After years as Eurasia's energy bully, Russia's state-controlled natural gas monopoly, Gazprom, is getting a taste of its own medicine. Even as Gazprom seeks to build the tallest skyscraper in Europe as its new headquarters in St. Petersburg, pressure from Russia's neighbors led to a 15 percent decline in the company's profits last year, eating into the state budget. Moscow's single-minded focus on gas exports in an effort to become, in the words of President Vladimir Putin, an "energy superpower" has crippled its ability to adapt to profound changes in the global energy landscape -- from the shale gas revolution in North America to the dynamism of new market players such as Azerbaijan. Having spent the last decade making enemies in Central Europe and Central Asia, Gazprom and Russian decision-makers are now reaping what they have sown.
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Policymakers in European capitals could be forgiven for a little schadenfreude right now. Building on the legacy of Soviet gas exports to the Eastern Bloc and parts of Western Europe, Putin and his cohorts in the Kremlin have, for years, used Gazprom as a cudgel in Moscow's relations with European Union member states. Over the past decade, well over a third of EU gas imports have come from Russia, with a number of Eastern European states almost completely dependent on Gazprom. Bulgaria, for example, receives more than 95 percent of the natural gas it consumes from the company. Millions of European consumers shivered through the winters of 2006, 2008, and 2009 when Gazprom cut off supplies in order to squeeze middlemen in Ukraine, Belarus, Georgia, and Moldova who had had the temerity to buck Moscow's policies.
On the supply end of the network, Gazprom routinely bought cheap natural gas from producers in the Caspian region and sold it for as much as four times the price in Central Europe. To maintain the racket, Gazprom CEO Alexey Miller and Putin himself actively traveled across Eurasia threatening and cajoling European and post-Soviet leaders to quash alternative pipeline networks put forth by Western companies. Russia continues to pursue a "divide and conquer" strategy with respect to Europe that purposely undermines EU-wide energy directives, such as the Third Energy Package, intended to bring more competition to the market. Meanwhile, Gazprom seeks to isolate entire countries in "energy islands" where consumers are unable to receive gas from sources other than Russia, even during cutoffs.
But in just the last two years, the tide has started to turn. Low energy prices across the globe are allowing consumers to use Russia's "reverse dependence" on European markets against Gazprom. Russia's export options outside Europe are increasingly limited, allowing European consumer to demand better terms. Meanwhile, Central Asia is no longer Moscow's vassal, but has finally emerged as competition for cheap energy, with producers such as Turkmenistan, Uzbekistan, and Kazakhstan not only willing to give consumers (still largely in East and South Asia) a better deal, but without treating them as former colonies to be manipulated.
Gazprom's once-intimidated customers are growing increasingly bold. Last year, seemingly hapless Bulgaria was able to negotiate a 20 percent decrease in the price that it will pay Gazprom for the next 10 years. While it was still a long-term, so-called take-or-pay contract -- meaning that Bulgaria agrees to pay for a fixed amount of gas for a certain amount of time, regardless of how much gas its consumers actually require -- Sofia was able to add in a renegotiation clause, should circumstances change drastically. This would have been unthinkable in previous years.
The unexpected changes in energy markets have allowed the Bulgarians and others to play hardball with Gazprom. A glut of gas globally, due mainly to unprecedented shale gas production in North America, has driven prices down and freed up volumes around the world to be shipped as liquefied natural gas (LNG) to Europe. The United States is set to export LNG, though that will mostly go to East Asia instead of Europe. In addition, because natural gas has recently replaced coal as a fuel source throughout much of North America, EU member states, many of whom already have well-developed coal-burning infrastructure, are reaping the benefits of excess coal, which allows them to be more flexible when it comes to natural gas dependence. Thanks to this combination of factors, Gazprom has or is in the process of negotiating new contract terms with all its European customers, including the major markets of Germany and Italy.
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