Are Gazprom’s frosty relations with Europe beginning to thaw?


In September 2012, the European Commission (EC) launched a formal investigation of colossal state-owned Russian gas company Gazprom, marking a focal point in a sustained period of testy relations between the company and the European Union, its largest market.

The investigation is still ongoing and the subject of increasingly intensive negotiations between Gazprom and the EU. The probe is focused on allegations that the company has leveraged its dominant market position in eastern European member states to charge unfair prices in some of those countries and inhibit the re-sale of gas across borders, decreasing competition and running contrary to the EU’s long-standing goal of moving towards integrated gas and electricity markets across the continent.  

Political tension over gas disputes

When the European Commission sent its Statement of Objections to Gazprom in April 2015, laying out its preliminary findings, Commissioner for Competition Margrethe Vestager did not mince words.

“All companies that operate in the European market – no matter if they are European or not – have to play by our EU rules,” Vestager said. “I am concerned that Gazprom is breaking EU antitrust rules by abusing its dominant position on EU gas markets. We find that it may have built artificial barriers preventing gas from flowing from certain Central Eastern European countries to others, hindering cross-border competition. Keeping national gas markets separate also allowed Gazprom to charge prices that we at this stage consider to be unfair. If our concerns were confirmed, Gazprom would have to face the legal consequences of its behaviour.”

Gazprom, for its part, has argued that its status as a state-controlled company puts it outside of the EU’s jurisdiction, and that the EC should take up negotiations with the Russian government directly. It also contends that its practices and pricing policies conform to international law and the legislation of the countries in which it operates.

"I am concerned that Gazprom is breaking EU antitrust rules by abusing its dominant position on EU gas markets."

As Gazprom has effectively responded to the European challenge by taking shelter under the auspices of the Kremlin, the case – along with other international gas-related disputes – has become yet another facet of a protracted cooling of relations between Europe and Russia, particularly in light of the tensions caused by the conflict in Ukraine.

The Gazprom investigation is a truly politicised stand-off; after the EC’s investigation was launched in 2012 Russian President Vladimir Putin introduced a law barring strategically significant companies such as Gazprom from cooperating with external regulators without the explicit permission of the state. Commission plans to bring formal charges against Gazprom were put on hold in 2014 to avoid fanning the flames in the wake of the Ukrainian crisis.

As the inquiry dragged on, diplomatic relations between the two blocs continued to sour and the possibility of Gazprom rejecting Europe and turning to Asian markets loomed, the obvious question was which of these reluctant partners’ bargaining chips would prove to be worth more: Europe’s business or Russia’s gas?

Gazprom strikes a conciliatory tone

Recent signs, however, suggest that a less combative approach to Gazprom and Europe’s disagreement has been taking hold. In September 2015, Gazprom offered a settlement agreement to the EC for negotiation, which is currently ongoing and would likely involve finding a compromise that would see the company avoid what could potentially amount to €10bn in fines if the anti-trust case goes against it.

A noticeably conciliatory tone, given that Gazprom had previously maintained that the Commission had no jurisdictional legitimacy. Vestanger confirmed in October 2015 that discussions were in progress, and offered some indication that an alternative outcome was a possibility.

“They [Gazprom] do not recognize our concern, but we are trying to find out if there is a track for a solution, or if we continue to follow formal proceedings,” Vestanger told RIA Novosti last year.

Other moves by the company seemingly reiterate a desire to re-engage with Europe and consolidate its position in a market that accounts for more than 60% of its gas sales. On the regulatory side, in March Gazprom agreed to sell its 34% share in Latvian gas company Latvijas Gaze, bringing it into compliance with the competition requirements of EU’s Third Energy Package, which restricts energy companies from owning all components of the natural gas supply chain.

And in investment terms, despite the cancellation of the South Stream gas pipeline project – due to the restrictions of the Third Energy Package – Gazprom unveiled its Nord Stream 2 proposal along with five European partner companies, which would massively expand the supply of gas from Russia to Germany across the Baltic Sea. The $11bn project would add capacity equivalent to two thirds of Russia’s total current exports to Europe, signalling a firm step back in Europe’s direction.

“We understand very well that Russian gas will be needed on the European market for a very long time,” said Gazprom CEO Alexei Miller in a recent speech at the St. Petersburg International Economic Forum.

It seems that Europe’s business may have proved the trump card in the continent’s face-off with Gazprom, and as some experts have suggested, the readjustment the company’s stance on the continent perhaps reflects a perception Europe holds the edge over Asian titans like China as the primary market for Russian gas, for now at least.

“[There is an] understanding inside Gazprom that there is a whole new world of gas out there,” IHS Energy’s senior director of Russian and Caspian Energy Thane Gustafson told the Financial Times last year. “And also there is some realisation within the Kremlin that China is not a magic trump card, and Europe is going to remain the main market for the foreseeable future.”   

Tough negotiations to come

Of course, it wasn’t just Europe’s economic attractiveness that encouraged Gazprom’s reassessment of its partners to the west. A tough stance from Europe has likely also helped to persuade the company that fighting its corner might not be the most productive approach. Gazprom’s recent decision to sell its stake in Latvijas Gaze, for example, was almost certainly influenced by its unsuccessful two-year attempt to fight a similar EC order to sell its stake in a Lithuanian gas company in 2012.

"[There is an] understanding inside Gazprom that there is a whole new world of gas out there."

“In 2012, Gazprom already got involved in legal battles and behind-the-scenes wars,” ThetaTrading managing director Dmitry Ederman told Russia Beyond The Headlines in March. “It does not want to make the same mistake twice.”

More critical negotiations still remain if the two parties are to regain their standing as stable, functional energy bedfellows. Not least of these is the anti-trust issue, on which Gazprom will likely only be willing to bend so far. The prospect of bolstering competition in central and eastern European gas markets over which it currently has strong control will be of grave concern to the company and to Russia, and potentially strong opportunities to build new gas markets in Asia will give it a strong negotiating position.

And as much as the Nord Stream 2 project speaks to Gazprom’s commitment to Europe, it could be a bone of contention for many of the countries that it is currently accused of exploiting. Central and eastern European states have argued that the move would increase the region’s reliance on Russian gas, while the likes of Slovakia and Ukraine would miss out on fees for gas that would no longer be transmitted through their territory.

The EC has pledged to consider the implications for “security of supply, diversification and creation of competitive gas markets” as it deliberates on whether to approve the project. Its decision on this project, as well as the anti-trust case currently being negotiated, could set the diplomatic tone between Gazprom and Europe for years to come, and decide whether the recent thawing of relations is set to continue.