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    Is Mark Twain Really Dead?...



If realised such a Putin's grand policy might further enhance Russia's market dominance and score another victory against the EU's idealist security-through-market-liberalisation.

by: Faig Abbasov

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Natural Gas & LNG News, News By Country, Russia

Is Mark Twain Really Dead?...

Recently the European Commission has launched an antitrust probe against Russian state monopoly - Gazprom's - non-liberal market practices in Central and Eastern Europe. The EC's major concerns are Gazprom's "destination clauses" in its bilateral contracts with the European consumers (prohibiting re-export of Russian gas across the member states), obstructing the pipeline access to third party energy producers through acquisition of transportation assets and monopolistically dictating gas prices while pegging it to the oil prices, which has acquired a tendency of hovering over $100/barrel in the last couple of years.

The anti-trust probe is largely referring to two, so called, legislative pieces/competences of the EU: Firstly, it relies upon the European Commission's anti-trust competences which it has successfully applied against other "wrongdoers" in the past, most notably, Italian ENI in 2004 and 2010, Distrigaz in 2007 and most famously (although in other sphere) against world computer giant Microsoft in 2004.

The second piece of legislation that the European Commission has justified its actions on is the Third Energy Package, which aims to liberalise European natural gas and electricity markets by unbundling supplies from transportation and distribution activities and entrusting different segments of natural gas (also electricity) provision to different market actors, which (hopefully) will act according to the market principles and induce competition in the (yet to be established) European internal  gas market. To cut things short, this legislation means that Gazprom cannot own natural gas transportation and distribution networks while simultaneously being natural gas supplier across the EU territory. For many, this seemed to be the end of the Gazprom's invincible dominance of the Central and East European markets.

Grand strategy

The EU's grand strategy - regulated market as a bedrock of competition - to force the major suppliers to trade in a civilised manner has considerable loopholes however it might have been ignored so far. Firstly, the EU's unbundling scheme targets individual companies and prevents them horizontally controlling the flow of natural gas from up-to-downstream in a vertically integrated manner. The key word here is individual companies, and not actors at large. While applying this logic to the Gazprom case, the latter might seem to be an actor in its own right, however if to zoom out, one can certainly observe that Gazprom is just another subsidiary of the "parent company " - Kremlin Ltd. In this regard, as a skirt away policy, official Moscow can sell Gazprom's European transportation assets to other Russian state energy (potentially oil) companies, which are not necessarily engaged in natural gas trade in the EU market, therefore not bound by the provisions of the Third Energy Package. Russia seems to be quite abundant with ghost energy companies which are apt in acquiring quite strategic stakes abroad while remaining mystic about who stands behind them, just like Russian energy giant Surgutneftgaz which in 2007 acquired a decisive stake in the Hungarian energy company MOL, which accidentally happened to be one of the NABUCCO's equal shareholders. The in-transparency of the company was so stark that actually everybody knew who stood behind it, while one of the major newspapers published an article headlined: "Mr. Putin, Declare Yourself."

Secondly, Mr. Putin may give it a go with a transmission business - both pipeline and LNG, given that the business is becoming increasingly profitable and apparently strategically important. In this vein, it is hard to envisage how the Third (or "Fourth") Energy Package can preclude a state from running two separately managed companies within the EU market. At the end of the day, Russia is now a member of the WTO and can use its membership for raising up the WTO rules against the EU's anti-liberal market practices and embarrass the latter in its omnipotent liberalisation quest.

Domestic windfalls: killing two birds with one stone

Obviously, all these possibilities are not without problems. One of the biggest challenges that Mr. Putin might face is the political backlash that those transmission giants might have against Kremlin and his personal rule and command by becoming too strategic and too strong. As the saying goes, power corrupts and absolute power corrupts absolutely. Such a challenge might be solved by selling Gazprom's different mid and downstream assets to different domestic players as a method of preventing them from becoming too demanding.

Secondly, coordinating among different companies that will operate in the EU energy markets will be of additional challenge as those companies will also have their cooperate interests to advance, which can be damaged as a result of Kremlin dictates of how to behave. This, on the other hand, can be implemented via carrot and stick policy that might include giving those companies financial incentives at home in the form of tax relaxations and extra pipeline access capacity for their own exports, which potentially will increase their energy rents. All these, thus, will be a good opportunity not only to respond to the EU's attack but also a good chance of getting an unfinished job done, i.e. rationalisation of the Russian energy production under state interests, while at the same time, breaking up big monopolies and pretending to be market oriented.

If realised such a grand policy might further enhance Russia's market dominance and score another victory against the EU's idealist security-through-market-liberalisation. In any way it is hard to see how Mr. Putin, a person with strong dedication, can give up and play by the EU rules. At the end of the day, natural resources are finite in nature and therefore it is the state's responsibility to get maximum use of them for furthering national interests, just like Mr. Putin argued in his PhD dissertation. 

Faig Galib Abbasov is a PhD researcher focusing on the energy politics surrounding the EU and the wider Caspian basin at the University of Sheffield, United Kingdom. He can be contacted at: f.abbasov@sheffield.ac.uk