European Commissioner for Competition Margrethe Vestager settled the seven-year antitrust case against the Russian gas giant.
Since 2017, Ms Vestager has forced Amazon, Google and Qualcomm to pay €250 million, €2.4 billion and €997 million, respectively, for abusing their market dominance and breaching EU antitrust rules. Central and Eastern European states expected these cases to serve as precedents for Gazprom’s case. However, the Gazprom stakes were higher.
Firstly, the EU could no longer turn a deaf ear to the Central and Eastern European states’ complaints over Gazprom’s double standards.
Secondly, considering the European Union’s dependence on Russian piped gas, Ms Vestager thought wiser to force the Russian giant to acknowledge EU jurisdiction of its contracts with all EU member states and abide by EU rules than simply fining the state-controlled company.
“Gazprom has accepted that it has to play by our common European rules, at least if it wants to sell its gas in Europe,” declared Magrethe Vestager after the decision was made public 24 May.
Gazprom has agreed to some cardinal changes in its market behaviour, namely to allow the sale of its gas across borders, give control of gas transmission infrastructure to the domestic operators, allow Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia to exchange flows of gas, offer these countries the same prices as those it offers Western member states, and not claim compensation relating to the cancellation of the South Stream project.
Until this decision, Central and Eastern European states were paying up to 40 per cent more than Western states for Gazprom deliveries and were not allowed to buy cheaper Russian gas from other EU states.
These countries have the highest dependence on Russian gas, in particular the Baltic states and Bulgaria which until recently almost entirely relied on Russian gas supplies.
Bulgaria and the Baltic states were all the more vulnerable to Gazprom’s double standards because their transmission systems lack interconnecting pipelines, and therefore isolate their markets.
Special contractual clauses forbid them to buy gas from neighbouring countries which pay lower prices for the same Russian piped gas. However, since Ukraine started buying cheaper gas from Slovakia with the EU’s approval, it was only a matter of time until these contractual barriers would be removed.
Even though the Baltic states and Poland are turning to other suppliers such as Norway and the USA to meet their domestic gas demand, Russian gas remains the cheapest option on the market.
Russian piped gas is currently 20 per cent cheaper than imported US liquefied natural gas (LNG) and Gazprom enjoys sufficient margin to offer further price cuts to its European customers.
Whether political bitterness will overtake economic sense remains to be seen. But with free flows of Russian gas now allowed throughout the entire EU pipeline network, it is hard not to imagine even the strongest Russia detractors taking advantage of the situation and buying cheap Russian gas from their EU neighbours.
As for the Russian energy giant, the settlement comes as no surprise, especially amidst growing political tensions with the Skripal affair and expulsions of Russian diplomats from several Western nations as well as the extension of economic sanctions to the Russian energy sector.
There was no better timing for Russia to show good will to its precious European customers. Although Gazprom has been very keen on developing partnerships with Asian nations and in particular China, the energy giant still gets over half of its revenues from gas supplies to Europe.
Often accused to “flex its muscles,” this time the Kremlin’s strategic arm took a particularly conciliatory stance and even agreed to submit all price disputes to EU arbitration bodies within four months of them arising.
In other words, if the Russian company does not fulfil its obligations and does not offer Central and Eastern European states prices in line with those paid by Western European states, it agrees to exclusively rely on the EU arbitration bodies to settle any price disputes.
The European competition commissioner will also be able to fine the state-owned company up to 10 percent of its annual turnover for any breach of its obligations.
“This is not an empty theory,” warned the EU’s competition commissioner. She pointed out the case of Microsoft which broke its obligations and was fined over half a billion euros in 2013.
Russia detractors and state-run energy companies in Central and Eastern Europe are disappointed by this settlement. They hoped that the Kremlin’s economic arm would be punished for years of alleged abuse of market dominance. The settlement, they argue, does not prevent Gazprom from monopolizing the Central and Eastern European gas market.
These countries have always relied heavily on Russian piped gas as they inherited an extensive pipeline network from the Soviet era.
The EU energy packages have forced the member states to increase the share of clean energy in their energy mix. Natural gas is one of them and it is more reliable than renewable energy.
Consequently, Europe has been importing more gas from Russia. In fact, each year marks a new record in Russian gas supplies to the EU. Last year, Gazprom covered almost 40 per cent of the EU’s gas demand.
This trend is likely to continue as Gazprom can offer unequalled price cuts to its European customers in a bid to convince them to buy more Russian gas.
With this settlement, the EU hopes to tame the Russian gas giant and ensure that any future increase in Russian gas purchases will be supervised by the EU and that Gazprom will recognize the EU as the highest jurisdiction of its contracts.
This decision by the European competition commissioner also paves the way for the Nord Stream 2 pipeline.
Central and Eastern European countries have strongly opposed the construction of the pipeline linking Russia and Germany.
After failing to make it fall under US sanctions, including it in the EU jurisdiction could be another way to slow down its construction and reduce Gazprom’s ownership of the pipeline.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.