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The European Commission vs Gazprom. A Great Antimonopoly War


Dmytro Shemelin , Lawyer at Ilyashev & Partners Law Firm
Source: Evropeiska Pravda

In autumn 2011 subsidiary companies of Gazprom in EU and at the offices of several European trading companies cooperating with Gazprom were visited by law-enforcement agencies who conducted search of the premises. A year after such jump-start the European Commission started investigation against Gazprom. Up until recently, however, investigation was advancing quite slowly; there were constant rumors about the possibility to resolve everything amicably.

For example, in 2003 the European Commission and Gazprom had already come to understanding regarding the attempt to isolate Italian market. It could have been be possible to enter into such agreement now. However, in March 2014 the Russian Federation annexed Crimea and the negotiations were terminated.

The European Commission has found itself in a stalemate: conclusion of an amicable agreement or lodging a claim against Gazprom may have resulted in accusations of political bias. The situation freezed until November 2014 when the office of the EU Commissioner for competition was occupied by Ms. Margrethe Vestager from Denmark.

As opposed to her predecessor, Mr. Joaquín Almunia, Ms. Vestager has numerously occupied a tough stance regarding amicable settlement of such discrepancies. For example, in her interview to FT in March she declared that “it is important not to get used to amicable agreements. They are much more swift and convenient and everyone can move further, but an opportunity for creating a precedent must present itself and our judges must handle it”.

That is why commencing from November 2014 the investigation regarding Gazprom intensified. On April 22 the European Commission served Gazprom with a statement of objections – an official “accusation” in violation anti-monopoly law. The established deadline for Gazprom to reply was September 28 after which a hearing may be held and a decision taken. Unexpectedly one week prior to the deadline (on September 21) the Deputy Head of the Board of Directors of Gazprom, Oleksandr Medvedev, announced that Gazprom sent formal proposals to the European Commission regarding amicable settlement of the dispute.

Moreover, in September Gazprom for the first time ever took part in the trading sessions at the spot market which, in itself, contradicts Gazprom’s multi-year policy of justifying long-term agreements as the only advantageous in gas supplies.

If the amicable agreement is reached it is expected that Gazprom will say “no” to its policy of markets isolation in exchange for abolition of fines (amount of which may reach several billion Euros). If we talk about price manipulation it is hard to predict the end result of discussion of this subject.

What is the nature of the claim put forward by the European Commission

Gazprom is occupying an evident monopolistic position the EU gas markets. In certain countries its share of imported gas reaches 100%, but in its own right monopolistic position, as in Ukraine, as well as in the EU, is not a violation of the law, but only its abuse.

The nature of the Commission’s claim is that Gazprom is using its monopolistic state to “lock up” or fragment the markets of the EU member-countries after which it is planning to manipulate gas prices at certain markets: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia.

While the EU legislation is trying to unite and unify gas markets of EU member-countries into a single trade space, Gazprom is building walls at the borders of these countries and is creating a separate small market in each country where it has a possibility to dictate its terms.

According to the opinion of the EU Gazprom is reaching the said goals as follows.

First and foremost, contracts with Gazprom, someway or other, prohibit export of gas outside the country to which it supplied it, i.e. if Polish PGNiG will purchase a little more gas from Gazprom than needed it will not be able to sell it to no one outside Poland. In such way the Polish gas market will be locked up.

By locking up certain markets Gazprom may exercise control over the gas prices. It is understood that except for economic goals the Russian gas monopolist may exert strong political pressure onto certain EU countries by supporting governments friendly to the Russian Federation and creating economic problems for opposing ones.

As a source of energy gas is widely used by modern countries and even slightest price fluctuations may have vast negative effect. The European Commission attacked both components of Gazprom’s policy simultaneously: as price formation, as well as markets isolation.

According to the opinion of the European Commission fragmentation of the markets may be considered to be a violation of itself. At the same time difference in gas prices for different countries is not a violation: there are objective reasons determining the price difference. The problem is created only when Gazprom manipulates these prices in isolation from economic factors and establishes prices randomly (or on the basis of politically motivated matters).

It is understood that to prove unfair nature of prices is a difficult matter considering for a large number of price formation factors to be taken into consideration. Correspondingly, the European Commission, decisions of which may be appealed to the court, runs quite a great chance to lose the case in court to Gazprom under such politically biased circumstances.

How does this situation threaten Ukraine?

Undoubtedly the decision of the EU on acknowledging Gazprom to be a violating party or reaching an amicable agreement with it shall have no direct effect onto Ukraine until it acquires EU membership.

However, loss of Gazprom in anti-monopoly investigation may have important indirect consequences onto Ukraine. Firstly, the problem with reverse flows from Slovakia and other European countries: we will make unobstructed reverse purchases without objections on the part of Gazprom. Secondly, tighter unification of European gas markets shall mean that Gazprom will practically lose any political or economic instruments there. Correspondingly, pro-Russian governments and pressure groups will create much less problems for Ukraine in realization of any joint EU programs. It is also evident that loss of Gazprom will directly affect the gas price for Ukraine as well. Thirdly, Ms. Vestager manages to outplay Gazprom in anti-monopoly matters it will mean that EU takes much stricter stance as to application of European legislation towards international companies. As Ms. Vestager said, “all the companies operating at the EU market, European or not, must follow EU rules”.

Correspondingly, a tough stance is to be expected towards realization of the Third energy package which, roughly said, forbids gas suppliers to be the owners of gas pipelines. Realization of the Third energy package will surely bury all “southern” projects of Gazprom related to gas supply to Europe by its own pipeline.

Any pipeline construction project now must involve European investors as a project party. Finally, in April 2015 Ukraine started its own anti-monopoly investigation against Gazprom. Undoubtedly, Ukraine will take conclusions made by its European partners into consideration which increases our chances for success.

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