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The Wall Street Journal: More Gas Blackmail

EXTRACT: European customers who want to know how they might be treated by a vertically integrated Gazprom might ask Royal Dutch Shell CEO Jeroen van der Veer; late last month he was all but forced to cede control of his Sakhalin-2 oil project to the Russian gas giant. Let the advocates of Kremlin capitalism answer this: Since when does “market” economics entail the forced sale of one firm’s assets to another, particularly when those assets weren’t for sale in the first place?

THE ARTICLE

January 3, 2007; Page A12

The new year did not begin, as many had feared, with Russia’s Gazprom again turning off taps that lead eventually to natural gas customers in Western Europe. At the last moment, Belarus acquiesced to the Kremlin’s demands to double gas prices and cede control over the Belarusan gas-transit network, thereby avoiding the shut-off that hit Ukraine on January 1, 2006.

The bullying of Minsk this year also didn’t elicit a hue and cry in the West as did last year’s gas war with Kiev. Part of this is cynical self-interest: Europe gets only a fifth of its gas through Belarus compared with four-fifths through Ukraine. But this latest rendition of Moscow’s spigot shakedown carries a blueprint for its strategy toward the rest of the Continent, and Europe’s leaders ignore it at their peril.

This dispute was also less overtly political. Whereas the Kremlin was blatantly punishing the West-leaning democrats of Ukraine’s “Orange Revolution,” Belarus appeared to be a strictly economic case because its president, Alexander Lukashenko, is a Russian puppet. That’s not entirely true, however.

Russia made Mr. Lukashenko’s re-election possible last year, and Gazprom came to collect for that favor in the form of a new contract. His stubbornness amounted to political insubordination. The West might not have wanted to stick up for “Europe’s last dictator,” but leaving him out to dry only entrenches the Russians in Belarus. They will be far more difficult to expel from Minsk than Mr. Lukashenko ever could be.

As for the future, the key to the Belarus compromise was the 50% stake that Gazprom won in Beltransgaz, Belarus’s gas-pipeline monopoly. Gazprom has been transparent about its aim to own the pipes that connect its gas fields to its customers. This is one of the main reasons Moscow refuses to ratify the International Energy Charter, which requires free access to pipeline networks, and why it is lobbying hard against European Union plans to liberalize its gas market. As part of that reform, the EU would likely prohibit gas suppliers from owning pipelines, and vice versa.

Gazprom is thus scurrying to build and buy enough pipelines inside the EU to strengthen its leverage. It already owns 50% minus one share in Wingas, a joint venture with BASF’s Wintershall AG unit that, according to Gazprom, owns 2,000 kilometers of pipe in Germany as well as Europe’s largest underground gas storage site. Moscow must figure that, if it can consolidate enough, the Europeans won’t have the backbone to force Gazprom out. Given Brussels’ timid reaction to Paris’s shotgun marriage of Gaz de France and Suez, the Kremlin might be right.

This type of monopoly power is worrying enough in companies and countries where the state has a large influence in the energy sector: Think of France’s GdF and EdF. It’s even worse when the state is the company, as in Russia today, and explicitly bars certain foreign investments while changing investment terms on a whim. European customers who want to know how they might be treated by a vertically integrated Gazprom might ask Royal Dutch Shell CEO Jeroen van der Veer; late last month he was all but forced to cede control of his Sakhalin-2 oil project to the Russian gas giant.

Gazprom’s monopoly status also undercuts claims by the company and Kremlin — pardon the redundancy — that the situation in Belarus was merely a matter of introducing “market pricing” to the former Soviet republic. The same line was trotted out in the disputes with Ukraine, Azerbaijan, Moldova and Georgia. Just so we’re clear, there is no proper market price for this gas. Gazprom has no competitors that could offer to fill the pipelines to Belarus with Russian gas at a lower price. But never mind. Let the advocates of Kremlin capitalism answer this: Since when does “market” economics entail the forced sale of one firm’s assets to another, particularly when those assets weren’t for sale in the first place?

It’s hard to remember now, but before its Ukrainian blackmail last year Gazprom had a decent reputation for reliability. So much for that. All the more reason for Brussels to expedite its plans for gas-market liberalization. We’ll get an idea of how European policy makers size up the threat from Russia on Thursday, when the EU’s Gas Coordination Group meets, and next week when the European Commission unveils its energy sector review. No news on the liberalization front will be bad news.

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

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