The EU strikes back

By bne IntelliNews December 5, 2013

Tim Gosling in Prague -

In the wake of the collapse of the trade deal with Ukraine, the EU struck back against Russian meddling on December 4, warning it's ready to block Gazprom's South Stream gas pipeline. Brussels also appears to have persuaded the Russian state energy giant it's serious about pursuing an anti-trust case that could see it fined billions.

Gazprom deputy head Alexander Medvedev, in Brussels to open a new office and meet with European Commission officials, was told that South Stream - planned to carry 63bn cubic metres of Russian gas per year across Southeast Europe - does not meet EU regulations blocking the ownership of pipelines by energy suppliers. To ram the point home, he was told that adapting the project - which saw construction launched in Serbia last month - will likely take years.

"In all openness and frankness, the South Stream link will not operate in the territory of the European Union if it's not in compliance with EU law," Klaus-Dieter Borchardt, director of the Internal Energy Market in the energy department of the European Commission, announced at a meeting that included the Gazprom man, according to Reuters.

"I can only reiterate our willingness to work constructively," he added. "It will take not months; it will take maybe two years."

Understandably, the Gazprom man appeared to get a little hot under the collar. However, while Borchardt agreed with Medvedev's claim that EU law does not stop Gazprom from building the pipeline, he said Gazprom could not: "Hand a baby to us and then say, 'Now how can we operate it in accordance with the Third Energy Package?'"

Later the same day, following a meeting with Medvedev, EU competition chief Joaquin Almunia announced that Gazprom has committed to present proposals in response to the bloc's anti-trust case against the Russian company's gas pricing in Central and eastern Europe. Designed to reduce Russian pressure and its dominance of the gas markets across the Baltics, Central Europe and down into Bulgaria, Almunia said in October that he is ready to draw up a list of charges, and that Gazprom could be facing fines of up to €11bn.

Under EU anti-trust rules, a company can offer concessions aimed to address the EU's concerns, which Brussels can then decide to make legally binding on the firm, reports the Wall Street Journal. The commitments don't imply wrongdoing by the company and are a way of settling a case without imposing fines.

All routes lead to Ukraine

Both issues lead directly to Ukraine, which is currently wracked by protests over President Viktor Yanukovych's failure to sign off on an association and trade pact with Brussels at a Vilnius summit on November 28-29. Russia, which wants Ukraine to join its Customs Union instead, used economic carrot and stick to force Kyiv - which is desperately trying to stave off economic meltdown - out of signing the long-planned agreement.

Gas is both the biggest carrot and stick that Moscow possesses. Yanukovych is currently in China to see what concessions he can extract from Beijing before heading to Russia. He will be hoping to win a huge discount on the price of Russian gas, but Moscow appears ready to play hardball.

While Medvedev was in Brussels, his boss - CEO Alexei Miller - was reminding everyone that Ukraine's outstanding gas bill continues to grow. "At this point, the debt owed by Naftogaz Ukrainy for gas delivered in August, October, and November is $2.02bn," the Gazprom head said, according to Interfax. "We are looking for ways to resolve this problem. We are negotiating, but no agreement has been reached so far."

The EU's concern over Gazprom's domination of CEE markets spiked in 2006 and 2009 when bickering over gas bills saw Russia cut off supplies to Ukraine. As the bulk of Russian gas flows to Europe are transited through Ukraine's pipelines, much of the eastern end of the European bloc spent those winters shivering too. Moscow's response was two pipelines that circumvent Ukraine's pipeline system: Nord Stream, which is already built and runs under the Baltic Sea, and South Stream, which runs through the south of Europe.

The threat by the EU to block South Stream by leveraging the unbundling regulations of the Third Energy Package offers a triple play. Not only does it send Russia a stern warning - President Vladimir Putin has personally complained about the threat the legislation carries throughout the past few years - but it's also a clear sign of support to Ukraine, without caving in to Yanukovych's demands for hard cash to stave off crisis.

At the same time, it's also a warning to the EU hopefuls that have volunteered to host the pipeline that they should not allow Russia to disrupt their path towards joining the bloc in the same way that Ukraine has. Serbia has made huge efforts to open accession talks with Brussels in recent months, but Russia still holds big sway in the country.

In the wake of its summit in Vilnius, the EU insisted it will not accept third parties meddling in its relations in the region. However, the Kremlin - like most others - likely took that complaint as largely toothless. Yet Brussels had already illustrated its resolve in refusing to play the Russian and Ukrainian game, which essentially sees the situation as a geo-political auction. Gazprom's offer to draw up proposals on the anti-trust case suggests it has discovered in the meetings that the EU is ready to stick to its guns. The Kremlin's immediate response to the launch of the initial probe in September 2012 had been a decree banning Gazprom from disclosing information to foreign regulators without government permission.

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