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Gazprom as Policy Instrument

Gazprom as Policy Instrument

A consistent challenge in international relations is the calculus of national power. Publications such as Military Balance have long made calculations based primarily on military considerations such as the numbers of tracked vehicles, infantry units, aircraft, naval vessels and other tangible assets. 

The tangible and the intangible “softness” of… “power” 

One of the most obvious categorizations is the distinction between “hard” power and “soft” power. Among the world’s “realist” leaders, there has been a preference for hard power since it was associated more with an assertive, even aggressive national policy. Moreover, it could be calculated in clearly measurable terms as were tallied in studies of the global military balance.

Given the increasing lethality of hard power in the nuclear age, there is a growing respect for the less destructive soft power, an element that was suggested in the writings of President Woodrow Wilson. While the appeal of economic power, diplomacy, and the so-called “moral force” of public opinion paled during the debate over innovations such as the League of Nations, since 1945 there has been an implicit conclusion among international diplomats that greater emphasis should be placed on various forms of soft power.

When considering soft power, it is recognized that there are many tangible elements as well as intangible ones. The utilization of resources is especially prominent among the tangible elements of power and an examination of Russia’s utilization of energy resources through Gazprom, which is the world’s largest producer of oil, highlights the significance of this aspect of power. Gazprom is owned by the Russian government and is responsible for extraction of energy resources as well as the transport and sale of natural gas. Gazprom shares are marketed in Moscow, Germany, and the United Kingdom.

Gazprom was created as a public joint stock company in 1989 and is the main instrument for advancing Russian interests in this arena. As of 2006, it enjoyed the exclusive right to export natural gas. Gazprom maintains the world’s largest gas transmission system and has been the key to a resurgence of Russia’s economy and political influence. Its mission is to provide natural gas for the Russian domestic market as well as for over thirty nations, some of which were part of the USSR. While there is speculation that Saudi Arabia tried to convince Russia to join OPEC, Putin declined to do so. It has, however, forged an increasingly close relationship with OPEC, apparently seeing that relationship as helpful in Russia’s efforts to take control of the European energy market. 

Petroleum-politically-powered. The case of Russia vs. EU 

By 2019, EU members such as Poland were fearful not only that this development posed a threat to their country’s very survival but that an alliance between Russia and Germany would expand the role of petroleum as an instrument of Russian political power.

In 2016, Russia scored a victory when the European Union decided to allow Gazprom to enjoy the benefits of full access to the Opal pipeline. This decision undermined the security of Poland’s energy supplies. Accordingly, Poland filed a case with the European Court of Justice (ECJ). In September 2019, in response to Poland’s demand that Gazprom’s access to the Opal pipeline should be restricted, the European Court of Justice concluded that the 2016 European Commission decision ignored the principle of “energy solidarity” by failing to examine the negative impact of this decision on Poland. These arrangements will be maintained by the ability of the Competition Commission to impose severe fines if Gazprom violates the rules.

This dispute became a major issue in 2015 when the European Commission filed charges against Gazprom. The specific complaint was that Gazprom had violated antitrust rules and, as a result, Poland and Bulgaria, as well as three other Central and Eastern European nations, were forced to pay higher gas prices. In 2017, Gazprom made a provisional decision to modify its practices and in 2018 this agreement was formalized. By accepting antitrust practices that ensure the free flow of gas in the region, millions of consumers would enjoy lower prices, according to former European competition commissioner Margrethe Vestager. In particular, Gazprom customers could now resell gas to other countries while the Baltic States and other vulnerable states that are isolated from major European markets are assured they will enjoy unrestricted flow of fuel. (“E.U. Settles With Russia’s Gazprom Over Antitrust Charges”

Pipelines unite nations, but pipelines divide them as well 

When the Opal pipeline was opened in 2011, Gazprom’s use of the pipeline was restricted to no more than 50% of the pipeline’s capacity. Until the reversal of the 2016 European Union decision which did away with the original limits, Gazprom had greater access to the German market via the Opal gas pipeline. The net effect of the EU’s 2016 ruling was a doubling of the Nord Stream’s capacity, something which was very advantageous to Germany. This would seriously undermine both Ukraine and Poland as their gas routes were bypassed.

Gazprom does not operate alone in this arena but relies on important contractors who share in the work and the profits. In 2017, Gazprom made a deal for the purchase of Stroygazmontazh which is its largest subcontractor. Stroygazmontazh is controlled by Arkady Rotenberg who used to be Vladimir Putin’s judo training partner.

This issue highlights the competing interests of Poland and Ukraine on the one hand with Russia and Germany on the other. Tremendous economic gains versus losses are at stake but it is also reminiscent of the German-Soviet pact of 1939 with implications for the very existence of Poland. Of greater significance than economic interests or bitter historical memories is the fundamental principle of energy solidarity. The future relevance of the European Union rests on the maintenance of such concepts and the ability of institutions such as the ECJ to enforce those concepts.

Gazprom’s maneuvers and its alliance building with the Germans greatly enhanced the marketability of Gazprom products. It also underscored its utility as an instrument of Russian power. There were two indications of this in 2019. The first was the Moscow Times report that Gazprom was anticipating a secondary public offering (SPO) of it more of its treasury shares. The foreign investors who would participate in the SPO would enjoy the prospect of dividend hikes as well as the near certainly that they could re-sell and enjoy a generous profit. The second indication of the value of Gazprom as an instrument of Russian power was the dramatic 5.6 times rise in the value of its shares. This represented the highest level for Gazprom stock in ten years. 

Player in “energy markets” and actor in “energy politics” 

While the ECJ decision is a setback for Gazprom, the Russian global energy company is an adept player in the international energy market. The 2020 oil market will have a surplus in spite of the recently announced OPEC+ cuts, so Gazprom is facing a difficult market. It is in Russian interests to appear to be cooperating with OPEC guidance since Russia has emerged as an OPEC ally. Yet, in order to deal with their immediate requirements, Russia does not actually want to cut production. It is a tribute to Russian ingenuity that they have been successful in bringing about the elimination of gas condensates as a determinant of production quotas. With this, Russia can maintain the appearance of being cooperative with other oil producing states while concentrating on the development of new oil fields that it has recently acquired.

This situation supports another of Putin’s important strategic objectives. As part of a restoration of Moscow’s global influence, Russia has set out to counter American influence in the Middle East. As a major oil producer, Russia is able to help an OPEC that has faced a series of difficult situations. While this is now little more than a temporary alliance, it may well become more. By supporting the Saudi effort to reduce global oil production, Russia can enhance its authority in a region once dominated almost exclusively by the United States. In so doing, it will demonstrate the validity of arguments in favor of soft power in international relations today.

 

Photo credit: pxhere.com

 

 
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OEconomica No. 1, 2016