Turf Wars, Gas Market Transformations and Sanctions - Implications for Liberalization Trends in the Russian Gas Sector

Liberalization of the Russia gas sector, which has remained the domain of state-controlled Gazprom that has enjoyed export and transit monopoly since the collapse of the USSR, has been discussed for at least a couple of years.  Debates have included inter alia the questions whether Gazprom’s pipeline export monopoly will be abolished following liberalization of LNG export earlier this year[1] and whether the third party access to domestic infrastructure will be properly regulated and implemented in practice as a result of widely publicized tensions between Rosneft and Gazprom.

These institutional changes in the Russian gas sector are argued to be driven by two major factors—by adaptation to market and regulatory externalities and by struggles between domestic interest groups of the oil and gas sectors. In addition, adaptation to externalities requires finding a balance between enhancing a more competitive gas market domestically and compromising to European partners (price discounts, sporadic switches to spot pricing and TOP renegotiations) externally, preserving at the same time the strategy of grand projects—such as the gas contract with China and the South Stream. Adaptation to changes in gas markets since 2008, such as the shale gas revolution, LNG trade, and economic recession in Europe with lowering demand of gas, has indeed reinforced certain shifts in institutional dynamics of the Russian gas sector. Despite initially Russia was rather reluctant to accept serious implications of these changes for the gas trade and still seems to adhere to an escapist position—at least in official statements by the Ministry of Energy and Gazprom—increasing price arbitrage has forced Russia to renegotiate long-term contracts and to engage in fierce debates with the EU regulatory institutions about an appropriate gas pricing mechanism. Domestically, adaptation to externalities has triggered previously silenced debates about the prospects of US shale gas and the need to boost LNG development, increase competitiveness, and to develop own unconventional resources.

Struggles between domestic groups are the second factor that has been facilitating liberalization of the gas sector in Russia. Gazprom’s positions as a monopolist have witnessed to be challenged, primarily by increasing involvement of oil players in the gas sector and a growing role of independent gas producers. Thus, launching a number of disputes, Rosneft has been challenging Gazprom’s transit and export monopoly, bringing several claims to court.[2] These suits, partially resolved, have coincided with a rather unexpected ‘hands off’ approach by the Russian Government which used to be a direct arbiter between the domestic oil and gas groups. These trends are yet to be assessed given the shifting priorities and preferences in the Government and increasing role of the Rosneft group that has increasingly being managed to lobby its interests.

The prospects and consequences of these ‘liberalization’ trends, which combine adaptation to market and regulatory externalities and domestic inter-group struggles, are rather difficult to predict. While adaptation to market and regulatory changes seems to be inevitable, affected by internal struggles between oil and gas groups, the outcome of these liberalization efforts is unlikely to result in the best available strategy. Given a high level of informality among competing domestic elite groups, rhetorical use of liberalization discourse by them, and the weak institutional structure, an effective, a well-functioning regulatory framework of the liberalized gas market is unlikely to emerge out of ongoing disputes between Rosneft and Gazprom. Contrary, it is much more likely that these disputes will lead to redistribution of resources between interest groups and prioritization of commercially questionable projects.

In addition, destabilization of the Russian gas sector may be triggered by potential flaws between external governmental strategies and domestic developments. Thus, for example, the geopolitical project—the gas contract with CNPC, which offers minimum profits and incur high costs—is becoming a burden for Gazprom, even in case it is co-financed by the State. The Government’s plans to preserve—with limited adaptations—the external strategy of control over infrastructure and transit avoidance are coupled with unclear messages to domestic players. Thus, signing the contract with China and invoking a complex web of governmental support for this project, the Government opts for a ‘hands-off’ approach in the disputes between Gazprom and Rosneft. By this, geopolitical grand strategies might become inconsistent with domestic dynamics, where Gazprom is urged to act as a normal market actor, competing with other players. At some moment this inconsistency may have a positive effect, paving the road towards liberalization of Russian gas market.

(Partial) liberalization of the gas sector might take place, but an increasing gap between external and domestic strategies and detriment of State-Gazprom symbiosis (no matter how effective it is) in the absence of a stable and well-functioning regulatory framework may lead to destabilization of the sector. In other words, the EU-like model of the competitive market is unlikely to emerge out, but another redistribution of gains between oil and gas groups will take place. As Tatiana Mitrova notices in the last issue of Oxford Energy Forum, “these battles between the state-controlled giants (Gazprom and Rosneft) should not mislead: this situation is not about increasing real competition, it is about division of power within the state itself”[3].

EU and US sanctions against Russia are another factor that can lead to unintended fundamental transformations in the Russian gas sector. A lot of questions need to be addressed. Will sanctions facilitate further liberalization of the Russian gas sector or invoke increasing state involvement? Will competition between domestic interest groups continue or be mitigated in the light of external threats? In other words, what will happen if external conditions are partially changed (imposition of sanctions to the Russian oil and gas sectors), but internal dynamics of turf wars persist? Given the discussed inconsistencies of institutional changes in the Russian gas sector, the sanctions may lead to serious unintended consequences.

 Irina Kustova is a PhD candidate in International Studies at the School of International Studies, University of Trento, Trento, Italy