Wednesday, April 22, 2015

EU antitrust vs Gazprom (2): Politics always interferes with the economics of pricing

If found guilty, Gazprom would be fined sums that could run up to 10 billion euros ($10.7 billion). But taking such an expedient decision takes time since Gazprom represents both economic and political concerns.

Russia is in the throes of an “economic war” with the West following its support of separatists fighting the government in Kiev, Ukraine. It has already been sanctioned for that. Gazprom’s revenue is significant to the Russian economy, not counting the politico-economic advantages of having an economic stranglehold on its little neighbors. The EU will not want to risk Putin hardening its stance on Ukraine; if Putin thinks escalating the fighting in Ukraine would be to his advantage, no doubt, he wouldn’t hesitate making such overtures.

Secondly, Gazprom’s gas monopoly is not easy to relinquish. If it made true its threat to stop supplying gas to Europe that move would create economic woes for European businesses. Gazprom will be strengthening that hold much further when it finally completes the South Stream, expectedly this year, and Turkish Stream pipeline projects. Those projects would decrease the cost of providing European gas and increase its margins in a region beset with uncertainty. It would give Gazprom a great jump over any potential rival such that it could not only fight back using prices, but using unilateral supply cuts and expansions.

Ms. Vestager, taking on formidable opponents.
But diversify gas supplies Europe must. Ukraine is even taking steps towards that area. It has cut its dependence on Russian gas from 100% to 75% of gas imports. Last month, the EU endorsed the European Commission’s proposal to create an European energy union. Such an arrangement will an energy secured and integrated Europe, as well as be able to directly influence commercial agreements on gas supplies, including Gazprom contracts. This union, it is believed, will create risks for Gazprom, not only to make its contracts transparent, but to establish a unitary price for all European gas.

Russia will not stand by and see its positions compromised. The market is lucrative. If it loses Europe, it might lose its power to fix prices and have to face other markets where it has to play on unfamiliar terrain. Politics aside, Gazprom is faced with the ever present threat of competition from lower global gas prices from new shale fields in the US and liquefied-gas export projects in Qatar. The EU has encouraged its members to implement diversification programs. Ukraine is already doing so. Ukraine’s gas supply is now coming from diverse sources like Slovakia, Poland and Hungary through reverse flows. Pipeline capacity expansion in Slovakia has made it possible for Ukraine to increase gas import volumes. Reverse flows from Europe is also winning in price competition over Gazprom. In February 2015, it was reported to have exceeded the direct flow from Russia for the first time in terms of monthly volumes.

Last week, Ms. Vestager, filed formal charges against Google, accusing it of abusing its dominance in the market for online search in Europe. Gazprom’s case is her second battle within the space of two weeks. The success of this latest initiative could determine future supply and pricing of European gas. Failing to mention, and also, the future of a regional monopoly like Gazprom. The pawns of history are in favour of Gazprom. What moves does Ms. Vestager have?

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