Gazprom Highlights Foreign Investment Risks, Threatens Europe - Again

By Jason Simpkins
Staff Writer

In a story that underscores the risks investors face with emerging-markets investments, OAO Gazprom, Russia's energy giant, is up to its old tricks and is once again threatening to cut gas supplies to the Ukraine, in an effort to extort payment, Bloomberg News reported.

It's an issue that Money Morning has reported on extensively before.

Gazprom supplies 25% of Europe's gas and is now threatening to curtail exports to the Ukraine over a $1.3 billion debt. The company warned the European Commission and consumers that it would take action unless the debt is settled by the end of the month. Gas supplies throughout Europe declined in a year and a half ago when Gazprom froze the Ukraine out the first time and negotiated a higher price.

And no one wants a repeat performance.

Troubles don't end at the Ukraine either. Gazprom threatened to cut off gas supplies to Belarus in August. That dispute was resolved when Belarus paid $190 million of its $456 million debt. Threats and corresponding actions like these have made every nation in the European Union wary of Gazprom, and impelled them to seek out alternatives.

In September, the European Commission introduced a plan calling for a massive restructuring of power grids throughout the continent. The plan was designed to reduce the region's vulnerability to massive energy companies that control the production and transmission of gas and electricity.

The Commission offered two options to proceed with a version of deregulation that it has labeled as "ownership unbundling." The first would force energy companies to sell off their transmission networks. The second would require companies to retain their respective transmission networks, but lease them to fully autonomous operators. The Commission also called for an independent EU energy agency to oversee national regulators.

The measures are clearly an attempt by the European Commission to safeguard the continent against Gazprom. Gazprom has clearly been agitated by accusations of impropriety and malfeasance. According to Bloomberg, after the commission signaled its intention to propose legislation on ownership unbundling, Gazprom Deputy Chief Executive Officer Alexander Medvedev called the plan "the most absurd idea I have ever met in the history of the world economy."

Regardless Gazprom's power-play shenanigans have attracted the attention of the United States as well. A few months ago, Reuben Jeffery, the under-secretary at the state department for economic, energy, and agricultural affairs, traveled to Russia with the hopes of addressing some of these issues.

Jeffery commented on the failure of other nations in the region to work around Russia saying, "The objective as we talk about alternative routing systems is to create legitimate market-based competition, and to develop some redundancy in the system in the event of legitimate physical breakdown, or other political issues that might arise that might lead somebody to cut off supply."

It's no secret just who that ‘somebody' is.

With every price hike and subsequent threat from Gazprom, the company becomes less credible. Still, there isn't much that Europe or the United States can do right now. Europe is heavily dependent upon Russian energy, and as the EU heads into the cold-weather months, that dependence is only going to increase. Until Europe cultivates alternative energy supplies from Africa and Central Asia, Gazprom is going to keep bullying the continent, and especially its weaker dependents, including Belarus and the Ukraine.

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