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Nov 7, 2012 | 11:31 GMT

The EU Shifts Russian Natural Gas Policy

ALEXEI NIKOLSKY/AFP/Getty Images
Summary

Russia's decision to cut natural gas prices for Poland suggests it can no longer rely only on bilateral, exclusive deals with strategic partners to secure its access to the European market. On Nov. 6, Russian state natural gas company Gazprom and its Polish counterpart, PGNiG, reached an agreement that would see the price Russia charges Poland for natural gas drop. This is probably the first of several instances of Russian efforts to normalize natural gas pricing among its EU customers.

While the details were not revealed, Poland likely received a discount ranging from 10 to 20 percent of its current rate, the latter figure being Poland's demand in the arbitration proceedings. Before their price breakthrough, PGNiG and Gazprom had been locked in an arbitration suit for nearly a year. Poland was contesting the increase in natural gas prices Russia had forced on PGNiG in a 2010 contract. At one point, Poland was paying at least 30 percent above the average European natural gas price.

The lower prices are a welcome break for Poland, whose economy is beginning to show signs of weaker growth after weathering the economic crisis relatively well so far. The Polish government previously announced that the savings from lower natural gas import prices would be transferred to domestic and industrial end consumers.

Unlike in its negotiations with Germany and Italy, the core pricing structure of natural gas was not placed in question in Russia's negotiations with Poland. Warsaw will keep its long-term contracts with take-or-pay clauses and significant oil indexation, maintaining Russia's large influence over the Polish energy sphere.

Poland's discount follows similar deals Russia struck throughout the year with major Western European consumers, particularly Germany and Italy, and as Russia has come under EU pressure to normalize the natural gas prices Moscow charges across the Continent. Emboldened by Russia's weakening position on the Western European market, the European Commission launched a probe into Gazprom's monopolistic and anticompetitive practices in the Central European natural gas market in September. This sent Moscow a clear signal that Russia would have to prove more accommodating to Central European nations if it hopes to retain its position as the major supplier of natural gas to the Continent. Poland's natural gas discount should be therefore viewed as the first visible sign that EU pressure on Russia to equalize its business practices among all its members is bearing fruit.

Locator map Europe

Poland's success in resolving its ongoing price dispute with Gazprom is particularly significant, since Poland is neither a major natural gas customer nor involved in negotiations with Moscow over Russian strategic assets. In addition to the major Western European consumers, the countries that previously had made progress in pricing negotiations with Moscow were Balkan and Central European nations participating in the South Stream pipeline project.

With both the large Western European consumers and the Central European and Balkan consumers, Russia has had a direct interest in providing lower prices. For the first group, Moscow sought to maintain market share in its primary revenue generators in the face of the threat of regional diversification and liberalization efforts. For the Balkan and Central European group, Russia used the promise of lower natural gas prices as an incentive for these countries to sign on to the South Stream project as quickly as possible. By contrast, Poland imports about a fourth of the natural gas Germany does and is not part of any significant Russian infrastructure project.

To address the growing pressure from the European Union to normalize natural gas prices and pricing structures across the Continent, Moscow previously had given high-value partners a better deal to assuage their fears while still maintaining a strong grip on the Central European markets fully dependent on Russia for their natural gas supplies. However, over the course of the next year, Russia's energy leverage on EU members will continue to weaken. The pressure on it to normalize its pricing practices for all EU members, even those with which Moscow does not have a special relationship, will continue. This will be particularly true for Central European nations, which can expect similar price cuts as Poland's lead emboldens them to challenge Russia's pricing practices.

Russia will continue with its current accommodating pricing policy in the European market in exchange for the renovation of long-term contracts from its current customers. Moscow's efforts to present itself as a reliable business partner for Europe plus behind-the-scenes cooperation with Germany will most likely mollify the EU legal challenges to the practices of what remains the Continent's largest single supplier of natural gas.

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