WTO DISPUTE: RUSSIA AGAINST EU OVER REGULATIONS IN THE ENERGY SECTOR

Gas pipeline over Russian and European Union maps

Introduction

On April 30, 2014, Russia filed a request for consultation against the EU over its new energy market law – the 2009 “Third Energy Package”. A panel was established later, but the dispute has not been composed yet. This dispute is very controversial. On one hand, countries in EU largely depend on the gas exports from Russia and they are struggling to reduce such reliance. On the other hand, Russia is trying hard to maintain its absolute competitiveness in gas industry and to control the European market with political intentions.

30 percent of the natural gas consumed by the EU came from Russia, most of which was transported through Ukraine. Some of the countries in East Europe even have all their natural gas imported from Russia. Given the political instability and economic sanctions on Russia at that time, the EU started to carry out various plans to restrict the exports of natural gas from Russia and “Third Energy Package” was one of them.

The 2009 “Third Energy Package” put restrictions on the production, supply and transmission of natural gas or electricity, the alleged discriminatory certification requirements in relation to third countries in this sector and the requirement in respect of granting access to natural gas and electricity network capacity by transmission service operators. In this case, natural gas exporters in Russia, including a monopolistic company Gazprom, were forced to give up their control over pipe lines inside EU. Obviously this was a devastating news for Russian suppliers since companies in EU, who took over the control, then had the right to choose their new trading partners.

Due to series of actions adopted by the EU, Russia filed a complaint in 2014. Its claim was based on the General Agreement on Trade in Services (GATS), General Agreement on Tariffs and Trade (GATT) and some other measures. Then the EU turned to accuse the illegal terms in contracts between companies in EU and Gazprom, the largest supplier in Russia, claiming that Gazprom violated the anti-trust agreement. However, Gazprom and other suppliers in Russia have been actively connecting with firms in the Europe, hoping to expand their consumer bases. Conflicts remaining unsolved, both parties continue to explore new means to guarantee their own profits.

Influence On Russia

With most of their revenues coming from the EU, Russia is clearly afraid of EU’s possible reduction of natural gas importing. To reduce the risks brought by EU’s sanctions, Russia has found two ways out. One is seeking new international partners, especially in the Asian market, while the other is gradually switching their pipelines in Ukraine to newly-built pipelines in Turkey.

South Stream Pipeline

South Stream Pipeline and Blue Stream Pipeline
Source: Honoré

The new pipeline, Blue Stream Pipeline is designed to start from the north of Caucasus, passing through the Black sea and to end in Ankara in Turkey. Russia plans to transport 630 billion m3 natural gas through the pipeline, four times the annual consumption of Turkey. The excess amount will then be transported to other countries in south Europe via Turkey. Obviously it is very costly to build a new pipeline, which is much longer than the former one. However, from a long-term point of view, the new pipeline helps to guarantee annual amount of exports to Europe while getting rid of the political uncertainty in Ukraine. In addition, Russia is expanding its trading towards Asia, especially China which has a huge demand for natural gas, via the new pipelines under construction West Siberia.

Influence On The EU

Russia Gas Supplies to Europe

Russia Gas Supplies to Europe: Borders and Delivery Points
Source: Oxford Institute for Energy Studies (OIES)

After putting various restrictions on natural gas exports from Russia, EU themselves are facing difficulties in alternative energy. The first question is what other countries that the EU can import from are. The EU is considering fuels and liquefied natural gas from other parts of the world. The second question is how will the new source of energy be distributed throughout Europe. These two questions both bring up the huge cost of transportation and the construction of new distribution channels. The amount 30 percent is not a small proportion, let alone the rapid demand in winter, and thus it is very difficult for EU to completely get rid of Russia in a short period.

Possible Solution

The trade of natural gas is just one of the conflicts between the EU and Russia, and given complicated political relationship and other critical factors, these two parts probably won’t compromise a lot to reach consensus. If trade of natural gas between them does decrease by a large amount, Russia could still be fine with new contracts with other countries and EU could also satisfy citizens’ need by exploring new channels. However, theoretically we have learnt that free trade could benefit both parties. With existing contracts and pipelines, Russia could save a lot of money not building the Blue Stream Pipeline to Turkey and EU could remain a relatively low cost of transportation and storage.

To conclude, WTO should help to reach consensus between both parties to maintain their former trade of natural gas. At the same time, allow both party to take their structural reform in their energy sector in reasonable ways. For example, EU could try to diversify their basket of energy consumption and Russia could continue to explore new partners in Asia.

 

References:

1/ DISPUTE SETTLEMENT: DISPUTE DS476 – World Trade Organization

2/ EUROPEAN UNION AND ITS MEMBER STATES – CERTAIN MEASURES RELATING TO THE ENERGY SECTOR

3/ Pipe Dream: No quick energy-fix if EU plugs Russian gas pipelines

4/ Energy Security: How can Europe wean itself off Russian gas?

5/ Russia-EU Gas War: Poland accuses Russian Gazprom of using energy as a weapon

6/ Russia turns to WTO over EU energy package

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About Laylazhangblog

A graduate student studying about investing in energy and its impact on environment.
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One Response to WTO DISPUTE: RUSSIA AGAINST EU OVER REGULATIONS IN THE ENERGY SECTOR

  1. Yibo Wu says:

    An interesting blog on an interesting trade issue. On the one hand, EU’s request for Russian energy monopolies to open distribution network has its economic justification – the energy sector is a natural monopoly and building extra distribution pipelines cannot benefit from economies of scale. On the other hand, the sanction imposed on Russian oil exporters is a political distortion to free trade. Energy exports are highly geographical dependent – the EU would have a natural trade pattern of importing energy from Russia and Iran, but they sanctioned both countries. Geopolitics is an important impediment to the free trade.

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