Russian energy vultures prepare to swoop

If there are limits to the free market instincts of the EU’s post-communist states, then they are to be found at Russia’s border with the EU.

Estonia, Latvia, Lithuania, Slovakia and the Czech Republic have a famously laissez faire approach to globalisation, but their free-market attitude is being called into question as they express doubts about the European Commission’s attempts to break up national energy giants.

Today (15 February), EU energy ministers meeting in Brussels discuss ‘unbundling’ of energy firms - making sure that the companies that provide power for customers are not the same as those which generate it. Those in favour of unbundling say it would stop vertically integrated firms pushing their rivals out of the market, inject more competition into the energy market and bring prices down.

Although France and Germany have been vocal in their opposition to the proposals, largely to defend their national energy champions, another group of member states is increasingly concerned about the implications of the policy.

For many of the EU’s newer member states, the prospect of Russia’s energy giants - Gazprom, UES or Rosneft - devouring the remnants of ‘unbundled’ companies is just too much to swallow.

They have good reason to suspect that Russian firms will be interested.

While Gazprom has been buying up pipeline networks in eastern Europe, Alexander Medvedev, the company’s deputy chief executive, has stated publicly that ten EU companies are possible acquisition targets.

"With our current financial strength it’s hard to find a company which is not on our watch list," Medvedev said last year.

When Gazprom named the UK’s Centrica as one such target, there were rumours that the British government might block the deal, until Prime Minister Tony Blair said he would not succumb to the type of "economic patriotism" sweeping continental Europe.

But for the EU’s eastern member states, unbundling is an area where energy policy stops becoming a question of economic competitiveness and starts being a matter of national security.

Beneath diplomatic-sounding requests for the Commission to "ensure that internal market legislation will deal with vertically integrated energy companies from third countries", some member states are fighting hard to make sure Russia is not allowed to get a firmer grip on EU markets.

"We have nothing against liberalisation," explained one diplomat from a new member state, "but we are concerned about what impact this would have."

The Czech Republic is one of the countries worried about the consequences of unbundling. Since the privatisation of the Czech gas industry in the mid-1990s, German firm RWE has dominated the market. Czech officials argue that if RWE were forced to separate the ownership of pipelines from its supply arm then Russian firms could swoop.

The Czech government would no doubt like to buy up RWE’s pipeline business, but as one official put it, "the costs would be prohibitively expensive".

In a race between the Czech government and a cash-rich Gazprom, Prague is unlikely to win.

There seems to be little appetite to revise internal market rules to give EU firms or governments an advantage over their Russian counterparts, which would be perceived as unfair in Moscow.

"I don’t think we need to be that provocative, after all we need Russia as an energy partner," said one official.

But an increasing number of observers would like the EU to challenge Russia’s perceived market bullying.

While most observers regard Russian President Vladimir Putin’s musings about the creation of a "gas OPEC" as far-fetched, Russia is stepping up co-operation with other producing countries.

So far EU attempts to confront Russia have been unsuccessful. The Union has failed to persuade Russia to sign up to the energy charter treaty - which, in part, ensures non-discriminatory access to pipelines.

But as Gazprom and the others become more interested in EU firms, a new battle line is being drawn. Attention is turning to Russia’s own energy market.

"We should at least ask for reciprocity," said one diplomat referring to barriers on EU companies to invest in Russia’s energy market.

As Vladimir Chizhov, Russia’s ambassador to the EU, likes to say, Europeans can invest as much as they want in Russian energy firms…up to 49%.

If there are limits to the free market instincts of the EU’s post-communist states, then they are to be found at Russia’s border with the EU.