EUobserver opinion: The EU and Gazprom

In 2007, Alexei Miller, head of Russia’s state-gas behemoth Gazprom famously boasted he would raise the company’s market value to US$ 1 trillion; up from US$ 360 billion at the time. Today, much of that dream has vaporised. After years of hard-nosed tactics in Central and Eastern Europe and several high-profile gas supply interruptions, Gazprom’s reputation as a reliable supplier is in tatters.

The fallout over the Ukraine crisis brought severe pain to the Russian economy and prompted the EU to press ahead with the launch of its Energy Union. American frackers and the halving of the price of oil essentially did the rest. What’s more, EU competition law has proven to be a powerful tool against the whims of Putin and Gazprom, and acts as a careful reminder to those member states that wish to bend the rules.

Hungary and Bulgaria - to name but a few - will undoubtedly be more careful next time. Rattled by sanctions, and facing a legal wall in Europe, Russia had to change course. Today, Gazprom is increasingly forced to do deals with countries outside of Europe that carefully exploit the Kremlin’s weaker negotiating position.

From Brussels… with regulations

The axing of South Stream on 1 December 2014 caught many by surprise, not least the EU member states involved in the project. The pipeline, which at a cost of US$ 50 billion always had a questionable economic rationale, was Gazprom’s key-geopolitical project in Europe.

Following Putin’s mantra of ‘divide and rule’, it would provide 63 billion cubic metres (bcm) per year to the European market, get Southeast Europe hooked on Russian gas for the foreseeable future, and bypass Ukraine; all in a day’s work.

Contrary to Russia however, Europe operates by different standards, and knows such a thing as ‘the rule of law’. Under EU competition law gas companies are not allowed to simultaneously own the pipeline infrastructure and supply the gas.

Making new friends

Keen to demonstrate to the world that Russia does not need Europe with its pesky rules and regulations, Putin announced an alternative plan that would export Russian gas to Turkey instead. Dubbed ‘Turkish Stream’, the pipeline will run underneath the Black Sea to Turkey from where gas will be delivered to a gas hub at the Turkish-Greek border.

From there, Europeans - if they so desire - could ship gas to the European market. Clever plan? Think again. Turkey managed to secure a whopping 6 percent discount on gas deliveries from Moscow, and is set to aim for more. Furthermore, Turkey is no Ukraine. It is not as susceptible to the kind of strong-arming that Moscow subjected Kiev to over the years.

Moreover, by entering the Turkish market in this way, Gazprom is opening itself up to competition from Azerbaijan, and potentially Iran. If there is a nuclear deal with Iran, chances are that gas exports to Europe may become a reality in the distant future. Putin then may see his own divide and rule tactics being turned against him.

The Turkey deal - which still needs to be finalised - bears many similarities with an earlier deal struck between Moscow and China. Under pressure in Europe, Gazprom turned to the Chinese. After years of acrimonious talks, in May 2014 Moscow and Beijing finally inked a US$ 400 billion deal that would secure 38 bcm of natural gas deliveries per year from Eastern Siberia to China’s Eastern region for a period of 30 years.

Although qualified as the ‘gas deal of the century’ by Putin, the reality is very different. First, to call the negotiations protracted would be an understatement of biblical proportions; both parties had been negotiating since the 1990s.

Second, with Russia’s position in Europe weakened, China finally saw the opportunity it was waiting for. With its back against the wall, and eager to show the world that it could do without Europe, Gazprom made significant concessions on the price.

Deal of the century alright, just not for Russia.

Gazprom for its part will continue to rely on the European market for the bulk of its revenues for the foreseeable future.

Time to see the job through

In February 2015, the EU Commissioner for competition Margerethe Vestager announced the EU was weeks away from launching its anti-trust battle against Gazprom. The company stands accused of overpricing its clients in Eastern Europe.

For Europe, it is of the utmost importance that the European Commission presses on and counters the Russian gas empire - the foundation of the Kremlin's divide and rule tactic - with the rule of law.

Dr. Sijbren de Jong is a Strategic Analyst at The Hague Centre for Strategic Studies (HCSS)