“I do not think the European Commission’s investigation will have any short-term effect at all on the policy of gas prices for Ukraine. Our relations with Gazprom and the latter’s relations with European countries are entirely different things. But in the medium term, if Ukraine continues to move steadily towards the European gas market, this can obviously become a precedent – Gazprom as well as European partners will be checking the ongoing Gazprom-Europe processes against the Ukrainian-Russian gas relations. But, unfortunately, there is absolutely no relationship between our markets and, obviously, any likely decisions of the antimonopoly bodies will have no direct impact on the Ukraine-Russia relations and the Russian gas price for Ukraine. But if we integrate into Europe, we will be subject to the same principles as the other EU states – in particular, we will be able to count on antidiscrimination protection. Meanwhile, I don’t think Gazprom will be afraid of this investigation and be more responsive to Ukraine. As far as I can judge by the reaction of the monopolist, it can see no reason why it should worry or panic. And as problems with the European Commission began as long ago as last year (let us recall searches in Gazprom offices), I believe Gazprom has already braced itself against the odds.”

Viacheslav KNIAZHNYTSKY, independent expert:

“They are conducting the probe because they have the rule of law and a point of departure. Had we done things properly in good time, at least as part of the Energy Community, we would not have the current gas problems. It is the way Lithuania, Estonia, and Poland have done. They are guided by their law, which we do not have. We must establish our own energy-sector laws in compliance with our commitments to Europe, at least within the framework of the Energy Community – we would then have an entirely different history. Later last week there was a session of the European Community’s ministerial council, where we were asked to support the introduction of the so-called third package into the agreement. But, as far as I know, we have not even answered yet. It was not a question of implementing this package. Like any civilized Energy Community member, we were just to give our consent to the introduction of changes to the agreement. Naturally, we should follow closely the European Commission’s probe. It is colossal experience for us, which we must study and stop talking about inviting Gazprom to the consortium because we have already adopted a gas market law based on the Energy Community’s second package which envisages separation of gas transportation from other functions of the Naftohaz Ukrainy national joint-stock company.”