Vestager chooses pragmatic Gazprom solution, but risks abound

27th October 2016. By Lewis Crofts & Matthew Newman

The political fallout after Russian troops entered Crimea in 2014 undermined the EU’s first attempt to settle a probe into Gazprom’s market power in Eastern Europe. Political relations with Moscow have hardly improved since then, but EU antitrust chief Margrethe Vestager has judged the moment ripe for a resolution.

If the two sides reach an agreement, it will represent a significant victory for Vestager, but a settlement would carry risks. It may prove toxic for the EU’s image and weak when it comes to the bloc’s biggest commercial demand — to get Gazprom to change its indexation mechanism so that it doesn’t lead to abusive prices.

Vestager met yesterday with Alexander Medvedev, Gazprom’s deputy chairman, and Russia’s Deputy Energy Minister Anatoly Yanovsky. She agreed in principle to settle the five-year-old probe, with Gazprom committing to submit a proposal to address the EU’s competition concerns “shortly”.

Gazprom was significantly more upbeat about the meeting’s outcome than Vestager, judging from statements from the two sides. Despite the variable rhetoric, the case is heading toward a solution without penalties on the state-controlled gas giant.

And therein lies the first problem, for Vestager has meted out harsher treatment to companies far closer to the hearts of European consumers.

Google has received four formal charge sheets — a record number — for its online conduct. Ireland was ordered to claw back 13 billion euros ($14.2 billion) from Apple — a record sum for a state-aid case. European truckmakers have been ordered to pay cartel fines totaling 2.93 billion euros — a record amount for price fixing.

But Gazprom — often maligned in Brussels circles and East European capitals — will get away with a promise to behave.

Hot and cold

This discrepancy goes some way to explaining the hot-and-cold statement issued by Vestager’s office yesterday. The antitrust chief insisted that commitments “would have to ensure the free flow of gas in Central and Eastern Europe at competitive prices.”

While Gazprom saw only good coming from the meeting, Vestager was full of finger-wagging and warnings that the case might yet go south.

That may be true. Gazprom’s commitments will doubtless draw anger from some Central European states and their gas companies. The Poles have been the first to scream, with Polish oil and gas provider PGNiG saying it was prepared to sue the European Commission if it fails to impose fines.

But Vestager has made the strategic choice to keep the settlement route open. Arguably, this was her only choice: Imposing fines on the Russian company — which remains an “option” — would be an aggressive step, one sure to trigger a reaction from Moscow.

In return, Vestager can chalk up a victory of her own.

Gazprom and Russian leaders have consistently made two arguments: EU antitrust law doesn’t apply to a Russian company, they have said, and the probe is a political tool. By settling the case, Russia will be agreeing that its gas giant actually does fall within the ambit of EU antitrust law. That is no mean concession.

Vestager can also argue — rightly — that politics haven’t played a role in the EU’s ability to advance a case. After all, the political flashpoints of today (Russian activity in Syria) are hardly less explosive than those of two years ago (Crimean occupation).

Delivering the case in this form — barring the PR risks — is a success in itself. For both sides.

The small print

But the technicalities of the agreement itself shouldn’t be forgotten.

It was always reasonable to expect Gazprom to make concessions on its long-term contracts and pipeline investments. Both of those practices were obviously illegal and easy to address.

But the third strand of the EU’s complaint — Gazprom’s insistence on maintaining price indexation — has been exceedingly tricky, and here it may seem that the EU’s case has fallen flat. Gazprom has resisted moving away from gas prices that are indexed based on the oil price.

Slumping oil prices and Gazprom’s policy of moving more volume onto spot market-hubs have gone some way to taking the sting out of this part of the investigation.

A commitment decision is likely to include two main concessions. It would probably remove clauses restricting the resale of gas, and it would give customers the right to review the “pricing mechanism” in their long-term contracts. The idea is that customers would be able to push contracts toward prices based on spot gas markets.

Vestager would thus walk away with two trophies — an acceptance that EU law applies and an end to certain contractual clauses. But she may not get the main prize, which would see Gazprom change the way it indexes gas prices to introduce more flexibility for customers.

These gains will come at a cost. The PR fallout is potentially toxic. East Europeans wanted Gazprom to be punished. And the pricing mechanism may not represent a major change for customers.

But those negatives are balanced by a pragmatic solution to a long-running case that would never be easy to resolve.

	Eliot Gao