Gas Trading with Russia is not a Zero-Sum Game
The Russian Federation is a plentiful source of competitive natural gas for the European Union. Imports of Russian gas, predominantly from the state-owned monopoly Gazprom, are a key component in the EU’s efforts to reduce emissions by phasing out coal-fired power generation. They also provide a large and reliable source of revenue to the ailing Russian economy. So why have these benefits not fostered a closer relationship between Europe and its Russian partners?
One example why came in the wake of the EU Commission’s antitrust ruling on Gazprom in May, when the state news outlet RT ran a piece entitled Russia just won big in the European gas war. Originally published by the energy news website OilPrice, the article argued that the European Commission’s decision to abstain from imposing fines on Gazprom represented a victory for Russian interests in what it cast as a contest for European gas market supremacy.
Viewpoints such as that demonstrated by the RT piece feed an adversarial narrative in which Russian and Western interests are interpreted as fundamentally at odds. Anything which is to the benefit of Russia, the logic of this narrative goes, must be detrimental to the interests of the West - and vice versa.
Russian media outlets are not the only ones at fault. In a recent essay published by Foreign Policy magazine, former United States Ambassador to Russia Michael McFaul describes an optimal strategy for U.S. / Russian relations as one which finds “ways to contain the Kremlin’s economic, military, and political influence”. The West is exhorted to work with Russia only “when doing so is truly necessary,” and to “freeze it out when it is not”.
A Hard-Won Compromise
The Gazprom antitrust case ruling is, in fact, a perfect example of why a zero-sum approach to relations with Russia should be avoided. The ruling was by no means an obvious victory for Gazprom - but neither was it a clear-cut victory for the European Union. It was instead a hard-won compromise with tangible benefits for both sides.
As a result of the ruling, Gazprom is compelled to remove the contractual barriers it places upon the free flow of gas (known as destination clauses), and to allow greater harmonisation between prices in the Baltic states and Bulgaria with Western European gas hub prices. In return, the company managed to avoid paying fines that would have amounted to as much as 10% of its annual turnover.
According to Andrei Belyi, an Adjunct Professor at the University of Eastern Finland, and author of the monograph Transnational Gas Markets and Euro-Russian Energy Relations, the ruling was a successful demonstration of the European Commission’s growing soft power. “We see a total change in the Gazprom attitude because of the European Commission’s initiative,” he told KNect365 Energy. “Many warned against this action, especially the European gas companies… they want to have Gazprom as a reliable partner that supplies gas. Possibly they did not want to make the bear angry.”
That makes the Commission’s successful resolution of the antitrust case all the more significant. In the decade since the Commission began pursuing antitrust actions, Belyi believes that it has managed to effect a tremendous and unanticipated change in its influence over the European gas market. Despite Gazprom’s explicit rebuffal of cooperation with the European Commission on antitrust monitoring in 2011, this most recent ruling proves that the Commission’s influence now applies to Europe’s largest natural gas supplier, too.
As to Gazprom, Belyi says it is “good news… that [the company’s] economic interests were considered”, but that the lack of fines should not be surprising. “When you already have a company which adapts quite a lot to the European Union rules, and which has actually demonstrated an evolution from pure denial of competition in the European market to a pretty cooperative attitude, why would you fine them?”
Ukraine: The Lessons Learned
Unfortunately, it is unlikely that the mutually beneficial outcome of the case will allay the anxiety that still exists in Europe and the U.S. about over-dependence on Russian gas. In a recent interview with KNect365 Energy, Mark Gyetvay of the Russian LNG company Novatek describes the resulting attitude as one that distinguishes between “good gas” from the US and other allies, and “bad gas” from Russia. He professes not to “understand today the hysteria behind some of the politics.”
Russia’s critics would say that Gyetvay need look no further than the situation in Ukraine to find his answer. The decision to halt pipeline exports through Ukraine in 2009, and the detrimental effects this course of action had on countries like Bulgaria, illustrates why the West ought to be wary of supply dependence on Russia.
In Belyi’s view, a different moral can be drawn from events in Ukraine. He compares Bulgaria’s situation to that of Austria, which also imported most of its gas via Ukrainian pipeline routes. In Austria’s case, interconnectors to the north of Europe and access to underground storage allowed the country to reverse flows and keep gas supplies uninterrupted. In 2014, when gas supplies to Ukraine were once again about to be cut off, Gazprom provided two months’ warning of the impending discontinuation of supply to the European Union.
The lessons that can be drawn from these events are, firstly, that better access to pipeline interconnectors provides sufficient protection against interruptions in supply along a single route. The second lesson is that Gazprom has demonstrated its willingness to coordinate cut offs with its European partners, proving that maintaining export capacity to Europe is a higher consideration for the company than political grudges against individual states.
Gazprom’s acceptance of the constraints imposed by the antitrust ruling supports this conclusion, as does their continuing use of Ukrainian pipeline routes. A study conducted by Jack Sharples for the Oxford Institute of Energy Studies estimates that the average capacity utilisation of the Ukrainian pipeline routes Velké Kapušany and Isaccea throughout 2017 was as much as 76%.
It is time to accept that gas trading with the Russian Federation is not a zero-sum game. The spectre of supply dependence is real, but it should not worry the European Union unduly. “The issues exist,” Belyi offers, “but the level of dependence on Russia is overestimated”. Russia is best able to leverage the power it wields over its clients when it is dealing with small, isolated states.
Negotiating with the European Union – which it depends on for revenue, as much as the EU depends on it for gas supplies – the Russian bear finds itself much more evenly matched. Understandably, there is little appetite in Russia for interrupting supplies to Gazprom’s most profitable market.
