Central Europe welcomes Commission charges against Gazprom

By bne IntelliNews April 24, 2015

Wojciech Kość in Warsaw -


“It’s the decision of the decade,” Poland’s former treasury minister Mikołaj Budzanowski said on receiving the news on the European Commission’s decision to file antitrust charges against Gazprom on April 22. The former minister expressed the hopes of Poland – and other CEE countries – that they will no longer had to deal with Gazprom’s monopolist practices when signing gas supply contracts.

The Commission filed charges against the Russian gas company for abuse of dominant position in several CEE markets: Poland, the Baltic states, the Czech Republic, Slovakia, Hungary and Bulgaria.

According to the Commission, Gazprom’s abuse was that in signing gas supply contracts in those countries, the Russian gas giant linked gas price to that of oil (when it was still high) and forbade re-exporting of gas within the region.

CEE economies are highly dependent on Gazprom supplies. Poland receives some 70% of its gas from Russia, for example. Countries like Bulgaria or Latvia, which are 100% dependent on Gazprom’s supplies, are in an even worse position, weakened by a lack of realistic alternatives to Russian supplies.

Gazprom was also accused of gauging the price to reflect its political stance on a given country. In early March, the company’s pricing for Poland was leaked to the media, showing that Warsaw paid $379 per 1,000 cubic meter of Gazprom gas, as compared to Germany’s price of $329. Hungary, which is seen more friendly to Russia than many CEE peers, paid $338 per 1,000 cubic meters.

“We suspect that Gazprom can use its market power to adopt a pricing policy that is out of line with market fundamentals,” EU’s antitrust commissioner Joaquin Almunia said in 2013.

But Almunia froze proceedings against Gazprom and it took his successor, commissioner Margrethe Vestager, to get on with them. Gazprom is facing a penalty of up to 10% of annual revenue if it is found guilty, which would equal around $15bn. The Russian company has two weeks to respond to charges before the legal wrangling rolls out in full.

Even though the case is far from closed, CEE countries are rejoicing for two reasons.

The first one is that CEE countries are hoping that the case will result in ending Gazprom’s practices when new contracts are signed, i.e. delinking the gas price from the oil price and allowing re-export of gas in the region. According to Budzanowski, the Commission’s action could have an effect on the ongoing renegotiations of Poland’s contract with Gazprom and potentially lead to better pricing in future supply contracts.

“[The Commission’s decision to take action] comes at a favourable time for us. Even if Gazprom rejects the Commission’s arguments, we are gaining important objective arguments from an EU institution against Gazprom,” Budzanowski told Rzeczpospolita.

Secondly, hopes are flying high in the region for some sort of revision of the apparently unfair contracts from the past. “[Contracts] from the years 2004-2011 need to be looked at as that was the time when gas was supplied to the EU member states based on dishonest practices,” Budzanowski said.

Not that some CEE states have been waiting for the Commission to take action. Lithuania has a case ongoing against Gazprom in the Stockholm arbitration court, accusing the Russian of unfair pricing during the same period of time that Poland’s Budzanowski indicated.

There are risks attached to the Commission’s charges as well. The primary one is that Gazprom will choose to fight back – both in courts and at the pipeline valves, as it may try exerting pressure on the EU by reducing supplies. That is a possible scenario given that the Russian economy is currently weak and the Kremlin may not want to allow Gazprom to pay any fines.

“In the context of tensions between Brussels and Moscow, as well as the deteriorating situation of the Russian economy and of Gazprom itself, Gazprom may not be willing to pay penalties. It is possible, then, that Gazprom will want to demonstrate strength via a temporary suspension of gas supplies to Europe. That might push prices up in the short run,” Piotr Kasprzak of Hermes Energy Group told PAP.

Before the case is over, which may take months, if not years, the CEE countries have seen that they can exert pressure on the monopolist supplier individually. An example came from Lithuania, which has successfully used its new LNG terminal as leverage in talks with Gazprom. The Russian company cut its supply price by 20% recently after Vilnius – which first pushed Gazprom out of ownership of the gas transmission grid – said it would consider not renewing the contract with Gazprom if the price was not reduced and pump up the volume of LNG imports to the terminal instead.

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