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What’s behind the Gazprom crisis?

An employee turns a valve at a gas compressor station in the village of Boyarka, outside Kiev, on April 22. (Gleb Garanich/Reuters)
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The European Union has opened an initial antitrust case against Gazprom, the Russian government-owned gas and energy giant. It is accusing Gazprom of abusing its market power to jack up prices and punish E.U. member states for noncompliance with its demands. As always with such cases, there is plenty of politics. The E.U. delayed bringing the case for more than a year, in part because it feared that it would further damage the relationship between Russia and the West. Rawi Abdelal, a political scientist at Harvard Business School, has written a lot about Gazprom, including this article (ungated earlier version here) for the Review of International Political Economy. The following presents some of the arguments that Abdelal makes, and tries to apply them to the current crisis.

Gazprom is not a simple arm of the Russian government

Much of the commentary about Gazprom in the last few years has been driven by the fear that Gazprom is making Europe more and more dependent on its gas supplies, and thus more and more beholden to the Russian state’s foreign policy goals. Abdelal argues that this is mistaken. For sure, a majority of Gazprom is owned by the Russian government. However, the Russian government desperately needs the money that Gazprom makes in rich foreign markets to subsidize a cheap gas policy for Russia’s domestic market and favored satellite states. The result is, in Abdelal’s words, that Gazprom is “desperately dependent on [the] European market. Consequently, the state’s interests directed Gazprom, or at least its exporting business unit, to act as an efficient, profit-maximizing firm.” Abdelal reports that Gazprom revenues made up 8 percent  of Russia’s GDP, and Gazprom taxes and dividends accounted for 12 to 13 percent  of the Russian federal budget.

This doesn’t mean that Gazprom necessarily behaves nicely toward Western European countries that import its gas. What it means is that its behavior is the kind of behavior one would expect from monopolists — price discrimination between different customers and the like — rather than the building of political empire. It is Gazprom’s claimed market abuses that the European Union is trying to put an end to.

Gazprom’s exports to Europe are a source of vulnerability, not strength

One of the implications of Abdelal’s argument is that Gazprom (and Russia) may depend more on exporting gas to Western Europe than Western Europe depends on importing gas from Gazprom. Wealthy European customers are subsidizing Gazprom’s business model — and if Gazprom doesn’t have those customers, it doesn’t, at the moment, have many other places it can turn to. It wants to start exporting gas to China  but won’t be able to do this the 2020s, and may not expect high profits either; the Chinese are hard bargainers. This may help explain why Russia’s reaction has been less vociferous than many feared — Russia has indicated that while it does not recognize the authority of the European Commission to make findings, and views the effort to change contracts as unacceptable, it hopes for an amicable settlement of the dispute.

Gazprom has nonetheless succeeded in reshaping European energy politics

Abdelal documents how Gazprom’s relationship with its European customer firms has been built up over decades. Energy markets are always political and always risky. New technologies and shifting geopolitics can have enormous consequences. Gazprom has tried to deal with this by creating very long-term relationships with German, French and Italian firms. These relationships have reshaped energy markets and European politics, especially as new pipelines have been constructed, leaving Poland and Eastern European countries fearful that they were being cut out of a deal that was being made by Germany and Russia.

This points, as Abdelal argues, to more subtle patterns of influence. German, French and Italian understandings of their national interest have been reshaped by the relationships between their big firms and Gazprom. These firms want to preserve a stable relationship with Gazprom, and see Gazprom’s 2006 dispute with Ukraine as an unfortunate disruption rather than, as many U.S.  commenters would have it, an example of Russia trying to extend its hegemony. They have created a constituency within Europe that prizes stability and predictability in relations with the East.

The E.U. action is in part a reaction to these dynamics

Abdelal notes that the willingness of big firms in powerful member states to cut individual deals with Gazprom has challenged European Union officials, who would prefer Europe to speak with a single voice, and to have a genuinely common energy policy. It is hard to have such a policy when the big firms in major states have cut individual deals that they prefer to common action.

Given this background, I (and not necessarily Abdelal) would interpret the European Commission’s action against Gazprom as, in part, an effort to grab authority away from firms and decisionmakers in the big member states. The European Union has far more powerful competences in competition (antitrust) policy than in energy. It is using these competences to try to remake Gazprom’s relationship with Europe in ways that both (a) make it tougher for Gazprom to cut special deals with individual countries, and (b) strengthen the authority of European Union officials vis-a-vis the member states. The commission’s action is plausibly aimed at creating a common energy policy through the back door. To understand the Gazprom action, you need to understand the internal dynamics of European politics

The likely outcome will substantially reshape European energy politics

This report by the influential European think tank Breugel gives some very useful background. It notes that the very long-term contracts which have anchored relationships between Gazprom and its European customers are under challenge. Long-term contracts look less attractive when other energy sources are becoming cheaper. E.U. demand for gas fell by 10 percent between 2013 and 2014. It isn’t clear that long-term stability will be as high a priority as in the past, especially if the European Commission is questioning the legality of these arrangements.

Furthermore, the European Commission is questioning Gazprom’s requirements that its customers not sell gas across borders. This allows Gazprom to price discriminate betweenE.U. countries. However, it seems on its face hard to reconcile with the objectives of the E.U.’s single market, which is supposed to get rid of arrangements that weaken cross-border competition.

The most interesting question, however, is how this challenges some of the long-term patterns identified in Abdelal’s work. Abdelal shows that Gazprom and its customers have created a set of long-term relationships that have in turn shaped European energy politics and the ways in which key E.U. member states think about their national interests. If, as seems likely, these relationships are about to be disrupted, it’s interesting to speculate about whether the politics will change too, as conceptions of national interest shift from the fostering of long-term relationships at the national level to some other schema, whether it be relationships at the European level (if there is a wholescale reworking of energy markets), more short-term, market-based relationships, or something else altogether.