Don't Blame Gazprom for Europe's Energy Crunch

Gazprom is getting a bad rap. The state-controlled energy giant that supplies a huge amount of Europe’s natural gas has been spun into a storybook villain for its hardball negotiating tactics. But it’s not Gazprom’s fault that Europeans want to consume more gas than they have.

STRINGER/AFP/Getty Images Not a monster: Gazprom isnt the big bully Europeans have made it out it to be.

Not a day goes by without a new article critical of Russian President Vladimir Putins increasingly authoritarian regime, or of his countrys supposedly aggressive use of the energy weapon. The target of all this ire is Gazprom, the quasi monopoly and energy behemoth that controls 25 percent of the worlds reserves of natural gas. For some, Gazprom has now joined Iran and North Korea as a top threat to the Westturning security of supply into a catch phrase in Washington, London, and Brussels. Gazprom triggered this hysteria when it picked highly public fights with its clients in Ukraine, Georgia, and Belarus over gas prices in 2005 and 2006, culminating in gas delivery cuts that temporarily disturbed European imports during the cold of winter.

But Gazprom is getting a bad rap. Rightly or wrongly, the management of the company is trying to do what businesses do: maximize its income. Putins brand of realpolitik may be less than subtle, but its driven by rational motivations. Were not obliged to subsidize the economies of other countries, Putin has said. Nobody does that, so why are they demanding it of us? Hes got a pointits a bit rich to see the supposedly pro-market Westerners calling for heavy subsidies. And a country like Ukraine thats angling to join NATO (an organization that Russia understandably perceives as anti-Russian) can hardly expect a discount on its gas. So why is Russia getting demonized for defending its interests? The answer lies with European leaders, who are trying to distract the public from the mess theyve made of European energy policy. Europeans themselves are to blame for their dependency on Gazprom, which is doing what any company would do in its place.

Gazproms business tactics do appear to be heavy-handed. The energy companys demands for more money for its gas have often looked like ultimatums. In 2005, after months of negotiations and deadlock, Gazprom did cut off the taps when the Ukraine refused to agree to an immediate quadrupling of gas prices. (Ukrainians then siphoned off gas in transit to Europe, as they have done several times before, and Gazprom actually relented before an agreement was found.)

But its important to understand why Gazprom chose to provoke a showdown when it did and in the way that it did. There are public reasons and private reasons. On the public level, the former Soviet Republics usually receive gas on the basis of annual contracts with fixed prices negotiated at the highest levels. These contracts can become extremely favorable to the importing countries when market prices for gas skyrocket, as they have in Europe. Officially, Gazprom was merely trying to ensure that it wouldnt get ripped off as market prices rose. (On the private level, theres a fierce battle for control between local Ukrainian oligarchs and Russians with access to Gazprom pipelines. These fights have been going on for the past 15 years, but they usually remain hidden; this time, they spilled over into public view.) Gazproms public rationale may have been just a diversion, but it was nevertheless true that the company was leaving money on the table.

As for European leaders, they have no one but themselves to blame for turning worrying domestic gas problems into a major international crisis. Europe, led by the United Kingdom, has made a conscious choice to rely on gas as its main new source of energy at a time when its domestic supplies are decliningand declining a lot faster than everybody expected. And Europes economic liberalization encourages market players to build easier-to-finance gas-fired plants, thus feeding demand for more gas. If political leaders were really worried about gas supplies from Russia, they should change that structural feature of the market rather than wailing about Gazproms clumsybut ultimately harmlessfights with its neighbors.

There has been no actual energy crisis yet in Europe, just the manufactured perception of one. And it is quite striking to note that the Russia is unreliable theme appeared exactly at the time when Britain was becoming a net gas importer, after years of enjoying its North Sea bonanza. France, Germany, Italy, and others have been fully dependent on imports for decades, but have built up an array of long-term contracts with diversified suppliers (including, but not limited to, Russia). Britain did not have the same foresight, and its government has consequently gone into panic mode. After trying to blame other European countries for lack of solidarity, it went after Gazprom and rediscovered Putins authoritarian behavior.

Gazprom has nonetheless always fulfilled its contractual obligations to European customers. During the crisis with Ukraine, Gazprom restored gas deliveries before any solution was found, as soon as it saw that the Ukrainians were diverting gas meant for Europe from the transit pipelines on their territory. Last year, supplies to Europe were actually more disturbed by a long, intense cold wave that struck Eastern Europe and Russia, causing demand for gas within Russia to skyrocket and putting strains on Gazproms delivery network. But, at all times, Gazprom has fulfilled its contracts.

Its true that Russia has agreed in the past to lower prices for gas in exchange for political or diplomatic quid pro quos with the importing country. But its also true that Russia can cancel such favorable terms when it wants. Thats the very nature of quid pro quo bargains. And the fact that Russia raised prices on Belarus, a cooperative satellite of Moscow, lends weight to Putins argument that his goal is to increase Gazproms revenues more than it is, as some critics would have it, to use energy policy to resurrect the Soviet Empire for the 21st century.

In any case, the real long-term worry is not about geopolitics: Its about whether Europeans will be able to heat their homes two decades from now. By then, Russia might not have enough gas to supply Europes endlessly increasing demand, as well as its own burgeoning needs. It has more than enough gas to fulfill its existing contracts and has always made these commitments its first priority. But it may not have enough in its reserves to fully cover Europes expected demand beyond 2020. The problem is not Gazprom or Vladimir Putin, but my fellow Europeans extraordinary expectation that Russia must deliver its gas to us, on the cheap. It may feel good to blame Putin for our problems, but it doesnt make us right.