Friday, March 18, 2011

Europe Preaches Competition to the Russians

Russian Prime Minister Vladimir Putin came to Brussels on 24 February 2011, and accused the European Union of trying to confiscate Gazprom's private property. He was accompanied by 13 members of the Russian cabinet of ministers, underlining the importance of his presentation. Putin's ire was reserved for the EU's Third Energy Package, which went into effect on March 4. The plan is designed to break-up energy monopolies and encourage competition in the European markets. Putin's response was emphatic: "We consider that the full and mechanical implementation of this package could lead to a rise in energy prices on the European energy market...The third energy package, it is quite clear, will harm the activities of our energy companies. We are talking in practice about the confiscation of property," reported Reuters. Putin separately described the rules as robbery. "Our companies, together with German partners, legally acquired distribution assets. Now they are being thrown out. What is this then? What is this robbery?" he said according to Iranian PressTV.

Under the new rules, Russia might have to sell off some of its pipeline network, to meet EU demands for the "unbundling" of energy asset ownership, including the divestment of Gazprom stock ownership in the Lithuanian gas company Lietuvos Dujos. There are a number of ways of interpreting "unbundling," but under the most severe interpretation suppliers would have to sell their gas transport businesses. Other possibilities include the suppliers maintaining ownership, but an independent operator taking over the transportation arm, or an independent board be appointed to make decisions (such as pricing) on gas transport questions.

In response to the Putin barrage, European Commission President Jose Manuel Barroso did not retreat. "We believe our third internal market energy package is non-discriminatory...What we are asking of foreign companies is to accept the same rules that we are implementing for our own companies," reported Reuters. He said that the rules would not be changed: "Thanks to Russian gas, many of our institutes work and our houses are warm. But we pay for it. We pay for it well...Let me say very frankly, we believe our Third Energy Package is fully compatible with WTO rules, is non-discriminatory and is fully compatible with our bilateral agreements...I'm sure we will find an acceptable solution, but...we have adopted the Third Energy Package. For us and for the member states, it is now binding legislation," Hurriyet quoted him as saying. Interestingly, the Russian press reported Barroso was conciliatory. According to RIA Novosti, Barroso was unusually sympathetic to Putin's presentation.

Putin's visit had been heralded in advance as confrontational. Russian Ambassador to the EU, Vladimir Chzhov, warned that the talks would be detailed but "possibly unpleasant." In addition, the president of the Russian Gas Society paved the way for Putin's visit with an in-depth analysis of the Third Energy Package. Valery Yazev, who is also deputy chairman of the Russian State Duma, told the Russian media that the new law would cause the Russian state-controlled pipeline monopoly Gazprom "direct economic prejudice...the Russian company would be deprived of the right to use a gas transport network it had been establishing in Europe for a long period of time for the purpose of achieving the same energy security the "package" talks about," acccording to the website Yazev continued his verbal assault on the energy package in a video conference with the Brussels press corps in which he said the new rules would disrupt Russian investments in prospecting and building pipelines. He claimed that plans to build a second, parallel pipeline to Nordstream were being suspended, and implied the suspension was the direct result of the Third Energy package. He also implied that Russia would not be able to meet future European energy needs under the new regulations. Gazprom would have to reasses its long-term supply contracts with European customers, meaning Europe would only be able to purchase gas on the spot market. Deprived of a guaranteed income, Gazprom would pull back on investing in new oil fields so--when European energy demand returns--Gazprom would not have the gas to meet the demand. Yazev concluded his analysis with the threat of an OPEC-like consortium of gas producers that would peg the price at levels higher than Europeans would otherwise have paid. The Asia Times reports that Yazev reiterated these points in a letter to Eurogas, in which he warned that Gazprom would reorient exports toward more attractive markets if it had to relinquish control of pipelines in EU member countries.

British attorney Alan Riley analyzed the situation in the Wall Street Journal. He opined that no one in the European Union should be considering legal exemptions for Russian companies operating on EU territory, because the equal application of the rule of law is a fundamental European value. Further, Mr. Riley implies that the Russians may cave on their position, stating that Gazprom needs the EU more than viceaversa. Sale of gas to the EU represents one-third of Gazprom's production and two-third's of its revenues.

Russian Energy Minister Sergei Shmatko has proposed a compromise. "We proposed to the EU to differentiate between gas pipeline systems for the EU local market and transboundary trunks from outside...We sent our proposals and are waiting for the reply," he said according to Reuters. His call may not be falling on deaf ears, despite Barroso's strong defense. Russia already has exemptions to the law for two offshore stretches of the Nordstream pipeline, according to Radio Free Europe. Further, RFE says that due to the complexity of the new legislation, EU Energy Commission Gunther Oettinger has postponed legal action against member states who do not implement the new rules. His spokeswoman, Marlene Holzner said , "There is some discretion of maneuver within a law. It is possible under certain conditions to make exemptions, and this can be explored."

Last week, at the 27th Annual EU-Russia summit, European Council President Herman van Rumpoy confirmed that bilateral negotiations were continuing. The president struck a middle road between hard-line and conciliatory. According to CNC World, he said the EU would follow the rules, but was willing to hold "pragmatic talks" with Russia over its concerns.

Russia clearly wants exceptions made to the European law, which would allow them to maintain Gazprom's partial ownership of a number of European pipelines. This is the sort of arrangement that the Third Energy Package was specifically created to prevent. It would appear that Europe will make an accommodation, because of its growing need for Russian energy supplies.