Report

Gazprom’s Ties to Putin Could Help It Try to Escape the EU’s Wrath

The murky relationship between Russia’s energy giant and the Kremlin could turn the EU's antitrust case against the energy giant into the latest flash point with Moscow.

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The European Union’s antitrust case against Russian energy giant Gazprom is a clear challenge to a company that has alternately succored and bedeviled the Old Continent for decades.

But the landmark case, formally opened last week after more than three years of investigation by the EU’s army of gray suits, also raises a host of questions about the relationship between the EU and Russia specifically, and between markets and politics more generally. One immediate question is how the case will affect relations between Gazprom’s corporate leadership and the company’s political masters — and whether Gazprom will seek to fend off the full impact of the EU charges by hiding behind the Kremlin.

The EU has accused Gazprom of undermining competition in Europe by hindering natural gas flows among EU member states and by charging discriminatory prices, among other things. And the EU case worries Gazprom, as much as the firm might dismiss the charges as “unsubstantiated,” because Europe is far and away the company’s main cash cow. But Gazprom could try to argue that, as a strategic, state-controlled company, ordinary competition law doesn’t apply to it. That would likely be a tough sell with EU regulators.

Gazprom is, of course, nominally a regular energy company: Its shares trade internationally, it operates in dozens of countries, and it reports quarterly earnings like any other company. (And it reports dismal earnings: Gazprom’s 2014 full-year profit, announced Wednesday, plunged almost 90 percent thanks to dwindling demand for natural gas in Europe and the crisis in the Ukraine.)

But in reality, Gazprom has long served as Russia’s cudgel when it comes to using energy exports as a geopolitical tool. Gazprom was the company that disrupted natural gas flows to Ukraine in 2006 and 2009, freezing consumers across Europe. Gazprom shut off flows to Ukraine last summer. And Gazprom is the company inking natural gas deals worth hundreds of billions of dollars with China that could propel Moscow and Beijing into a true strategic partnership.

Because the EU antitrust case takes square aim at longtime elements of Gazprom’s business model, the logical response for the Russian firm would be to reach some sort of negotiated settlement with regulators in Brussels, as Western energy firms have done in years past. That could help parry the threat of civil lawsuits. It could even help Gazprom adjust its business model to the emerging realities of the world’s energy business. That could help it maintain a strong position in the European market, which accounts for the lion’s share of its revenues and profits.

“Their only hope is to liberalize and get in line with modern realities,” said Carolyn Kissane, a professor at the Center for Global Affairs at New York University.

But Gazprom doesn’t call all the shots; Russian President Vladimir Putin always hovers in the background and takes a deep, personal interest in Russia’s development of natural resources, especially oil and gas. Gazprom’s leap into the Chinese market with the “Power of Siberia” pipeline, for example, is widely seen by energy experts as a Putin initiative. “What is rational and logical does not always play out in Russia’s relationship to its companies,” Kissane said.

Indeed, the very different perceptions of the antitrust case make it less likely that the two sides will be able to come to an agreement. Brussels sees it as a purely regulatory affair, devoid of broader political meaning; EU competition authorities have been targeting anti-competitive behaviors across the 28-nation bloc for years.

Many in Russian political circles, in contrast, see the formal antitrust charges as a politically motivated vendetta inseparable from the broader tensions over Ukraine. Those suspicions are bolstered because the EU had the antitrust case ready last year, but waited until this spring to make the charges public — after a cease-fire agreement had been reached on Ukraine and after worries of a gas cutoff in the cold winter had passed by.

It’s not just Russia’s current perceptions, though. Moscow’s own actions could ensure that the case leaps from the “realm of law to the realm of politics,” says Marek Martyniszyn, a specialist in antitrust issues at Queen’s University Belfast’s School of Law.

That’s because, in the wake of a “dawn raid” by EU regulators on Gazprom offices in 2011, Russia passed legislation essentially prohibiting a few dozen big, strategic, state-controlled Russian companies from acting without the government’s consent. The so-called “blocking order” specifically forbids those firms from sharing business information with foreign authorities, changing commercial contracts in foreign countries, or even selling shares or assets those companies may have abroad.

That blocking order makes it harder, in principle, for Gazprom to cooperate with EU officials during the antitrust investigation. And, Martyniszyn says, that legislation could even make it impossible for Gazprom to comply with any eventual EU ruling unless the Kremlin gives the green light. The EU could order Gazprom, for example, to sell the network of natural gas pipelines it operates in Europe, in order to inject more competition into the market.

“Without Russia’s consent Gazprom will not be able to comply,” Martyniszyn noted in a paper last year.

If Gazprom is indeed beholden by law to the Kremlin for its business decisions, that might help explain one seemingly jarring element of Gazprom’s initial response to the antitrust charges. The company, Gazprom reminded Brussels in a statement last week, “has a status of strategic state-controlled entity.”

Gobsmacked analysts took that as an admission that Gazprom is an extension of the Kremlin and not a regular company at all. But it could also be an effort to shield Gazprom from any penalties for not complying with Brussels’s future rulings: If the Kremlin indeed calls all the shots, Gazprom itself can’t be blamed.

It’s far from clear that this legalistic strategy will be enough to save Gazprom’s endangered business model or salvage its dominance in the crucial European market. Europe would have the final say on implementing any remedies it might call for in the course of the investigation, and those would likely concern assets and businesses inside European territory, not in Russia.

But one thing’s for sure: Such a frontal collision between Moscow and Brussels on the very nature of the EU and the rule of law will only aggravate the broader economic and trade tensions that have reached a fever pitch in the past year.

Photo credit: President of Russia

Keith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career. @KFJ_FP

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