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13 September 2017

Gazprom: Double standards in EU antitrust law

One law for American tech companies and another for one Russian gas company?

Dr. Alan Riley


In June, the European Union fined Google €2.42 billion—the largest antitrust penalty in EU history against an individual company. In 2016, Apple was ordered to repay Ireland €13 billion in back taxes—the largest repayment order in the history of EU state aid law. Meanwhile, the EU’s case against Gazprom—which has been running since 2011—may lead this fall to a slightly inconvenient reordering of the Russian energy conglomerate’s business practices. It is not unreasonable for Google’s Larry Page and Apple’s Tim Cook to feel there is one EU antitrust law for American tech giants and another for Gazprom.


In September 2011, the European Commission undertook the largest unannounced antitrust inspection in its history—raiding Gazprom offices in Berlin and Prague as well as those of several of its corporate allies across the continent. As a result, the commission opened an investigation into Gazprom in September 2012, and filed antitrust charges (in EU jargon, a “statement of objections”) against the company in April 2015.


The commission’s underlying concerns focused on three issues: illegal partitioning of EU markets via destination clauses; denial of third-party access to gas infrastructure, and unlawful pricing flowing from Gazprom’s dominant position in Central and Eastern Europe (CEE). At this point, Gazprom faced significant remedies challenging its business model as well as a heavy fine. However, EU antitrust procedure lets firms under investigation offer legally binding “commitments” to settle these cases. The advantage is that such companies do not have to admit wrongdoing  Nor is there any detailed legal decision customers can deploy in subsequent damage claims. Gazprom decided early in 2017 to make such a “commitment” offer to the commission.


In March 2017 the European Commission announced it had received a commitments offer to settle the antitrust case. EU Competition Commissioner Margrethe Vestager said,


"They (the commitments offered) address our competition concerns and provide a forward looking solution in line with EU rules."


Under the commission’s rules, Gazprom’s offer is subject to a “market test” whereby competitors and customers are invited to comment on the offer. The commission is currently considering the comments it has received and has entered into further discussions with senior Gazprom officials.


Gazprom’s offer raises several technical concerns particularly in respect of the lack of any anti-circumvention mechanism; the limited powers of the monitoring trustee; the time period for price reviews; and the limited period (of only eight years) these conditions will apply to Gazprom.


However, what really raises very serious questions as to the credibility of the commitments is the inclusion of destination clauses in Gazprom’s offer. Under the deal, Gazprom will generously no longer impose destination clauses in the territories of eight CEE and Baltic member states for eight years. A destination clause is a device in a long-term gas supply contract that prohibits the customer from reselling gas to third parties.


The difficulty with this Gazprom offer is that such a clause is a very serious antitrust offense. Solid case law on this point—in cases such as United Brands and TetraPak II—prohibits such destination clauses imposed by dominant companies as illegal market partitioning devices. They are seen as particularly serious because they undermine the functioning of the single market.


Furthermore, Gazprom has a prior track record when it comes to destination clauses. In 2003, in an informal settlement with the commission, Gazprom agreed to remove such devices from long-term supply contracts with Western European energy companies OMV, ENI, E.ON and GDF. It is difficult to see how 14 years later the commission can deal with the same hardcore antitrust issue with Gazprom—in relation to another set of supply contracts with CEE companies—and again give Gazprom a free pass.


This view is reinforced by the commission’s own fining guidelines, which urge additional penalties for repeat antitrust offenders. Gazprom’s defenders could argue that Gazprom was not fined the first time, so it has not committed a “repeat offense.” Clearly, Gazprom was not convicted of an antitrust offense in 2003. However, given the fining guidelines, it is difficult to see how Gazprom can get a second free pass with no penalty in 2017.


In addition, the 2004 Commission Memorandum—which sets out the terms under which the EU’s commitments procedure should operate—specifically says that commitments can only be accepted where “the case is not one where the imposition of a fine would be appropriate.” It is difficult to see how a fine cannot but be appropriate where evidence of a serious antitrust offense exists, and where the company in question previously entered into an informal settlement with the commission to terminate the same type of offense.


In its response to the Gazprom case, the commission faces a real danger to its credibility. If it does not impose significant sanctions against Gazprom, American tech companies and CEE governments will no longer see the commission as a credible, even-handed enforcer of EU antitrust law.


Europe's Edge is an online journal covering crucial topics in the transatlantic policy debate. All opinions are those of the author and do not necessarily represent the position or views of the Center for European Policy Analysis. Dr. Alan Riley is a Senior Fellow at the Institute for Statecraft, Temple Place in London. 

Photo: Thawt Hawthje