Margrethe and the bear

GAZPROM revelled in its untouchability. It was the main supplier of imported gas to the European Union, benefiting both from close Kremlin patronage (the Russian state is its largest shareholder) and from a web of business and political relationships in countries it sold gas to, notably Germany. Alternatives to Russian gas were scant, as was customers’ willingness to resist Gazprom’s dominance.

Now the EU is taking on the Russian gas beast. The first blow fell on April 22nd when the EU’s competition commissioner, Margrethe Vestager, sent the company a long-expected “statement of objections” (Euro-parlance for a charge-sheet) alleging market abuses. The unpublished document runs to hundreds of pages. They detail the murky world of Russian gas exports, featuring lucrative intermediary companies with unknown beneficial ownership, deals struck by politicians not businessmen, and a hefty dose of geopolitical favouritism.

The EU claims Gazprom is “pursuing an overall strategy to partition central and eastern European gas markets.” It curbs customers’ ability to resell gas, which allows it to charge “unfair prices” in five countries: Bulgaria, Poland and the Baltic states of Estonia, Latvia and Lithuania. Moreover, the EU says, Gazprom abused its dominant market position to try to keep control of the Yamal transit pipeline across Poland, and to bully Bulgaria into supporting South Stream, a now-cancelled Kremlin project to bring gas across the Black Sea into the EU.

Gazprom had put out feelers to Brussels in previous months to see if it could reach a settlement. But those talks broke down amid the freeze in East-West relations over Ukraine. Now Gazprom has 12 weeks to deal with the charges—by rebuttal, concessions or both. If it fails to satisfy the commission, the next stage is enforcement. This could mean fines of €1 billion ($1.1 billion) or more—in theory up to 10% of its turnover—and legally mandated changes to its business model. Such options are still in reserve. “All roads are open,” says Ms Vestager. “We would like Gazprom to answer and we would like to talk.”

Gazprom’s initial response was icy. It said the EU’s complaint was “unfounded”, insisted that it already abides by international law and the domestic legislation of the countries where it does business, and argued that the dispute should be settled at a governmental level. Gazprom was established “beyond the jurisdiction of the EU”, it noted. Revealingly, it said that Russian law gave it “special, socially significant functions…and the status of a strategic government-controlled business entity”. Back in 2012 President Vladimir Putin banned such “strategic” companies from disclosing information to foreign regulators or obeying their orders.

The EU began its move against Gazprom with the launch of the “Third Energy Package” in 2007. That was a deceptively bland title for a series of measures that “unbundled”—in fact, upended—Europe’s energy market. The main effect was to ban the same company from owning both the gas pipelines and the molecules that flow through them. Russia objected harshly to this, seeing it as a politicised, unprovoked and confiscatory attack on Gazprom’s assets and business model.

However, rather like Microsoft, which fell foul of EU competition law for bundling its Internet Explorer browser with its Windows operating system, the company and its political masters did not grasp the EU’s ferocious prosecutorial powers. And the more the EU looked at Russian gas imports, the less it liked what it saw. In 2011, in the biggest antitrust raid in the EU’s history, officials with search warrants seized documents and computers from dozens of offices belonging to Gazprom and its affiliates. In 2012 the EU followed this up by opening a formal investigation.

The statement of objections has been largely ready since 2013, but was subject to a long and timorous delay. Ms Vestager’s predecessor, Joaquín Almunia, repeatedly promised to launch charges, but left office in November with that pledge unfulfilled. Senior people in the commission thought a deal would be better than worsening relations with Russia.

Now Europe is in a more robust frame of mind. Ms Vestager, a steely Dane, insists that her directorate is part of the justice system and acts without fear or favour. The move against Gazprom came only a week after it launched a statement of objections against another corporate giant, Google.

For Gazprom the most petulant option would be to ignore the EU. That brings speedy penalties—and also potential lawsuits from customers who have been overcharged, notes Alan Riley, a British law professor. Another option is to mount legal challenges—including ones claiming abuse of property rights. Vaclav Bartuska, the Czech Republic’s energy envoy, forecasts a climbdown, masked by a showy but empty deal on future exports to China to show the Russian public that the Kremlin is punishing Europe for its impudence.

Russia may also press ahead with Turk Stream, a Black Sea pipeline which would deliver gas just as far as the Turkey-Greece border, to avoid the EU rules that stymied South Stream. The Kremlin is wooing Greece to support the project, with a $5 billion sweetener. More such divide-and-rule tactics in Europe are likely: Russia’s pipelines export political influence even when they are still mere lines on a map.

But turning off the gas taps, to punish the EU, seems unlikely. Russia is losing market share in Europe already, and cannot afford to annoy its customers or endanger its $40 billion export revenues.

A cold climate

Worries about dependence on Russian gas have in any case diminished. Not only is the winter over but Europe is generally in better shape to withstand a Russian tantrum. It has improved storage, and built north-south gas links, so that a cut in shipments across, say, Ukraine, can be made up with other supplies. Lithuania, once wholly dependent on Russian gas, has built a terminal to import liquefied natural gas (LNG), gaining a swift price cut from Gazprom. This year America will start LNG exports, creating yet more supply options.

For Mr Putin, the commission’s move underlines the scale of Russia’s isolation. Trust and patience have ebbed, even in Germany. His friends are fewer in number. By using energy as a weapon, he has prompted defence and counter-attack. The bear is not as feared as it was.