Send Lawyers: Russia Sues EU at WTO on Energy Law

So Gazprom avoids Ukraine, but not the long arm of the EU.

In their ongoing tussle with Western Europeans, the Russians have already deployed lots of guns and money, so I guess it was only a matter of time before they sent lawyers, too. To be sure, the Russians have been quite active as both complainants and respondents at the WTO since officially joining in 2012. With so many special interests to serve, you would expect as much. However, ongoing mudslinging  and the application of more Western sanctions has now prompted Russia to secure its cash cow. Namely, commercial rights for the distribution of gas in Western Europe going forward (no matter how thorny EU-Russian politics become).

The center of attention is the so-called South Stream pipeline that Gazprom is building to various European customers that will not only enhance deliverable volumes but also bypass Ukraine for obvious reasons. Having addressed Ukraine as a geopolitical impediment by avoiding it altogether, the Russians were then hit by another impediment with the EU passing its "Third Energy Package" in 2009 designed to encourage competition in the energy industry. The European Commission states that "[a] competitive and integrated energy market allows European consumers to choose between different suppliers and all suppliers, irrespective of their size, to access the market."

Being a 50% investor in the project, Gazprom has long expressed displeasure in having to accommodate other gas suppliers in a pipeline that is costing a fortune to build. How does Gazprom guarantee rents in the face of EU competition law when Russia is now a WTO member? Well of course you take the EU to court, but you need to be crafty about what to complain about. Hence Russia's gambit of claiming that the EU should not retroactively apply the "Third Energy Package" to an energy distribution deal struck with Gazprom before the law came into effect in 2009. In other words, it's an appeal against "grandfathering":

At the heart of the Russian complaint are expected to be EU provisions which prevent a single company from both owning and operating a gas pipeline. EU lawmakers agreed the rules, known as 'ownership unbundling', as part of its Energy Package on rules governing the bloc's gas and electricity market. The new framework, which was agreed in 2009, is aimed at stimulating competition in the EU's gas market and lower prices.

For its part, Russia claims that its state-owned energy giant Gazprom is the only company with the right to export gas and that the EU rules should not be backdated to cover contracts signed before 2009. "These and other elements of the Third Energy Package, in the opinion of Russia, contradict the obligations of the EU in WTO on basic principles of non-discrimination and market access," Maksim Medvedkov, a trade spokesman in Russia's Economic development ministry, told local news agencies.

Unfortunately for Russia, there is precedent at the WTO ruling that retroactively applied laws are acceptable. Moreover, I doubt whether a neoliberal institution like the WTO would gladly approve of monopoly-preserving practices. That said, who exactly are the other potential gas providers that Russia fears? It would have to be one of the transit countries. Bordering the Black Sea, Bulgaria is mostly a transit point. Romania OTOH has shale gas reserves, but protests there over foreign firms exploiting them are holding back development.

So I guess it's Russia being proactive on both fronts to decouple ownership from operation as well as forestall the rise of other energy suppliers who could capitalize on the pipeline once it's built. Unless Russia could build South Stream in such a way that circumnavigates central Europe altogether, it had to deal with this issue sooner or later. While I doubt its case, the legal challenge has now been made.

If Russia and the EU cannot resolve this matter in 60 days during bilateral talks, a panel will be formed to adjudicate this case as per WTO dispute settlement mechanism practice. I will update the particulars of this case once they are posted on the WTO site.

Meanwhile, here is Gazprom's description of the South Stream pipeline:

The South Stream gas pipeline is Gazprom's global infrastructure project aimed at constructing a gas pipeline with a capacity of 63 billion cubic meters across the Black Sea to Southern and Central Europe for the purpose of diversifying the natural gas export routes and eliminating transit risks [that's you, Ukraine]. The first gas will be supplied via South Stream in late 2015. The gas pipeline will reach its full capacity in 2018.

South Stream's offshore section will run under the Black Sea from the Russian coast to Bulgaria [to avoid Ukraine]. The total length of the Black Sea section will exceed 930 kilometers and its maximum depth will be more than two kilometers. A 1,455-kilometer onshore section will cross Bulgaria, Serbia, Hungary, Slovenia and will end in Italy. Gas branches from the main pipeline route will be built to Croatia and to Republika Srpska.