Gazprom’s 2015 Turning Point

Elise Reifschneider

http://commons.wikimedia.org/wiki/File:Major_russian_gas_pipelines_to_europe.png

Source: http://commons.wikimedia.org/wiki/File:Major_russian_gas_pipelines_to_europe.png (Author: Samuel Bailey)

Gazprom, the Russian state oil and natural gas company, has once again come under intense scrutiny from the West. This time, the European Union is bringing antitrust charges against the oil and gas powerhouse.  The political relationship between Russia and the EU is already volatile at best; therefore, recent allegations against Gazprom could be a critical turning point in relations between the EU and Russia.  In order to understand the current concerns and the impact of the pending charges, we need to take a critical look at Gazprom.

Formed in 1989, Gazprom was a government agency that was privatized after the collapse of the Soviet Union.  During the 1990s and with the ushering in of the Putin era, changes in its organizational structure and financial operations have made it largely a tool of the Russian government.  It is important to not underestimate the power and influence of Gazprom.  Not only is it one of the largest oil and gas companies in the world, its shares are majority owned by the Kremlin.  Oh, and did I mention it has its own security forces and media organization?  They aren’t messing around.

The Kremlin has wielded Gazprom wisely, particularly as a mechanism to support in-country social initiatives and influence foreign policy. Within Russia, Gazprom has a social and cultural capacity – the company supports athletic teams, the arts, as well as youth activities. However, its role in the international community is what is causing tensions.

Looking at the role of Gazprom in Russian foreign policy, Europe is the prime counterweight. With its vast reserves, Russia has long supplied Europe with natural gas – particularly critical for Eastern European countries that need that gas for heat during long and harsh winters. Recently, Russia has flexed its muscle and reminded Europe of its energy-based power.  In January 2006, Russia shut off gas supplies to Ukraine for four days after contract disagreements; furthermore, it happened again in 2009.  With these incidents in recent memory, European powers are increasingly nervous about Russian gas supplies.

Gazprom influence and control goes beyond just Ukraine and Eastern Europe though.  An estimated one-third of the natural gas Europe consumes comes from Russia, leaving it dependent on the Kremlin and with little leverage on policy issues when there is a looming threat of gas supplies being shut off.  For Europe, it is not as easy as shifting to a new supplier – the infrastructure for such trade does not exist.  As of now, Europe is dependent on Russian gas distribution, much of which runs through Ukraine.

As the conflict between Ukraine and Russia heated up in late 2013 and erupted in 2014, gas infrastructure in Ukraine became an increasing concern. It is estimated that up to 40% of Europe’s gas supplies bought from Russia travel through Ukraine – a problem when the eastern portion of the country is caught in a major conflict between Ukrainian forces and pro-Russia rebels. Listen below to a piece by NPR to learn more about how pipelines have played a role in the Ukraine-Russia conflict.

 

So, what’s going on today that brings Gazprom into the news?  Ukraine is suing Gazprom in an appeal for $16 billion dollars – but that’s the least of their worries.  In a bold move, the EU opened an antitrust case against Gazprom on April 2nd, 2015, accusing the company of overcharging many of its European clients.  Gazprom has 12 weeks to reply to EU charges.  If they wait the full time, that puts the discussion at about August – just a couple of months until winter weather will hit Eastern Europe.

Keep in mind, Russia could struggle to even afford this legal issue. In 2014, Gazprom’s profits fell an astounding 86%; meanwhile, the ruble plummeted.  Although Russia’s economic woes appear to be slightly improving, the impact of Middle East price wars on the price of oil is still hurting Russia’s bottom line.  Additionally, Gazprom has been hit by economic sanctions that were implemented by the West to punish Russia for its annexation of Crimea and support of pro-Russia rebels in the Donbass.  Both the United States and the EU have directed sanctions Gazprom in an effort to express disapproval of Russian activities.

Despite recent issues, Gazprom is still a force to be reckoned with, but that time may be coming to an end sooner than expected.  Gazprom’s influence stretches not only across all 11 Russian time zones, but to the ends of the globe – something the Kremlin is well aware of and surely intends to use in order to effectively accomplish policy goals.  Undoubtedly, 2015 will be an incredibly important year for Gazprom.  This year, the company will be dealing with EU pressure regarding anti-trust concerns, Western economic sanctions, lagging oil prices, and infrastructure challenges amidst the conflict in Ukraine.  The EU has also been seeking other sources from which they could import natural gas, while the US has been looking to beef up its supplies to Europe as well – both of which could come together to have a major impact on long-term Gazprom profits in regards to its European clientele. It is in this context that Gazprom must carve out its role.  It appears that after more than a decade of intimidation and influence, Gazprom may have finally gone too far.

 

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