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As Its Profits Tank, the EU Is Going After Russia’s Money Making Energy Behemoth

The European Commission launched an anti-trust case that claimed Gazprom, Russia’s state-controlled energy giant, has been putting the squeeze on Eastern European countries.
April 29, 2015, 11:10pm
Imagen vía Reuters

The European Union is trying to leverage one of Russia's most potent tools on the international stage — energy — against Moscow.

Last week, the European Commission launched an anti-trust case that claimed Gazprom, Russia's state-controlled energy giant, has been forcing Eastern European countries to pay as much as 40 percent more for natural gas than their western counterparts.

"Gas is an essential commodity in our daily life: it heats our homes, we use it for cooking and to produce electricity," said EU Competition Commissioner Margrethe Vestager in an announcement. "Maintaining fair competition in European gas markets is therefore of utmost importance."

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The EU is arguing that Gazprom bullied Bulgaria, Poland, and other small countries into agreeing not to sell natural gas to each other, accepting unduly high prices and making investments in pipelines and other infrastructure.

The alleged measures are classic Russian moves, said David Koranyi, director of the Eurasian Energy Futures Initiative at the Atlantic Council.

"It was a specific tactic in the Warsaw Pact days not to let these countries interact in the region and be dependent on the Soviet Union," Koranyi told VICE News. "It's the same policy today."

Related: Silencing Dissent in Russia: Putin's Propaganda Machine (Full Length)

Gazprom has until late July to formally answers the charges, but the company released a statement saying they were "unsubstantiated." EU commissioners have no deadline to reach a judgment. If they rule against the company, they could force Gazprom to change its contracts and impose a fine equivalent to 10 percent of the company's annual revenues, or more than $11 billion.

"They are going to have to restructure quite a bit," Jan Kalicki, an energy expert at the Wilson Center, told VICE News.

The EU's move turned Europe's usual energy relationship with Russia on its head.

Gazprom supplies Europe with around a third of its natural gas through pipelines in Eastern Europe. In 2006 and 2009, when Russia shut down gas lines to Ukraine, they also cut off supplies to other parts of Europe, reminding the continent of its dependence on Moscow to keep warm in the winter months.

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But Europe is also Gazprom's biggest customer, representing a hefty chunk of its sales, which comprise around 8 percent of Russia's gross domestic product.

Gazprom might not have the power to resist the EU. And Russia's energy domination isn't so dominant anymore.

In the past few years, Europe has been investing in renewable energy and building new pipelines and shipping terminals to receive natural gas from other suppliers, making it less dependent on Russian energy. Meanwhile, the advent of hydraulic fracking in the US has driven down energy prices that feed Russia's economy. Western sanctions against Russia for its aggression in Ukraine have hurt Russia's energy industry, too.

Those and other trends led Gazprom to report on Wednesday that its net profits fell 86 percent last year.

Koranyi said Gazprom would be wise to settle with the EU in order to keep its natural gas supplies flowing out and revenues flowing in. But the fight between the two sides could become nasty, he said, leaving Europe with little choice but to submit to Russia's will to receive natural gas, or spend vast sums of money to switch to other energy sources, including dirty coal.

Speaking to the German newspaper Süddeutsche Zeitung recently, Kremlin spokesman Dmitry Peskov said Russian President Vladimir Putin will be watching the case closely.

"We hope that a compromise will be found," said Peskov. "We are looking forward to an absolutely impartial attitude towards the Gazprom company. Of course, Gazprom will defend its interests and the state, as a major shareholder in the company, will also defend the interests of Gazprom."

Follow John Dyer on Twitter: @johnjdyerjr