The EU and Russia may once again be at a political impasse when it comes to Gazprom and the future of European energy. However, unlike the situation in Ukraine, the Europeans might have the upper hand.
Russian Energy Minister Alexander Novak, center, speaks to the media as he arrives at EU headquarters in Brussels on Monday, March 2, 2015. Photo: AP
On April 22, the European Union (EU) filed antitrust charges against Russian gas giant Gazprom, the world’s largest producer, for abuse of market power. Amongst the allegations are that Gazprom willingly manipulated and put undue pressure on countries to use Gazprom’s infrastructure exclusively, and, most damningly, “pursued an overall strategy to partition central and eastern European gas markets.”
Given three months to respond to the unpublished document containing the charges (said to be hundreds of pages long), Gazprom faces a fine of up to 10.7 billion euros from the EU if it does not adequately address the allegations.
The investigation against Gazprom has been underway for years, with a high-profile raid of 20 Gazprom offices in 2011 setting off the probe into instances where the Russian firm hampered or delayed competition. But while the EU has been careful to couch the results of its investigation last week almost entirely in terms of market share, there is undeniably a sense that this announcement is “war by other means,” perhaps in retaliation for Russia’s hybrid war in Ukraine.
While Russia can command a military conflict using new and different tactics, perhaps the EU can do the same utilizing economic might. And even though the investigation began well before relations between the EU and Russia turned frosty, the timing of the announcement appears to amount to another round of sanctions in all but name.
The immediate aftermath
The key to what happens next is, of course, how Gazprom (and, by extension, the Kremlin) reacts to these allegations. While the EU gave Gazprom 12 weeks to respond to these charges, it appears that the strategy to combat the EU’s investigation is coalescing already. According to the New York Times, Gazprom immediately shot back that the EU antitrust legislation does not apply, as Gazprom is effectively an agent of the Russian state.
Moreover, it is likely the Gazprom will hide behind Russian legislation that actually forbids it from sharing key information with foreigners. In a Russia where internet memes making fun of the president are banned and where the NGO running a memorial to victims of the Gulag has been branded a foreign agent, it is highly unlikely that this case will be where Russia decides to pivot to free and open information.
Such boldfaced insouciance by Gazprom amounted to an admission of what is known globally, and has been known for years: the company is nothing more than a political tool for the gain of the Kremlin, with its fortunes wedded to that of Russia’s government. Indeed, Gazprom has been a part of Russian President Vladimir Putin’s drive to state capitalism, whereby large conglomerates are meant to serve the state and recoup losses domestically by overcharging abroad. In this sense, the EU is also merely charging Gazprom with carrying out its desired (by the Kremlin) mission. However, it was still jarring in the world of international diplomacy for it to be stated so forthrightly.
Given the primacy of Gazprom to Russia’s resource-dependent economy, as well as the emerging arguments against the EU from Russia, it remains to be seen if the EU’s threatened sanctions are more bluster than effective policy. Of course, fining Gazprom 10 percent of its annual sales would represent a major blow to the company, but this presupposes that the money can even be collected. Again, it is unlikely that Russia’s slide into political repression will suddenly be reversed by a bureaucratic decision by the European Union.
The economics of anti-antitrust
Of course, beyond the geopolitical maneuvers that presumably are behind the antitrust case, there is an important matter of the antitrust case itself and whether it makes sense from the EU side. Many economists, especially those of a more free-market leaning, find all anti-trust investigations to be more detrimental to markets than the supposed “market failure” they are meant to redress. In particular, the public choice approach to regulation argues that antitrust regulators are just as susceptible to political winds and petty self-interest as any other individual, and thus antitrust investigations can be motivated by other factors than the commonweal.
The EU has been notorious for utilizing its antitrust weapon against some of the world’s most prolific companies. In the past decade, the EU has gone after supposed monopolists Microsoft (perhaps not noticing that one can buy a Mac or install Chrome or Firefox instead of Explorer), and also just announced a similar investigation against Google (although where they are going to find the evidence to support such allegations will be difficult without Google itself). In both cases, it appears that a wildly inaccurate reading of demand in Europe has resulted in sanctions against supply; also in both cases, competitors sought redress through the courts and the political process for victories they could not win in the marketplace.
From an Austrian economics perspective as well, the concept of “antitrust” is itself spurious, as there is no way to tell if a firm is “too powerful.” Under this conception, market forces tend to quickly erode monopoly power unless there is a governmental mechanism protecting the monopoly. But ironically, the case of Gazprom here proves this idea, as the giant firm is undoubtedly Russia’s a politically protected and guided monopoly.
Perhaps in this case, the benefits of finally challenging a giant state monopoly would overwhelm the negatives of having another government involved. Most probably, Austrians would respond that the ends do not justify the means, and that one governmental investigation of another government’s monopoly will not get the market back towards freedom. But in this situation, the EU’s moves may lead to a second-best solution. Again, this is highly contingent on Russia acquiescing to the judgment.
Looking to the future
In the end, it is hard to understand what the end game of this move will be, either for the EU or Russia. From the Russian perspective, Gazprom is a bloated and inefficient bureaucracy that likely would be better off in the hands of (non-politically connected) investors and exist as a much smaller entity. But this is unlikely to happen in the near future, given the political connections and importance of Gazprom to the state.
For the EU, cheaper energy prices - or at least stability in energy pricing - would be welcome, but it is hard to see how they can force Gazprom’s hand without real competition, i.e. another source of abundant and accessible energy. And given the lack of will and unity in actually confronting the political sources of disagreement between the EU and Russia, such a backhanded attempt at sanctions may be the strongest instrument it has right now.
One thing is for certain, and that is that energy unsold is energy wasted; this means that Gazprom retaliating against its European customers (say, by refusing to conclude new contracts) would only harm Gazprom’s interests as well. Thus, Russia is in a bind regarding its next steps. Gazprom can behave like a normal company and accept competition in its main markets, or it can fight the might of government with its own lawyers and argue that it is not a monopoly power.
Most likely, the Russian gas giant will go a third route, and have the Kremlin push an agenda of even more politically-powered antagonism on behalf of the gas giant. Thus, as in Ukraine, the EU and Russia may once again be at a political impasse. But unlike Ukraine, the Europeans might have the upper hand.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.