Gazprom probe reveals limits of applying EU antitrust law

13 March 2017. By Matthew Newman.

The EU hasn't been shy in unleashing its tough antitrust laws against even the most powerful and well connected of companies — including Russia's natural gas giant Gazprom. But when it comes to government-to-government agreements, the EU watchdog says its hands are tied.

That's the message coming from today's two-pronged announcement from Margrethe Vestager. The EU's antitrust chief reminded journalists that while she has been able to demand and obtain concessions from Gazprom on its supply of natural gas, she just doesn't have the power to deal with certain government deals.

Today, Vestager was obliged to admit that Russia's agreement with Poland had led her to drop objections to Gazprom's control over a crucial pipeline crossing the country. "As regards the Yamal pipeline, the situation cannot be changed by antitrust procedure," she conceded.

Yet when it comes to the state-backed Gazprom, there is a fine line between state and non-state actors — and the European Commission knows this well.

Since the EU regulator began its investigation of Gazprom in 2012, company officials have argued that the bloc has no jurisdiction to apply European antitrust law because the gas giant is under the Russian government's control.

Gazprom argued that its conduct in Eastern Europe is governed by agreements between Russia and various Eastern European governments. As a result, Gazprom has been acting under the direct responsibility of Russia. Under EU rules, antitrust rules don't apply to governments.

The commission has steadfastly rejected these arguments — and the regulator's seven-week "market test" asking rivals and customers to respond to Gazprom's commitments to change contracts and free gas flows suggests it is having some success.

But when it comes to gas deals underpinned by solid, state-to-state arrangements, Vestager has had to throw in the towel. And in the case of the Yamal pipeline, that's a galling realization, given that the Danish antitrust chief has real concerns.

Market test

The commission's market test, announced today, follows Gazprom's offer to change contracts to allow customers to sell Russian gas crossing their borders to a third countries. For example, Hungary, Poland and Slovakia may want to sell their Russian gas to a Baltic country or Bulgaria.

The commission has been investigating these contract restrictions, believing they artificially carve up markets along national boundaries.

Gazprom's concessions on this issue suggest the commission has made progress.

In a statement today, the company's deputy chairman, Alexander Medvedev, said Gazprom hopes "the commission — and ultimately the markets — will respond positively to our proposal, which should allow moving the procedure forward and closing the case in the near future."

But the commission has also raised concerns that the Russian gas supplier used its market muscle as a gas supplier to control access to gas infrastructure. And this has proven problematic.

In particular, the regulator probed Gazprom's supply agreements with Poland's state-controlled oil and gas company PGNiG that included an obligation for Gazprom to maintain control over the Yamal pipeline.

Yamal carries gas 4,196 kilometers from the vast gas fields of Western Siberia through Belarus and Poland, to customers in Germany and elsewhere in Europe.

In its official charge sheet — Statement of Objections — the commission found that control over the Yamal pipeline was governed by an agreement between Poland and Russia. This agreement mandated Gazprom to keep control over the pipeline.

And that's where the commission's competition enforcement came unstuck.

Compelled by the state

In the Yamal case, Gazprom was able to argue that it was acting under "state compulsion" and wasn't responsible for its behavior. Under EU rules, antitrust law can't be applied when companies' decisions are dictated by agreements between governments.

State-owned companies often invoke this argument. For example, in the commission's probe of illegal agreements between airlines to fix fees for transporting cargo, some state-owned companies argued in 2008 that antitrust rules couldn't apply because national laws required them to arrange prices with competitors.

In the Gazprom case, EU officials argue that the Polish-Russian agreement applies to only a "narrow" aspect of its case. The commission has successfully asserted its jurisdiction over other aspects of Gazprom's behavior and obliged it to remove control over its infrastructure, they insist.

Yet today's remarks by Vestager are an admission that, on Yamal, the commission was obliged to concede defeat.

This and other attempts of the "state compulsion" argument are prompting the EU watchdog to go back to the drawing board with legislation to avoid similar stumbling blocks in the future.

Under a proposed law, all intergovernmental agreements will be subject to prior scrutiny by the commission. The draft bill was passed by European Parliament earlier this month and now must be approved by EU governments.

Vestager said today that the proposed legislation "shows that effective competition in Central and Eastern European gas markets of course cannot be achieved by the enforcement of EU competition rules alone."

It was a frank acknowledgement on the part of the commission that EU antitrust law can only go so far. In its current form, the legislation can tackle contractual barriers and complaints that Gazprom charged excessive prices. But with government agreements, some hurdles still trip up antitrust enforcers.

That's why the commission needs to scrutinize intergovernmental deals, so companies can't argue that "the state made me do it" and get away with abusing their market dominance.

	Eliot Gao