Obey the Kremlin or pay up: why the EU’s heating bills will skyrocket this winter.

Editor’s Note

Since the beginning of the year, the price of gas in Europe has risen four times, from $170 in January to $700 in September, breaking historical records on a near daily basis.

This is the price Europeans pay for a weak EU policy towards the Russian state company Gazprom. Over the past years, Gazprom has managed to gain control over more than 50% of gas supplies to Europe. Additionally, Gazprom has created subsidiaries in Europe which now buy gas from other suppliers and resell it to European customers at inflated prices.

There is still a way out, but will the European Commission be ready to finally confront Russian ambitions?

Amid tight supply of both pipeline flows and liquefied natural gas (LNG), the pace of gas price growth has accelerated during summer, writes European Gas Hub. In September, at some trading points, gas prices reached up to $1,000.

The endgame to Kremlin’s blackmail

In resorting to direct blackmail, the Kremlin effectively demonstrates its power over the EU.

“ It seems one Russian state company is now ruling over the entire European Commission, ” summarizes Mykhailo Gonchar, president of the Strategy XXI Centre for Global Studies.

The goal of Kremlin is to rush the Nord Stream 2 certification procedure and see it fully operated by Gazprom alone. Such a move would violate EU norms, in particular the Third Energy Package, which prescribes diversification of gas supplies to prevent vertical integration.

Putin’s spokesman Dmitry Peskov has openly stated Russia’s demands:

“ The sooner the Nord Stream-2 project starts working, the sooner gas prices will return to normal. ”

If the EU caves in to the Kremlin’s demands, this would essentially mean two things:

  • The Kremlin further increases its control over EU gas supplies, cementing its position as monopolist and using economic leverage to receive needed political concessions. EU market regulations will as such cease to exist.
  • Gazprom stops gas supplies through Ukraine and redirects gas to Nord Stream 2. Not only will this deliver a blow to Ukraine’s economy, but it will first and foremost allow the Kremlin to conduct military operations in Ukraine without the risk of damaging pipelines and disrupting gas flows to Europe, which would inevitably cause a reaction from the EU.

Mykhailo Gonchar, chief editor of the Black Sea Security Journal and president of The Strategy XXI Centre for Global Studies. Source: glavcom

The road to this critical state of affairs was long indeed. It took strategic planning on Moscow’s part, which made effective use of Kremlin lobbyists in the EU and silence from the European commission. We spoke with Mykhailo Gonchar, chief editor of the Black Sea Security Journal and president of The Strategy XXI Centre for Global Studies, to find out how exactly we got to this point.

Gazprom worked strategically to monopolize the market and supplies

Russian propaganda presents the crisis as market-driven. In reality however, it was the Kremlin’s political decision to bring imports of gas through Ukraine to a minimum that launched the crisis.

It was artificially triggered by Gazprom by creating a deficit on the European market. The Kremlin was able to conduct such an operation due to its large market share. It was a strategic failing on behalf of the European Commision to allow a 50% share of one Russian state company on the EU market, contrary to EU norms. Gonchar shows specific numbers:

“According to the European Commission, in 2019 and 2020, Russia provided 43.4% and 45.5% of EU gas imports, Norway 22.7% and 20%, Algeria 11.6% and 12%, respectively. In the first quarter of 2021, Russia’s total share in supplies to the EU (pipeline gas and liquefied gas) amounted to 50%, including 45% of pipeline gas and 5% of liquefied Yamal gas. This dominant position spells price manipulation. That is, a Russian racketeer comes in and takes money from European consumers.

Since 1998, all energy packages adopted by the European Union have been conceived with a liberalized gas market in mind for the benefit of the consumer. But now, Russia is essentially crippling the system by supplying much more than the one-third prescribed by European diversification criteria. The question is: why does the European Commission grant Russia so much more than its fair share of the market?”

Russia created three additional pipelines in total: Turkstream, NS-1 and NS-2. The streams allowed Russia to monopolize pipeline delivery of gas to Europe, take a larger share of the market by supplying additional volumes, and also divert gas flows from Ukraine.

Explosion and fire at a factory in Novy Urengoy. Russia, 5 August 2021. Kremlin used this and several other explosions in Russia as one of the reasons why fewer gas was delivered to Ukraine. Source: Russian emergency service

Subsidiaries in Europe as an additional tool for controlling the market — Gazprom’s strategic planning bears fruit

To inflate prices, Gazprom additionally involved its subsidiaries in Europe, as Gonchar explains. Not only did it create the deficit by decreasing physical imports, it also bought gas from other suppliers in Europe to resell it at exorbitant prices. The cynicism of Gazprom is that it continues to report an increase in sales to the EU while real physical imports decrease. Meanwhile, gas is simply being purchased and resold within the EU.:

“It’s like an anecdote – you have the truth, you have statistics, and then you have Gazprom statistics. That is, on the one hand, the figures provided by Gazprom seem to be correct, but they represent only part of the picture, not the whole picture. They should be compared to the statistics of the Federal Customs Service, which records the physical export of gas. This is where the manipulation comes to light. Take for example the year 2020. Gazprom reports that it exported 179.3 billion cubic meters of gas to foreign countries, and the Federal Customs Service of the Russian Federation provides a figure of 167.3 billion cubic meters. The difference of 12 billion cubic meters is gas bought and resold on the European market. In the first eight months of 2021, Gazprom increased its sales by 19.4%. But the question arises: if such an increase really took place, then why was transit through Ukraine reduced, given that the main export route of Russian gas is via Ukraine to Slovakia? In reality, supplies to the EU have decreased, while Gazprom has increased sales due to the fact that it buys gas on the European market and resells it, artificially inflating the price. That is, Gazprom is now engaged in gas speculation.”

Over the past 15 years, Gazprom has been busy creating tools for influencing the EU’s internal market from within. Gonchar gives the specific example of a number of “family” companies registered in Switzerland, usually in the canton of Zug – all of which are subsidiaries of Gazprom involved in the purchase and reselling of gas in Europe.

The chain of subsidiaries is as follows: Gazprom, then Gazprom Export – a 100% subsidiary of Gazprom specializing in gas supply. Gazprom Export establishes Gazprom Germania, where 100% belongs to Gazprom Export, and it in turn creates Gazprom Schweiz. And so on. Formally independent companies that actually work within an algorithm set by Gazprom.

Gazprom subsidiaries actively operate across Europe, formally as independent companies but in reality along a single policy set by Gazprom in Moscow.

“Gazprom considers the gas market as a field of military operations. The European Commission has not been able to prevent a crisis situation because Brussels’ outlook has been limited to market factors. Out of naivety or because of the belief that the ‘hand of the market’ will adjust everything automatically, until recently, the European Commission has turned a blind eye on the fact that individual entities — with Gazprom the largest among them – were using the market for non-market purposes.Their aim is to completely break the rules of the game established by European institutions in the EU’s Third Energy Package and lift all legal restrictions on the operation of both the Nord Stream-1, Turkstream, and the Nord Stream-2.”

The simple but hard solution

The simple solution is to open the tap and let gas flow through Ukraine as it always has, using a developed network of pipelines and huge gas storage facilities located in Ukraine, Ukraine’s Naftogaz CEO Yuriy Vitrenko claims:

“What to do with the gas shortage in Europe? The answer is simple: Gazprom must urgently increase transit through Ukraine. The Kremlin says that European companies have to buy more gas to do this. This is not true, and is easily refutable. To do so , Gazprom must immediately start offering its European counterparts gas with a transmission point at the Russian-Ukrainian border (the Sudzha Gas Measuring Station). Then Gazprom’s European counterparts will be able to book transit through Ukraine themselves. There are definitely no problems on our side, we have everything open and accessible. Moreover, the fact that Gazprom does not do so indicates that it is abusing its dominant position on the European market by artificially restricting supply and blocking third-party access to transit pipelines.”

But having completed NS-2 due to President Biden’s decision to waive sanctions, Russia is already dictating its terms of work to Europe.

“You’d better hide your gas directives,” Gonchar translates Kremlin policy into simple words. “Back in the 1990s, I heard the following words from Gazprom employees: ‘What problems can occur with Gazprom? Do as Gazprom says and everything will be fine.’ This is exactly the principle that persists to this day. Then, it turns out that the EU is not run by the European Commission, the European Parliament, or EU Courts, but by one state-owned company from a non-EU country called Gazprom. It’s all absurd.”

While there exist ample alternatives to Russian gas in Europe, for some reason the EU refuses to acknowledge them. For example, Turkmen gas, with Turkmenistan the world’s fourth largest gas producer. Another alternative is liquefied gas from the USA. There is also Azerbaijani gas – it entered the European market, yet Gazprom did everything to confine it to a dead-end market in the south of Italy. It could enter the EU in much larger volumes given a relevant policy of supply diversification.

Corruption inside the EU

On 17 September, members of the European Parliament called on the European Commission to set up a commission and investigate the possible involvement of Russia’s Gazprom in the sharp surge in gas prices. The news sounds good but comes quite late. For the past 15 years, Gazprom has been working strategically to build its infrastructure of influence in the European market, and the EU commission failed to react.

“As sad as it may sound, not everyone in Europe and the United States still understands that Russia continues to abuse its monopoly on gas supplies to the EU,” says Olena Zerkal, Advisor to CEO of Ukraine’s state company Naftogaz and key Ukrainian diplomat in gas talks. She insists that “it is important to focus on one simple task: to make Nord Stream 2 meet all the requirements of the EU’s third energy package and break up Gazprom’s monopoly on gas supplies.”

Such a simple task may prove challenging if the Kremlin were to have already bought the loyalty of EU top brass.

There is a lack of open data and investigation into Kremlin influence on the EU through personal ties and corrupt officials. But without such leverage, the longtime blindness of the European Commission would be inconceivable.

The first signs of the EU’s inability to confront Russia came as early as 2014, when gas and oil sectors were excluded from the sanction lists. 70% of Russian export earnings come from oil and gas. Therefore this decision severely limited the sanctions’ impact. Had it been implemented, the current crisis would not be possible, while Russian aggression would have been left without financial resources.

M. Warnig and G. Schroeder anticipating Vladimir Putin in front of the entrance to the Yusupov Palace in St. Petersburg, 28 April 2014. Source: ZN.ua

Another telltale sign of Russian corruption within the EU is the common trend among many EU officials to find employment at Gazprom upon finishing their political careers. A classic example is the former German Chancellor Gerhard Schröder, whose transition to work in the Gazprom project Nord Stream raised many eyebrows, as did his magnificent 70th birthday celebration at the Yusupov Palace in St. Petersburg on 28 April 2014, just at the time when Russia was launching its war against Ukraine.

Gonchar offers other lesser known examples of top politicians working for Gazprom group: former Austrian Chancellors Christian Kern and Wolfgang Schüssel, Finnish Parliament Speaker Paavo Lipponen, Austrian Minister of Foreign affairs Karin Kneissl, whose wedding Putin attended in 2018, and French prime-minister François Fillon.

Vladimir Putin dances with Austrian Minister of Foreign Affairs Karin Kneissl, 18 August 2018. Source of image: AFP

The two other indirect pieces of evidence supporting the claim that Russian companies use corruption to influence European decision-makers is that most of the Gazprom group companies, including its largest members Gazprom Germania and Gazprom Schweitz, are registered in Switzerland. The country is not an EU member – and therefore the perfect haven to avoid punishment for violating EU regulations.

Also, according to Swiss law, information on shareholders is not accessible to the public. Therefore, there is no way of validating the statements of European politicians concerning their non-involvement in a particular Russian business registered in Switzerland.

Gazprom Germania is a particularly interesting company worthy of detailed analysis. Along with gas sales, it conducts such activities as “promoting a positive image of Russia and its companies in Europe, including sports, art and culture,” according to its statute.

This is not only a direct indicator of Gazprom’s involvement in Russian propaganda, but also a beautifully simple way of packaging remuneration for promoting said “positive image,” in EU governmental bodies among other places.

“ We and many in Europe have already realized that without American sanctions, this gas invasion from Russia cannot be stopped. We need to raise the question not only in the context of Nord Stream 2 and the gas prices inflated by Gazprom on the EU market. It is necessary to raise the issue of sanctioning Gazprom as a company, ” Gonchar concludes.

The first small victory happened on 23 September, when the US House of Representatives passed amendments to the defense budget that included mandatory sanctions against Nord Stream-2. Moreover, as Ukraine’s Naftogaz CEO Yuriy Vitrenko explains, the House of Representatives has approved changes in legislation that preclude Biden from granting an exemption from sanctions, as he did in February 2021. Ukraine’s position was supported by the House of Representatives and the final decision is down to the Senate.

US House of Representatives may have just killed Nord Stream 2

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