The laws of the market are not enough. The cause has been heard: no one is in any doubt any more about the highly political nature of discussions or negotiations on the subject of EU energy supply, even if they take place at company level. The latest developments in the stance of the Russian authorities and Gazprom leave no room for puzzlement or hesitation. Last month I spoke of the apparently divergent positions of European Commissioner Joaquin Almunia, the President of the Eurogroupe Jean-Claude Juncker and Tommaso Padoa Schioppa on whether the laws of the market could be applied as they stood to energy (see our Bulletin 9164). Three weeks later (see bulletin 9175) I quoted French Minister Thierry Breton, who said that simply applyingof the laws of the market was not enough for energy, nor indeed for agriculture or water: in these three areas, free market principles have to be combined with security of supply and environmental criteria.
Since then, Russia has shown the extent to which it uses energy supply, and the companies involved, as political weapons. It was clear before, it has now become blindingly obvious. For a period, it seemed that Russia was mainly concerned about reassuring its western customers about its reliability as a supplier, prepared even to play the free market (or nearly) game. A Minister hinted that Russia might ratify the Energy Charter, which it signed but never ratified. The authorities quickly distanced themselves from the Minister and he was forced to backtrack, and Moscow's stance swung towards protest and underlying aggression.
A fierce dialectical battle. Since then, a dialectical battle has broken out. When Brussels stressed that Russia needed to export gas as much as the EU needed to import it, Moscow announced it was going to diversify its outlets, and turn towards China and other Asian markets - and even North America. When the EU said it intended to increase its gas imports from Algeria, the Russian authorities rushed to Algiers to create a producers' alliance, with some observers even going as far as to suggest it could become a gas exporters' cartel, more dangerous than OPEC because there are fewer sources of gas than oil. When the European Commission, on the grounds of competition rules, expressed reservations over the practice of long-term contracts between Gazprom and western purchasers of Russian gas, Moscow protested and claimed they were necessary. When Europe said it intended to deal directly with independent Russian gas producers, putting them in competition with Gazprom as allowed in the Energy Charter and annexed protocol, Moscow buried the Charter: it is dead before it is born, said Gazprom Deputy Chairman Aleksandr Medvedev, who counter-attacked by negotiating access to European distribution networks with European gas distributors (notably with by taking shares in Wingas and E.ON), and Vladimir Putin protested strongly if any EU country expressed reservations. In this context, Gazprom said it intended to buy Centrica, the UK's largest distribution company, and when the British government expressed reservations, slightly bending the sacred principle that anything can be bought in the City, Mr Medvedev denounced this “hysterical reaction” (and it is not even clear yet what the ultimate British stance will be).
Given these developments, can it be doubted that the simple application of the laws of the market would be insufficient, because all of this derives from foreign policy and political authorities should deal with it at the highest level? In the light of statements (and there are plenty of them) that the Gazprom initiatives concern only the companies concerned, a German Minister stressed the difference between the acquisition of companies inside the EU and those of Gazprom, which is not bound by European rules and to which no one can control public subsidies. Can anyone imagine Gazprom being concerned by a “reasoned opinion” from the European Commission, and Moscow bowing to an order from Brussels Competition staff? Vladimir Putin must have been laughing, when Silvio Berlusconi wanted Russia to be considered as a candidate for accession!
Significance of a letter. Fortunately, the European institutions and Member States appear to have understood what is going on, as can be seen from the joint letter from Martin Bartenstein, President of the Council and Austrian Economy Minister, and Andris Piebalgs, European Energy Commissioner, to Russian Industry Minister Viktor Khristenko.
It is very positive that this letter was sent jointly by the Council and the Commission. As was briefly mentioned in our bulletin 9183, it clarifies the EU position on Gazprom and the problems raised by its monopoly of Russian gas supply to the EU. Gazprom, let us not forget, recently became the world's third largest company, with a capital of €213.8 billion ($266 billion), just behind Exxo Mobil and General Electric, and ahead of Microsoft. No other European group can compare with it in size.
The letter clarifies the European stance on four main points:
1. Long-term contracts are justified. The EU agrees that long-term supply contracts can facilitate the investments which Russian energy companies and their partners - often EU energy companies - need to undertake to meet future demand. The letter stresses, as a matter of fact, that under EU competition rules, contracts which promote new investment and other benefits are, in principle, viewed favourably (we know that, if these conditions are not met, there is reticence about long-term contracts from the angle of competition rules).
2. Towards common transparency rules and guaranteed investment. That the European Commissioner stressed several times the need to diversify sources of supply and suppliers does not indicate in any way that the EU intends to restrict Gazprom deliveries to the European Market. On the contrary, it indicates that demand is forecast to continue to rise, and the EU and Russia will remain in a position of mutually beneficial inter-dependence and strong growth in European demand will require huge investment. The EU needs the transparency and certainty that this investment will be made in a timely manner. The EU-Russia energy partnership should, then, be developed and deepened, to mutual advantage. Transparency, from both sides, should cover demand, investment and supply data to ensure that this mutual confidence becomes deeper. The high-level conference, scheduled to take place in Moscow in October should be an opportunity to clarify a common understanding on the parameters of the transparency. Before that, a further EU-Russia meeting could provide a useful opportunity to discuss, and if possible agree on, priorities and principles for the dialogue and cooperation.
3. There will be no discrimination against Gasprom but its monopoly position should be taken into account. Gazprom fears that the EU will impose limitations on its ambitions to become a global energy company, active not only in gas supply, but also oil, electricity etc. There exist Community companies active in each of these sectors: Mssrs Bartenstein and Piebalgs guarantee that the EU will apply the same rules to Gazprom and will apply them in exactly the same manner, particularly competition rules (which ban agreements and acquisitions which have an adverse effect on competition). At any rate, the fact that Gazprom is the sole exporter of Russian gas to the EU (when other Russian companies and foreign joint ventures would be in a position to supply the EU market) should be taken into account in any objective analysis.
4. Towards the ratification of the Energy Charter. Finally, the letter restates the importance the EU places on the ratification of the Energy Charter and the Transit Protocol. This mechanism provides the basis for the long-term management of the wider European energy market, including in relation to such issues as the right of transit and third party access.
A first step. The EU recognises the validity of the Russian position on long-term contracts, but maintains its positions on transparency, ending Gazprom's export monopoly and other issues. It is a first step towards a common energy policy affirming essential principles.
During high-level talks, as, recently, between Angela Merkel and Vladimir Putin and prior to that at the Economic Forum in London, the tone was more diplomatic and Mr Putin was seeking to reassure: Russia would remain a reliable supplier and would honour its contracts, as it had been doing for 40 years, he said. But at the same time, Mr Putin, in a wrathful, almost threatening tone (see bulletin 9181), once again condemned European limits on Gazprom's activities in the EU. At the EU-Russia Summit in Sotchi on the Black Sea on 25 May, the EU should speak openly, expressing its firmly joint positions and not be afraid to make use of the political weapons at its disposal, including, for example, conditions for Russian accession to the WTO.
(F.R.)