Europe ver­sus Gazprom

Financial Mirror (Cyprus) - - FRONT PAGE -

For years, Rus­sian Pres­i­dent Vladimir Putin has wielded Europe’s de­pen­dence on his coun­try’s nat­u­ral gas as a for­eign-pol­icy weapon, with­out fear of the Euro­pean Union call­ing his bluff – un­til now. With the EU launch­ing an an­titrust case against the state­con­trolled gas con­glom­er­ate Gazprom, Europe has sent a clear sig­nal that Putin’s brutish­ness is no longer as in­tim­i­dat­ing as it once was.

The mes­sage from the Euro­pean Com­mis­sioner on Com­pe­ti­tion – that mar­ket rules ap­ply to ev­ery­one – is one that Putin has dis­missed for years. Re­liance on eco­nomic and legal means to achieve his po­lit­i­cal goals has long been a hall­mark of his rule. More than a decade ago, the Krem­lin ex­pro­pri­ated Yukos Oil, which at the time pro­duced 20% of Rus­sia’s out­put, and jailed its founder, Mikhail Khodor­kovsky, for ten years on trumped-up tax eva­sion charges af­ter he dared to op­pose Putin.

All ma­jor play­ers in Rus­sia’s en­er­gy­cen­tric econ­omy quickly fell in line po­lit­i­cally, en­abling Putin to use the coun­try’s oil and gas ex­ports as a geopo­lit­i­cal cud­gel. EU coun­tries that he could not in­tim­i­date mil­i­tar­ily, ow­ing to NATO, were wooed with dis­counts – or pun­ished with price hikes.

Hungarian Prime Min­is­ter Vic­tor Or­bán is Putin’s staunch­est friend in Europe (though Greek Prime Min­is­ter Alexis Tsipras seems to want to change that), while Poland’s lead­ers have con­sis­tently warned that Rus­sia could be­come a men­ace to the con­ti­nent again. As a re­sult, whereas Hun­gary pays Gazprom $260 per thou­sand cu­bic me­ters of gas, Poland pays $526 – the high­est price in the EU.

The Poles have paid a steep price, but they were right. The down­ing of Malaysian Air­lines Flight 17 over eastern Ukraine last July seemed to mark the be­gin­ning of the end of Rus­sia’s rep­u­ta­tion, such as it is, as a civilised coun­try. And now there is the hear­ing, cur­rently un­der­way in Lon­don, into the mur­der of Alexander Litve­nenko, a dis­si­dent ex-KGB of­fi­cer. Early in that hear­ing, the bar­ris­ter act­ing for Litve­nenko’s fam­ily claimed that the ev­i­dence in the case led to Putin’s door.

Rus­sia’s econ­omy has al­ready been reel­ing un­der West­ern sanc­tions im­posed in re­sponse to the Krem­lin’s an­nex­a­tion of Crimea and con­tin­ued ag­gres­sion in eastern Ukraine. Out­put is ex­pected to shrink by al­most 4% this year, and the coun­try’s credit rat­ings have been re­duced to “junk” or “near junk” sta­tus.

And now the Euro­pean Com­mis­sion is tak­ing a page from Putin’s play­book. By seek­ing to pun­ish Gazprom for its ma­nip­u­la­tion of en­ergy prices, it is aim­ing a dag­ger at the heart of Putin’s regime. More­over, the EU’s an­titrust ac­tion seems to be part of a co­or­di­nated legal as­sault. Last sum­mer, the Per­ma­nent Court of Ar­bi­tra­tion in The Hague ruled that Rus­sia must pay $50 bln to Yukos’s share­hold­ers – a judg­ment ex­pected to be up­held on ap­peal. In essence, the de­ci­sion sent the same mes­sage as the EU’s anti-trust ac­tion against Gazprom: rules ap­ply to ev­ery­one, and stolen prop­erty must be re­turned.

Of course, Europe

could

not

eas­ily with­stand a 30% cut in nat­u­ral-gas de­liv­er­ies if Putin or­dered Gazprom to stop do­ing busi­ness there. But that is un­likely: Nat­u­ral re­sources com­prise 70% of Rus­sia’s ex­ports, and trans­fers from Gazprom’s rev­enues alone ac­count for at least 5% of the na­tional bud­get. Over the past decade, ris­ing oil and gas prices fu­eled rapid GDP growth, se­cur­ing Putin’s pop­u­lar­ity and giv­ing him the re­sources to re­con­struct Rus­sia’s mil­i­tary might, now on dis­play in Ukraine.

In other words, Gazprom (and the Rus­sian gov­ern­ment) are less ca­pa­ble of with­stand­ing the loss of the Euro­pean mar­ket than vice versa. In­deed, given the hard bar­gains that China has been driv­ing dur­ing Putin’s des­per­ate search for al­ter­na­tive buy­ers, threat­en­ing to cut ex­ports to Europe has proven to be an ex­ceed­ingly un­wise tac­tic.

A mo­ment of truth is slowly ap­proach­ing. Much of the world is work­ing to re­duce its de­pen­dence on volatile or un­savoury en­ergy sup­pli­ers by adopt­ing new tech­nolo­gies such as hy­draulic frac­tur­ing and in­creas­ing pur­chases from places like Australia, Nor­way, Qatar, and the United States, which has eased re­stric­tions on the ex­port of nat­u­ral re­sources.

Whether Putin likes it or not, this trend will force him to be­come accountable for his ac­tions. The EU may be un­able to re­turn Crimea to Ukraine, but its legal ac­tions should put Putin on no­tice that his stron­garm tac­tics will not work for much longer.

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