Brussels accuses Gazprom over stranglehold (April 2015)

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Brussels has confronted Gazprom over its stranglehold on gas supplies to eastern Europe, accusing the Russian government-controlled group of illegally overcharging its customers and muscling out rivals.

The decision on Wednesday to serve formal antitrust charges against Russia’s gas export monopoly is a serious escalation of a four-year probe that has provoked the Kremlin’s ire and threatens to upend Gazprom’s business model. It also comes against the backdrop of the ongoing war in Ukraine, which has raised EU-Russia tensions to levels not seen since the cold war.

Gazprom rejected the charges, saying the accusations were “unfounded” and insisting it adhered to “all the norms of international law and national legislation” where it does business. In a statement it said its pricing practices were the same as other gas suppliers to EU countries.

Significantly, Gazprom said it is considered a “strategic government-controlled business entity” within Russia, and reiterated the Kremlin’s position that a state-to-state solution should be found to the antitrust problem.

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Wednesday’s charges represent the opening salvo in the biggest antitrust case launched by the European Commission against a state-controlled company from outside the EU and come just a week after Margrethe Vestager, the EU’s competition commissioner, pulled the trigger on another highly contentious case, filing charges against US technology group Google.

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

Investigators accuse Gazprom in their so-called “statement of objections” of abusing its dominant position in the upstream gas market in five eastern European countries by charging wholesalers “significantly higher” prices than its own costs or what can be bought on the open market.

The charges also allege Gazprom is illegally preventing wholesalers in eight central and eastern European countries from selling on their gas to other countries. The EU has tried to assist Ukraine by using such “reverse flows” to provide Kiev with gas sold by Gazprom to neighbouring countries, such as Poland and Slovakia.

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The commission said it was continuing to investigate whether Gazprom has attempted to strong-arm the Bulgarian and Polish governments into maintaining control over gas pipelines in their countries. It said it had found evidence Gazprom threatened not to supply gas unless the two governments either invested alongside Gazprom-backed pipeline projects, or allowed it to reinforce control over existing pipelines.

Under recently adopted EU law, energy companies cannot control both gas supplies and the distribution infrastructure.

Russia’s energy ministry on Wednesday expressed “surprise and regret” over what it said were unjustified charges against a non-EU company.

In a statement it described the charges as “an unfriendly act and an attempt to exert pressure on Russia in its energy policy.” It went on to describe the “political nature” of the case, linking it to the EU’s effort to put economic pressure on Russia over the Ukraine crisis.

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Although the charge sheet has been ready since last year, Brussels put the case on hold for fear it could antagonise an increasingly belligerent Moscow. Some senior EU officials have feared retaliation, such as a cut-off in gas supplies to Ukraine and Europe, that would do more damage than the antitrust problems the commission is trying to address.

Ms Vestager points to her decision to serve charges against California-based Google as evidence that nationality or politics plays no part in her antitrust enforcement decisions.

Since September 2011, when the EU launched its biggest antitrust raids against almost two dozen Gazprom partners and affiliates in eastern Europe, Moscow has refused to recognise the EU’s authority over Gazprom and wants the case settled at a state-to-state level.

The commission, the EU’s top antitrust authority, outlines three main complaints in a charge-sheet running to hundreds of pages. Gazprom is accused of imposing contractual terms that stop the resale of gas and illegally carve up the market to its own advantage.

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A second strand of allegations claims the Russian group broke competition rules by using its clout to block rival sources of supply. Specifically this relates to Gazprom linking its own pipeline projects to supply deals and prices, making it more costly to diversify.

Most significantly, Brussels also claims Gazprom overcharges customers in some EU countries through abusive terms in long-term contracts, which link the price of gas to oil. Prices in Lithuania, for instance, were found to have been at times more than a third higher than Germany’s more developed energy market

Gazprom has been given 12 weeks to respond to the statement of objections and can call an oral hearing to make its defence. It would still be able to settle the charges through abiding by legally binding commitments that address the commission concerns about its conduct.

Should the commission decide to issue an infringement decision, it has the power to fine Gazprom up to 10 per cent of its global turnover, a sum that in theory could exceed €10bn, although in practice the penalty would be much less. It can also impose far-reaching changes to Gazprom’s business model in Europe, is that checkmate?

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