[ANALYSIS]
The gazpromization of European energy security

Concerns in the EU over energy security, fueled by increasing dependence on Russia, have never been greater. Together with the Russian authorities’ expropriation of oil company Yukos, foreigners have been squeezed out of Russia’s energy extraction sector. Inevitably, many in Europe are questioning the value of the Kremlin’s word.

Rather than turning away, the EU should seek deeper engagement and reciprocity. It should facilitate further incorporation of Gazprom into the EU market through market liberalization and downstream integration. Yet it must also press for Gazprom’s ultimate restructuring and real market entry into Russia for European companies, because Russia’s unwillingness to do so guarantees energy insecurity for Europe.

Indeed, the Putin administration established a track record of bending rules and bullying foreign investors, with the support of prosecutors, tax authorities, regulatory agencies and courts. At the same time, Gazprom has evolved into the dominant market-maker in gas for Europe, and its actions have made a mockery of EU efforts at greater collaboration with Russia.

Gazprom strategy deploys three tactics: co-optation -- cultivating partnerships with certain countries, political leaders and corporations as levers of its interests; preemption -- using upstream power and Russian diplomacy to manipulate downstream conditions and scoop up assets; and disaggregation -- dividing the EU through bilateral deals.

Gazprom’s co-optation of Europe has been achieved mainly through Germany, where its partnerships with energy companies and banks have helped align the authorities with Russian aims. Extensive lobbying, directly and by proxy, is underway to persuade European regulators to allow long-term supply contracts in the EU -- despite their deadening effect on competition.

Preemption by Gazprom has been accomplished through a raft of acquisitions. Gazprom has flooded the market in Turkey, withheld gas in Ukraine, threatened to do so in Belarus and offered preferential market access to willing partners, such as Italy.

In the Caucasus, the Kremlin has prevented Iran from establishing infrastructure to compete as a supplier of gas to Europe. To stop Iran’s gas, Russia effectively bought Armenia’s entire energy sector, while its support for Iran’s nuclear program helps maintain Iranian isolation, keeping away the Western money Iran would need to become a rival gas exporter.

Gazprom’s dominance is reinforced by activities coordinated with the Kremlin to assert its influence in markets like Spain and Italy. In exchange for gas deals with rival suppliers, such as Algeria, Russia has offered vast concessions on arms and preferential debt terms.  

In other cases, the Kremlin acts punitively, as when it cut off oil supplies to Lithuania following the sale of the Mazeikiu Nafta refinery to a Polish company, or to Ukraine after its people voted for the “wrong” party.

The prime example of disaggregation is the Nord Stream pipeline, which appeals to Germany while angering Poland and the Baltic countries. The undersea pipeline will cost three times as much as a new pipeline along existing land routes, undermines the energy security of Germany’s eastern neighbors and threatens the Baltic Sea’s fragile ecosystem. But, by delivering exports directly to Germany, Russia will be able to cut off gas to Ukraine, Poland and the Baltic states without directly affecting West European supplies -- and Russia’s recent behavior indicates that this is a real threat.

But Gazprom is worried about its upstream capabilities, as is evident from the decision to divert gas from its Shtokman field to Europe rather than liquefy it for new North American markets. As long as Gazprom remains opaque, Europe cannot know whether its key supplier is spending enough to develop future reserves. The Kremlin’s political battle to win control of Russia’s energy sector has resulted in a dramatic reduction in the growth rate of domestic oil and gas production.

That is a problem for Europe. Gazprom cannot be a partner to Europe if it does not invest in its own infrastructure, yet plays a leading role in stripping Russian private businesses, invests $14 billion in non-core assets, such as news media, and is run from the Office of the Presidential Administration.

The lights must not go out across Europe. Brussels must demand transparency, symmetry and the rule of law from Moscow, with the goal being a revolutionary integration of European and Russian energy markets.

Simultaneously, through the diversification of supply sources, massive investments in liquefied natural gas (LNG) and a strong push in favor of the Nabucco pipeline and inter-connectors between the Mediterranean rim countries, Europe can move closer toward energy security.

The very downstream access Gazprom wants in Europe is the EU’s trump card. The EU should tell Gazprom that access to Europe’s downstream assets is conditional on the reciprocal openness of Russia’s energy sector. The result would be a welcome place in the European energy market for a Russia that is both trusted and respected by its international partners.