The legal framework of EU-Russia energy relations · 2014-12-17 · years. urrently Russia is one of the EUs key trading partners. In 2013 goods exports to Russia amounted to 120

Faculteit Rechtsgeleerdheid Universiteit Gent

Academiejaar 2013-2014

The legal framework of EU-Russia energy relations

Masterproef van de opleiding ‘Master in de rechten’

Ingediend door

Khodakovskyy Yevgen

(00905357)

Promotor: Van Elsuwege Peter Commissaris: Vandendriessche Frederik

Faculteit Rechtsgeleerdheid Universiteit Gent

Academiejaar 2013-2014

The legal framework of EU-Russia energy relations

Masterproef van de opleiding ‘Master in de rechten’

Ingediend door

Khodakovskyy Yevgen

(00905357)

Promotor: Van Elsuwege Peter Commissaris: Vandendriessche Frederik

i

VOORWOORD

Als inboorling van Rusland en voormalige inwoner van Oekraïne ben ik steeds geïnteresseerd

geweest in de relaties van deze landen met de Europese Unie. In de loop van de laatste twee

decennia heb ik Rusland sterk zien veranderen. Haar opkomst heeft de globale machtsverhoudingen

ernstig door elkaar geschud en het is uitgegroeid tot één van de belangrijkste partners van de EU,

waarheen ik op mijn dertiende levensjaar verhuisde. Nergens is de coöperatie tussen de EU en

Rusland zo uitgesproken als in de energiesector. De link gecreëerd tijdens de koude oorlog heeft de

respectieve energiemarkten met elkaar verbonden en deze band bepaald vandaag grotendeels het

verloop van de gehele bilaterale relatie. Gezien het uitgesproken strategische karakter van de

energiebronnen is de energierelatie nooit van een leien dakje verlopen. Vooral de coöperatie in de

gassector is gekenmerkt door verschillende pijnpunten die doorheen de jaren vaak aanleiding

gegeven hebben tot conflicten die op hun beurt de algemene relatie complexer maken.

Het is over deze energierelatie dat ik besloten heb om mijn Masterproef te schrijven. Het

belangrijkste doel van mijn werk is geweest om duidelijkheid te brengen in de complexe

verhoudingen in de gassector, en een specifiek aspect ervan te belichten. Ik heb mijn onderzoek

gestructureerd rond drie punten. Ten eerste heb ik het huidige juridische kader van de energierelatie

onderzocht en bekeken hoe deze relatie binnen dit kader verloopt (of eerder daarbuiten). Daarna,

heb ik een diepgaand onderzoek gedaan naar één van de meest recente pijnpunten van de relatie die

geïntroduceerd werd in de Derde Europese Energiepakket, namelijk de ‘ontvlechting’. Ten slotte heb

ik voorgenomen om de belangrijkste reden te achterhalen achter de gebrekkige energierelatie tussen

de EU en Rusland, en heb ik gekeken naar diens toekomstperspectieven.

Doorheen mijn onderzoek stelde ik vast dat het grootste probleem schuilt achter het gebrekkige

juridische kader van de energierelatie. Deze dekt enkel de minder problematische aspecten en kan

geen oplossing bieden voor de uitstaande kwesties. Een van deze kwesties, de ontvlechting, legt aan

de Russische Gazprom een regeling op die volledig ingaat tegen de Russische energiestrategie en

botst daarom op veel protest. Naast vele andere, maakt deze kwestie de samenwerking in de

gassector een zeer complexe aangelegenheid die vaak tot ergernissen leidt aan beide kanten.

Huidige situatie kan verklaard worden aan de hand van de conflicterende energie strategieën die

beide partijen implementeren om hun respectieve belangen te beschermen. Enkel door middel van

onderhandelingen en het opzetten van een alomvattende en betrouwbare juridische kader zullen de

partijen uit de huidige impasse kunnen geraken. In het huidige politieke klimaat echter, lijkt de

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samenwerking niet vanzelfsprekend en zal de juridische energie frame mogelijks nog een tijd op zich

laten wachten.

Dit onderzoek heeft mij goed ingeleid in de complexe materie van de EU-Rusland energierelaties. Het

heeft veel interessante vragen opgewekt die ik hoop te kunnen beantwoorden in het verdere verloop

van mijn carrière. Hopelijk kan dit werk op zijn beurt iemand anders wegwijs helpen in deze materie

en ook interesse opwekkern voor de EU-Rusland energierelatie.

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TABLE OF CONTENTS

VOORWOORD ...................................................................................................................................... I

INTRODUCTION ................................................................................................................................. 1

1 THE LEGAL FRAMEWORK ..................................................................................................... 4

1.1 PARTNERSHIP AND COOPERATION AGREEMENT (PCA) .......................................................... 5

1.2 EUROPEAN CHARTER TREATY (ECT) ..................................................................................... 7

1.2.1 Energy Charter proces ........................................................................................................ 7

1.2.2 Main provisions ................................................................................................................... 7

1.2.2.1 Trade ........................................................................................................................................................ 8

1.2.2.2 Transit....................................................................................................................................................... 8

1.2.2.3 Investment ................................................................................................................................................ 8

1.2.2.4 Dispute settlement mechanism ................................................................................................................. 9

1.2.3 Specific Russian position ..................................................................................................... 9

1.2.3.1 Provisional application of the ECT ........................................................................................................ 10

1.2.3.2 Ratification issues .................................................................................................................................. 11

1.2.3.3 Recent developments and termination of the provisional application .................................................... 12

1.2.4 Concluding thoughts .......................................................................................................... 13

1.3 EU-RUSSIA ENERGY DIALOGUE............................................................................................ 14

1.4 WORLD TRADE ORGANIZATION (WTO) ............................................................................... 16

1.4.1 Energy within the World Trade Organization ................................................................... 16

1.4.2 Outstanding issues ............................................................................................................. 19

1.4.3 Conclusion ......................................................................................................................... 20

1.5 EU LEGISLATION ................................................................................................................... 21

1.6 BILATERAL INVESTMENT TREATIES (BIT) ............................................................................ 22

1.6.1 Origins, aim and content of the BITs ................................................................................. 22

1.6.2 New foreign investment competence of the EU ................................................................. 23

1.6.3 Conclusion ......................................................................................................................... 25

1.7 CONCLUSION ......................................................................................................................... 25

2 THE NEW UNBUNDLING REGIME ...................................................................................... 27

2.1 LIBERALIZATION ROAD TOWARDS THIRD ENERGY PACKAGE .............................................. 28

2.1.1 Liberalization of the EU energy market ............................................................................ 28

2.1.2 Unbundling in the First, Second and Third Energy Packages .......................................... 32

2.1.3 Conclusion ......................................................................................................................... 35

2.2 THE NEW UNBUNDLING REGIME AND CONCERNED RUSSIAN INTERESTS .............................. 35

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2.2.1 Ownership unbundling ...................................................................................................... 36

2.2.2 Third country clause .......................................................................................................... 38

2.2.3 Additional provisions and derogations.............................................................................. 41

2.2.3.1 Limited freedom of choice .................................................................................................................... 41

2.2.3.2 Derogations ........................................................................................................................................... 42

2.2.3.3 Procedure under article 11 ..................................................................................................................... 44

2.2.3.4 Deadlines ............................................................................................................................................... 44

2.2.3.5 Conclusion ............................................................................................................................................. 45

2.2.4 Russian interests on the European market ........................................................................ 45

2.2.4.1 North-Stream ......................................................................................................................................... 46

2.2.4.2 South Stream ......................................................................................................................................... 47

2.2.4.3 OPAL & NEL ........................................................................................................................................ 47

2.2.4.4 Yamal-Europe ....................................................................................................................................... 48

2.2.4.5 Lithuanian Energy market ..................................................................................................................... 48

2.2.4.6 Summary ............................................................................................................................................... 49

2.2.5 Conclusion ......................................................................................................................... 49

2.3 CONTROVERSY AROUND TEP’S UNBUNDLING REGIME ......................................................... 49

2.3.1 Conflicting points of view .................................................................................................. 50

2.3.1.1 EU ......................................................................................................................................................... 50

2.3.1.2 Russia .................................................................................................................................................... 51

2.3.2 Legal flaws of the new regime ........................................................................................... 53

2.3.2.1 General Agreement on Trade in Services of the World Trade Organization (WTO-GATS) ................. 54

2.3.2.1.1 Most Favored Nation (MFN) ............................................................................................................ 54

2.3.2.1.2 National Treatment (NT) .................................................................................................................. 56

2.3.2.1.3 Justifications ..................................................................................................................................... 57

2.3.2.1.4 Conclusion ........................................................................................................................................ 57

2.3.2.2 European Convention on Human Rights (ECHR) ................................................................................. 58

2.3.2.3 Bilateral Investment Treaties (BITs) ..................................................................................................... 59

2.3.2.3.1 MFN and NT .................................................................................................................................... 59

2.3.2.3.2 Expropriation clause ......................................................................................................................... 60

2.3.2.3.2.1 Expropriation ............................................................................................................................ 61

2.3.2.3.2.2 Remuneration ............................................................................................................................ 62

2.3.2.3.2.3 Discrimination ........................................................................................................................... 62

2.3.2.3.3 Conclusion ........................................................................................................................................ 62

2.3.2.4 Partnership and Cooperation Agreement (PCA) .................................................................................... 63

2.3.3 Conclusion ......................................................................................................................... 64

2.4 APPLICATION OF THE NEW UNBUNDLING REGIME ON GAZPROM .......................................... 66

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2.4.1 New infrastructure ............................................................................................................. 66

2.4.1.1 North Stream ......................................................................................................................................... 66

2.4.1.2 OPAL and NEL ..................................................................................................................................... 67

2.4.1.2.1 OPAL ................................................................................................................................................ 67

2.4.1.2.2 NEL .................................................................................................................................................. 67

2.4.1.3 South Stream ......................................................................................................................................... 68

2.4.2 Lithuanian Energy Market ................................................................................................ 69

2.4.3 Polish Energy Market ........................................................................................................ 70

2.4.4 German Energy Market ..................................................................................................... 71

2.4.5 Influence of the EU Competition Law ............................................................................... 72

2.4.5.1 Development of Competition Law in the Internal European Energy Market ........................................ 72

2.4.5.2 Application of Competition Law on Gazprom ...................................................................................... 73

2.4.6 Conclusion ......................................................................................................................... 74

2.5 ADDITIONAL THOUGHTS ........................................................................................................ 77

2.6 GENERAL CONCLUSION ......................................................................................................... 78

3 MAIN PROBLEM AND FUTURE PROSPECTS OF THE EU-RUSSIA ENERGY

RELATION .......................................................................................................................................... 81

3.1 CONFLICTING ENERGY STRATEGIES ...................................................................................... 82

3.2 FUTURE LEGAL FRAMEWORK ................................................................................................ 85

CONCLUSION .................................................................................................................................... 88

BIBBLIOGRAPHY ............................................................................................................................. 91

1

INTRODUCTION

The EU and Russia are traditional long-term partners in various fields of political and economic

cooperation. They are bound together by their geographical positioning and historically developed

relations.1 Trade relations between the two economies have been developing substantially over the

years. Currently Russia is one of the EU’s key trading partners. In 2013 goods exports to Russia

amounted to 120 billion EUR. The EU on its turn is by far Russia’s most important trading partner,

currently accounting for approximately half of its overall trade turnover.2

In no other field is the bond between the EU and Russia as strong as in the field of energy

cooperation. Beginning of this cooperation dates back to the second half of the last century. The first

oil pipeline Druzhba was constructed in 1964 and linked the USSR to Eastern Germany. As for the gas,

the first pipeline called Bratstvo was built in 1968 and stretched from Kiev to Czechoslovakia, with an

extension to Austria and Poland. First strategic decision to establish energy relations between Europe

and Russia came in the early 70’s after the Arab oil embargo. At that time USSR was regarded by

Europe as a more reliable partner compared to the Middle East. As a result of these links a strong

interdependence in the energy field was created between the two economies, which had a major

impact on their bilateral relationship.3

Since then, the energy relationship has developed substantially. Currently EU depends heavily on

external energy producers and imports around 54% of its energy. Russia on its turn provided in 2010,

27% of the EU’s hard coal imports, 35 % of the crude oil imports and 32 % of the natural gas imports4.

Approximately 60 % of all Russian gas and oil exports are destined for the EU market.5 Currently,

around 70 % of the EU-Russia trade comes from mineral fuel and related energy goods.6 This

interdependence will only increase in the future, with EU’s import dependency possibly rising to 70%

1 A. GUSEV, EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 25.

2 N. ESAKOVA, European Energy Security: Analysing the EU-Russia Energy Security Regime in Terms of Interdependence Theory,

Frankfurt, Springer, 168; European Commission, Russian Trade Statistics, 16 April 2014,

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdf. 3 N. ESAKOVA, European Energy Security: Analysing the EU-Russia Energy Security Regime in Terms of Interdependence Theory,

Frankfurt, Springer, 2012, 155-156. 4 European Commission, Main origin of primary energy imports, EU-27, 2002-2010 (% of extra EU-27 imports, 12 October 2012,

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Main_origin_of_primary_energy_imports,_EU-27,_2002-2010_(%25_of_extra_EU-27_imports).png&filetimestamp=20121012131852#filehistory). 5European Commission, EU Energy in Figures 2013, January 2013 http://ec.europa.eu/energy/publications/doc/2013_pocketbook.pdf. 6 T. ROMANOVA, “Towards a Comprehensive Theory of Legal Harmonization between the EU and a Third Partner: the Case of the EU-

Russia Energy Dialogue” B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012,

(279) 281.

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdf

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Main_origin_of_primary_energy_imports,_EU-27,_2002-2010_(%25_of_extra_EU-27_imports).png&filetimestamp=20121012131852#filehistory)

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Main_origin_of_primary_energy_imports,_EU-27,_2002-2010_(%25_of_extra_EU-27_imports).png&filetimestamp=20121012131852#filehistory)

http://ec.europa.eu/energy/publications/doc/2013_pocketbook.pdf

2

by 2030 while most of this increase will be met by Russia and other energy producing countries.7

Thus EU and Russia will most probably remain each other’s main energy partners.

This EU-Russia energy relation will form the subject matter of my thesis. It is however a rather broad

subject, which is to extensive to cover in its entirety. For this reason I have narrowed down the scope

of my research in two ways. Firstly, I will focus on the energy relation in the gas sector. There are

several specific challenges faced within this sector8 which makes it a pain point of the EU-Russia

energy relation. It is characterized by various issues and conflicts which hamper proper development

of cooperation and negatively influence the whole EU-Russia relationship. Recent developments

have once more put this sector in the spotlight. Secondly, as this thesis is written with the intention

of acquiring a Master’s Degree in the Law Studies, I will mainly focus on the legal aspects of this

relationship.

In my work I will seek to answer three main research questions:

1) What is the legal framework of the EU-Russia energy relation and what is its impact on this

relation?

2) What is the situation around one of the most recent issues of the EU-Russia energy relation,

namely the new unbundling regime?

3) What is the main reason behind the difficulties of the EU-Russia energy relation and what are

its future prospects?

The main objective of this work is to provide clarity in this complex matter and to conduct an in

depth research of a specific issue of the relationship.

To conduct this study several databases were consulted such as Jura, Stradan, Eclas, HeinOnline and

Westlaw. Majority of the sources was found in the libraries of the law faculties of UGent and KU

Leuven. It is important to notice that there are few primary law sources used in my research. This can

be explained by the fact that there is very little case-law on my research subject as it concerns a

rather politically sensitive issue on the international level. It is true that law can only be applied

7 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the

Committee of the Regions of 13 November 2008, Second Strategic Energy Review, An Energy Security and Solidarity Action Plan,

COM(2008) 781 final; European Commission, EU Russia Energy Dialogue Tenth Progress Report, 16 November 2009,

http://www.russianmission.eu/userfiles/file/energy_dialogue_10_progress_report_2009_english.pdf. 8 N. ESAKOVA, European Energy Security: Analysing the EU-Russia Energy Security Regime in Terms of Interdependence Theory,

Frankfurt, Springer, 161.

http://www.russianmission.eu/userfiles/file/energy_dialogue_10_progress_report_2009_english.pdf

3

where it is politically possible to do so. Also, the bulk of my work concerns a rather recent subject

which is currently only starting to develop.

I will structure my thesis in three parts that correspond to the research questions. In the first part I

will describe main instruments that comprise the legal framework and look at their influence on the

energy relation. Then I will evaluate the current legal framework. In the second part I will describe in

detail the new unbundling regime and look at its impact on the energy relationship with Russia. In

the third and last part of my thesis, I will describe what I assume to be the main reason behind the

difficulties of the EU-Russia energy relationship and briefly reflect on the future prospects thereof

and its legal framework.

4

1 THE LEGAL FRAMEWORK

Facts and numbers presented in the introduction, show the importance of the EU-Russia energy

relation in the gas sector. This relation has evolved substantially over the years and so did its legal

framework. Under today’s legal frame however, the situation seems to be as complex and unstable

as ever. In this first part of my thesis I am going to describe main instruments that as a whole

comprise the current legal framework of the EU-Russia energy relation. I will elaborate on the

content of these instruments and describe how each of them affects this relation.

Firstly, I am going to discuss the EU-Russia Partnership and Cooperation Agreement, which still is the

legal basis of the general bilateral relations. 2) Then I will focus on the European Charter Treaty. This

is a unique multilateral energy instrument that has an impact on the relation in question. 3) Then I

will briefly discuss the EU-Russia Energy Dialogue, which is strictly speaking not a legal but rather an

institutional instrument. 4) Subsequently I will discuss the recent WTO accession of Russia that has

somewhat modernized the energy relations. Lastly I am going to elaborate on 5) specific EU

legislation and 6) Bilateral Investment Treaties between Russia and EU Member States. Strictly

speaking these two elements don’t seem to belong in the list of bilateral and multilateral instruments

that address the EU-Russia energy relation. However, they do touch a rather important facet thereof,

which is why I chose to involve them in the present discussion.

I will conclude this part by evaluating current legal framework and its impact on the EU-Russia energy

relation.

5

1.1 Partnership and Cooperation Agreement (PCA)

To this day, bilateral relationship between Russia and the EU is governed by the EU-Russia

Partnership and Cooperation Agreement (PCA).9 The agreement was concluded in June 1994 and

entered into force on 1 December 1997. PCA was initially concluded for the period of 10 years. By

virtue of art. 106 however, after this initial period has expired the agreement is automatically

extended unless denounced by one of the parties.10 Objectives of this agreement range from

consolidating democracy and cultural cooperation to enhancement of free trade and transition of the

Russian economy to the market-based system (art. 1 PCA).11

Despite significance of the cooperation between the parties in the field of energy, the PCA does not

contain detailed provisions on energy. Only one provision specifically addresses energy, namely

article 65 of the PCA. This provision on its turn only contains that cooperation in the energy field shell

include i. a. ‘improvement of the quality and security of energy supply’, ‘formulation of energy policy’

and ‘modernization of energy infrastructure’. This cooperation would take place ‘within the principles

of market economy and the European Energy Charter’.12 In addition, several other PCA provisions can

have an influence on the energy relation. These are the Most Favored Nation provision (MFN) (art.

10 PCA), freedom of transit (art 12(2) PCA), investment protection (art. 58 and art. 28 PCA), free

movement of capital (art. 52 PCA) and general insurance of a positive economic climate (art. 34

PCA).13

However, these provisions have a rather limited legal value. Like many other PCA provisions, they are

not more than declarations of intent that do not entail direct legal consequences.14 In addition PCA

provides for a rather weak dispute settlement mechanism. Art. 101 states that disputes relating to

application of the PCA provisions may be resolved within the Cooperation Council. This Council

9 Council and Commission Decision of 30 October 1997 on the conclusion of the Partnership and Cooperation Agreement between the

European Communities and their Member States, of the one part, and the Russian Federation, of the other part, OJ L 327/3. 10 D. BUSCHLE, “The Effect of the EC-Russia Partnership Agreement in Community Law: Lessons Learned from the Soccer World” in K.

TALUS and P. L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (181) 181. 11 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 229; J.-C. PIELOW, “Les relations entre l’Union

européenne et Russi sous l’angle de la politique et du droit de l’énergie“ in C. BLUMANN (ed.), Vers une politique européenne de l’éenergie,

Brussels, Bruylant, 2012, (181) 194. 12 D. BUSCHLE, “The Effect of the EC-Russia Partnership Agreement in Community Law: Lessons Learned from the Soccer World” in K.

TALUS and P. L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (181) 182. 13 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 10; A. BOUTE,

“Wederkerigheid in Europese en Russische energie-investeringen: Een Juridische analyse van de ‘Gazprom-clause’”, Tijdschrift voor

Energierecht 2007, (247) 249-250. 14 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 11.

6

however, can only adopt recommendations, which are not binding. Therefore, this dispute

settlement mechanism has not been relied upon in the past conflicts.15

These deficiencies have been recognized by both Russia and the EU. Already in 1999 Russia insisted

on replacing current outdated PCA with a new framework agreement. Also EU recognized the need

for modernizing its relation with Russia. The first step in this direction was taken by adopting the four

Common Spaces Agenda.16 One of the four spaces, the Common Economic Space, seeks to i.a.

Integrate Russian and EU energy markets.17 These Common Spaces were further complemented by

the Partnership for Modernization.18 However, these are political rather than legal documents, which

by themselves hold little significance. This means that the ambitious cooperation in the energy field

set out in these documents will have to be implemented by virtue of a binding legal agreement.19

Alongside adopting four Common Spaces, EU committed to adopt an updated legal framework that

would replace the current PCA and implement the Common Spaces. In May 2006, EU and Russia

agreed to develop a new legal framework, which would include a comprehensive energy chapter.

Due to political difficulties official negotiations only started in December 2008.20 After multiple

negotiation rounds however, the parties have not made a lot of progress on this new agreement.21

This means that the energy markets integration foreseen in the Common Economic Space will have

to be implemented by virtue of the current PCA.22 However, as described above, this agreement

contains very little on energy cooperation. Provisions that do concern EU-Russia energy relation, do

not offer a solid legal basis to rely upon in case of a dispute. To top it all off, PCA provides for a very

weak dispute settlement mechanism. Thus it seems that PCA’s main contribution to the EU-Russia

energy relation is the reference to ECT made in art. 65 and establishment of institutional basis for the

EU-Russia Energy Dialogue.23

15 P. VAN ELSUWEGE, Towards a Modernization of EU-Russia Legal Relations?, CEURUS EU-Russia Papers No. 5, June 2012,

http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf, 8. 16 Joint Statement, EU-Russia Summit, 31 May 2003, 9937/03; Ibid., 2 17 Road Maps, EU-Russia Summit, 11 May 2005, 8799/05. 18 Joint Statement on the Partnership for Modernization, EU-Russia Summit, 31 May-1 June 2010, 10546/10. 19 P. VAN ELSUWEGE, Towards a Modernization of EU-Russia Legal Relations?, CEURUS EU-Russia Papers No. 5, June 2012,

http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf, 1-2. 20 Ibid., 2-3. 21 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 229. 22 P. VAN ELSUWEGE, Towards a Modernization of EU-Russia Legal Relations?, CEURUS EU-Russia Papers No. 5, June 2012,

http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf, 1; ENGLE, E., “From Russia with Love: The EU, Russia, and

Special Relationships”, Richmond Journal of Global Law and Business 2011, (549) 587-588. 23 A. GUSEV, EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 20.

http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf



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1.2 European Charter Treaty (ECT)

The Energy Charter Treaty24 is one of the few existing multilateral agreements that specifically

address energy. It represents the first international regime in energy trade and transit, and with

regard to investment protection, it is a treaty with the largest geopolitical scope.25

1.2.1 Energy Charter proces

The increasing internalization of the energy markets and dissolution of the USSR were the main

impulses behind the European Charter process. The initial aim of this process was establishing of

cooperation in the energy sector between the EU and the Eastern European and the Former Soviet

Union countries. For the ‘East’ it was a step towards transition into a market economy and

subsequent western investments, while ‘West’ would enjoy cheap energy supplies form the east.26

The first political initiative was taken by the Dutch Prime Minister Ruud Lubbers in June 1990, which

resulted in a signature of the European Energy Charter (EEC) in December 1991. Thus the framework

of the international cooperation in the field of energy was established. EEC set a further objective to

create a legally binding instrument in order to implement its regime. The outcome was the Energy

Charter Treaty (ECT), which was signed in December 1994 and entered into force in April 1998. As its

objective ECT stipulates under art. 2 that ‘this Treaty establishes a legal framework in order to

promote long-term cooperation in the energy field, based on complementarities and mutual benefits,

in accordance with the objectives and principles of the Charter’. In art 3, the contracting parties set to

reach this goal through greater opening of international energy markets.27 Currently ECT counts fifty-

one Member States. In addition, it has over 20 observer states and over 10 observing international

organizations.28

1.2.2 Main provisions

The legal framework of the ECT covers various areas of energy cooperation including investment,

trade, transit, competition, energy efficiency, access to capital, transfer of technology, protection of

24 Energy Charter Treaty, 2080 UNTS 95, 34 ILM 360 (1995). 25 A. KONOPLYANIK, “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the

Energy Charter and the New Russian Initiative)” in K. TALUS and P. L. FRATINI (eds.), EU-Russia Energy Relations, Brussels,

Euroconfidentiel, 2010, (45) 103; A. V. BELYI, “The Energy Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS

(eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, (301) 308.; A. JOHNSTON and G. BLOCK, EU Energy Law,

Oxford, Oxford University Press, 2012, 284. 26 Ibid., 284. 27 A. V. BELYI, “The Energy Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and

Policy Issues, III, Cambridge, Intersentia, 2012, (301) 305-307. 28 For ECT members and observers see Energy Charter, Members and Observers,

http://www.encharter.org/index.php?id=61&L=0L%200%2041%EF%BF%BD0%EF%BF%BD3


8

environment and dispute settlement. In what follows I am going to elaborate on several provisions of

the ECT that I consider to be the most important when discussing EU-Russia energy relation, namely:

trade, transit, investment and dispute settlement provisions.29

1.2.2.1 Trade

Through its provisions ECT tends to create a stable and non-discriminatory regime for trade of energy

materials and products between the contracting parties. This regime is on its turn based on the rules

of the GATT and other WTO Agreements. Through reference to the WTO in art. 4, ECT thus applies

the rules of the GATT to the ECT contracting parties that are not members of the WTO.30 However, in

view of recent Russian accession to the WTO, the ECT trade provisions have lost their value as to the

EU-Russia legal framework.

1.2.2.2 Transit

The ECT transit provisions were seen as a key element during the initial negotiations seen that

several ECT members are remote producing countries while others are major transit countries. Art. 7

of the ECT lays down the rights and obligations concerning transit of energy through territory of a

contracting state. This article mainly ‘facilitates’ transit in two ways: by granting access to existing

networks and by encouraging construction of new transport capacity. However, weak formulation of

art. 7, ‘Each contracting party shell take necessary measures to facilitate the Transit’, has created

some legal uncertainty between the members and resulted in deficient implementation of this

provision. For this reasons, shortly after entrance into force of the Treaty, a consensus emerged to

further develop the transit regime. Negotiations on the Transit protocol, which commenced in 2000,

became on their turn one of the main issues between EU and Russia concerning the European

Charter process.31

1.2.2.3 Investment

ECT’s investment provisions are based on a well-established Bilateral Investment Treaty practice, as

well as the EU’s First Energy Liberalization Package.32 The main objective of these provisions is to

create a positive investment climate by reducing non-commercial risks concerning foreign

29 Despite Russia’s withdrawal from the provisional application, I will elaborate on ECT’s legal regime not only for its historical and

theoretical value, but also in the view that ECT process still may have a future in the EU-Russia energy relation. 30 Y. SELIVANOVA, “The Energy Charter and the International Energy Governance” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (373) 375-376. 31 A. V. BELYI, “The Energy Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and

Policy Issues, III, Cambridge, Intersentia, 2012, (301) 308-309; A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University

Press, 2012, 290-291. 32 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 237.

9

investments. Only investments in the energy sector are protected under the ECT (see definition

‘investment’ in art 1(6)).33

The ECT distinguishes between two stages in the investment process and renders them a different

kind of protection. The pre-investment stage concerns access for foreign investors and it is protected

by ‘soft law’ measures. Two interesting provisions in this regard are the Standstill provision of art.

10(5) (a) and the Rollback provision of the art. 10(5) (b). The former requires contracting states not

to introduce new restrictions, while the letter requires reduction of existing restrictions on foreign

investment.34 The post-investment stage concerns the already made investments and is protected by

binding ‘hard-law’ measures. For this kind of investments ECT imposes four obligations on the

contracting parties. Art. 13 o the ECT protects foreign investors from unlawful expropriation. Art. 10

(1) protects them from breaches of individual investment contracts. The same article obliges

contracting parties to provide ‘equitable and fair treatment’ and ‘most constant protection and

security’. Lastly, national and the most favored nation treatment oblige to not discriminate against

investors from the ECT contracting states with regard to own or other foreign investors.35

1.2.2.4 Dispute settlement mechanism

The ECT regime is reinforced by a specific dispute settlement mechanism. This is a major confidence-

builder for the foreign investors. ECT contains 2 forms of binding dispute settlement. Investor-to-

State arbitration under art. 26 is provided for investment disputes. The Sate-to-State arbitration

under art 27 on its turn concerns all disputes arising from the interpretation or application of the ECT

(except disputes concerning competition and environment). Art. 26 (2) gives investors direct access

to one of the international arbitration forums, namely: International Centre for Settlement of

Investment Disputes (ICSID), the United Nations Commission on International Trade Law (UNCITRAL),

or the Arbitration Institute of the Stockholm Chamber of Commerce. The awards rendered under

this dispute settlement mechanism are final and directly enforceable.36

1.2.3 Specific Russian position

Throughout the whole European Charter process, Russia was seen as a key partner and played a

crucial role in its development. In what follows I am going to discuss the evolution of the Russian

position within the ECT and conclude with the current stance of affaires.

33 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 284-285. 34 These provisions could be interesting in view of the new investment-avers unbundling regime introduced in the Third Energy Package; K.

TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 237-238. 35 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 286-289. 36 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 237; A. JOHNSTON and G. BLOCK, EU Energy Law,

Oxford, Oxford University Press, 2012, 291-293.

10

1.2.3.1 Provisional application of the ECT

Throughout initial negotiations Russia played an active role in determining the content of the ECT. A

review of Travaux Préparatoires reveals that in this initial stage already Russia has expressed some

concerns with regard to i.a. transit and investment provisions. However a consensus was struck and

incorporated in the final text to Russian’s satisfaction and on December 1994 Russia signed the ECT.37

There are some doubts on whether Russia fully understood the consequences of signing this treaty.38

The signature obliged Russia under international law not to act in a manner contrary to its aims. By

virtue of the art 45 (1) of the ECT however, signature of the ECT implied that Russia had agreed to

apply this treaty provisionally.39

Although ‘provisional application’ is not a novel concept in international law, its implications as to

the exact rights and obligations of the concerned state are still not clear. Majority of the scholars

however agree that once a state has agreed to the provisional application of a treaty, it binds the

state in question in its entirety. Deciding otherwise would result in legal uncertainty.40 This vision was

confirmed by the ICSID in the case Kardassoupulos v. Republic of Georgia, where the issue of

provisional application of the ECT was addressed for the first time. The tribunal decided that by

consenting to provisional application, the Member State in question was obliged to apply all of the

ECT’s provisions as if it was already ratified and in force, and deciding otherwise would “strike at the

heart of the clearly intended provisional language”.41 The last doubts were swept away in the Yukos

cases. The arbitration tribunal ruled in its preliminary conclusion that despite the fact that ECT was

never ratified by Russian Duma, Russian Federation was still bound by the ECT, including the

arbitration provisions, by virtue of the provisional application.42

The conclusion is thus that even under ‘provisional application’ Russia was indeed subject to the

obligations under the ECT in its entirety.43 Besides that, by signing ECT Russia has also committed to

ratify it.

37 A. HADFIELD and A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 5. 38 Ibid., (1) 5. 39 The same article provides for an option to opt out form provisional application. Russia however made no such declaration; NAPPERT, S.,

“EU-Russia Relations in the Energy Field: The Continuing Role of International Law” in K. TALUS and P. L. FRATINI (eds.), EU-Russia

Energy Relations, Brussels, Euroconfidentiel, 2010, (103) 111 40 C. SEDAT, “Reciprocity and Provisional Application under the Energy Charter Treaty: legal aspects” in M. M. ROGGENKAMP and U.

HAMMER (eds.), European Energy Law Report VI, Antwerp, Intersentia, 2009, (189) 200. 41 Kardassoupulos v. Republic of Georgia, ICSID (2010) ARB/05/18, 59; ibid., 216. 42 Hulley Enterprises Limited (Cyprus) v. The Russian Federation, PCA (2009) AA 226; Yukos Universal Limited (Isle of Man) v. The Russia Federation, PCA (2009) AA 227; Veteran Petroleum Limited (Cyprus) v. The Russian Federation, PCA (2009) AA 228. 43 A. HADFIELD and A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 8.

11

1.2.3.2 Ratification issues

By signing ECT in 1994 Russia gave a strong indication of its intention to ratify it in the future.

However, both in 1997, as well as 2001 Russian Duma refused to ratify the ECT.44 These decisions

could be contributed to several concerns expressed by Russia with regard to the ECT regime. It has

been argued that whilst some of these concerns were expressed by the Russian Duma, the real

culprit behind the scenes was Gazprom, which feared for its business interests and thus pressured

the Russian Government and Duma to retract form the process.45

First issue concerns the ECT’s investment provisions. These provisions were rather permissive and

granted foreign investors a wider and more liberal treatment than what was the case under the

Russian law. Thus Russia feared an increasing number of legal actions by foreign investors under

ECT’s dispute settlement mechanism.46 These concerns seem to be confirmed in the view of the

current Yukos dispute.

Another issue was a number of misinterpretations of the ECT by Russia. Most notable example is the

confusion on the part of Gazprom concerning the exact obligations under art. 7(3) of the Treaty.

Gazprom feared that under this provision it would have to grant access to its transportation system

to cheap Central Asian gas that would be sold to the EU, which would substantially diminish its

dominant position on the EU energy market.47 This however is not required under the ECT provisions.

In the Understanding to the ECT (IV.1 (b) (i)) it is specifically noted that the provisions of the Treaty

do not provide for either mandatory or negotiated third party access.48

Possibly the main issue was the controversy around the Transit Protocol. As I mentioned earlier,

ECT’s transit provisions led to legal uncertainty amongst the contracting parties. For this reason

Russia proposed to reinforce the transit regime and clarify these provisions. Russia’s main concerns

that it sought to address were the uncertainty regarding third party access obligations and transit

theft that occurred in the energy flows through Ukraine.49 Negotiations on the Transit Protocol

started in 2000. However, more than a decade of negotiations did not result in an agreement

44 A. HADFIELD AND A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 5. 45 Ibid., (1) 6-7. 46 Ibid., (1) 6. 47 A. KONOPLYANIK, “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the


Euroconfidentiel, 2010, (45) 83. 48 Y. SELIVANOVA, “The Energy Charter and the International Energy Governance” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (373) 393. 49 A. V. BELYI, “The Energy Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and

Policy Issues, III, Cambridge, Intersentia, 2012, (301) 315.

12

between the parties. Currently, negotiations on Transit Protocol are still pending. The main issue

seemed to be the specificity of the EU-Russia energy relations and the conflicting interests pursued

by these parties. For Russia, Transit Protocol had to secure the long-term supply chain and prevent

competition. EU on its turn, sought to loosen the gas supply chain and introduce competition and

free transit into FSU area (provide for third party access to the network and limit long-term capacity

reservations for instance).50

1.2.3.3 Recent developments and termination of the provisional application

Due to the above mentioned issues Russian Duma was reluctant to ratify the ECT. The disintegration

process on the part of Russia however, reached its highpoint in the late 2000’s. This development

can be attributed to several events.

Firstly, the gas spats in 2006 and 2009 worsened energy relations between EU and Russia. Russia

claimed that ECT regime was unable to resolve these conflicts, which allegedly confirmed its

dissatisfaction with the transit provisions in particular. These claims however are not justified, seen

that Russia had not even referred to the ECT during these conflicts.51

Another issue was the Yukos case. Yukos Oil Company was the largest oil company in Russia, on its

way to become one of the largest companies in the world. In 2003 Russia Government launched

several attacks on Yukos under the pretext of tax evasion accusations, which resulted in its

dissolution, expropriation of its assets and liquidation in 2007. In 2005 Yukos shareholders initiated

three arbitration proceedings against the Russian Federation under the ECT’s dispute settlement

mechanism.52 Yukos investors claimed unlawful expropriation of their investments and sought

compensation of approximately 100 billion USD.53

Various speculations were made about the exact motives that led Russia to retreat from the ECT. It is

i.a. suggested that Russia was seeking to protect itself against the Yukos proceeding.54 However this

is rather unlikely because it would imply that no one in Russia had read the ECT during the whole

50 A. V. BELYI, “The Energy Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and

Policy Issues, III, Cambridge, Intersentia, 2012, (301) 318.; K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford,

2013, 239-241. 51 Ibid., (301) 319. 52 See footnote 42. 53 Sherman & Sterling, Yukos: Landmark Decision on the Energy Charter Treaty, January 2010,

http://www.shearman.com/en/newsinsights/publications/2010/01/yukos--landmark-decision-on-the-energy-charter-t__; For more details on

the Yukos case see Laidlaw, P., “Provisional Application of the Energy Charter as Seen in the Yukos Dispute”, Santa Clara Law Review

2012, 655-684. 54 A. KONOPLYANIK, “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the


Euroconfidentiel, 2010, (45) 94.

http://www.shearman.com/en/newsinsights/publications/2010/01/yukos--landmark-decision-on-the-energy-charter-t__

13

process, more precisely article 45 thereof.55 Therefore it seems that the decision was rather based on

long-term dissatisfaction with the investment and transit regime of the ECT.56 Whichever the reason

might have been, on the 20 April 2009 President Dmitry Medvedev introduced his alternative

proposal, the ‘Conceptual approach to the new legal framework for energy cooperation’. This

document on its turn is largely based on the Energy Charter Treaty. Short after that, in October 2009,

Russia ended its provisional application of the ECT.

The consequence of this action is stipulated under art. 45 (3) (b) of the ECT. This article provides that

in event a signatory terminates provisional application, it is obliged to continue applying part III on

investment protection and part IV on dispute settlement of the ECT ‘with respect to any Investments

made in its area during such provisional application by investors of other signatories…for twenty

years following the effective date of termination’.57 This means that for the investments made on its

territory prior to 19 October 2009, Russia is held under the ECT’s investment and arbitration

provisions until October 19, 2029.

1.2.4 Concluding thoughts

The European Energy Charter Treaty and its process has been facing criticism from some key

stakeholders. One of the expressed arguments is that ECT is unbalanced in favor of energy

consuming states at the expense of the energy producing and transit states, hence it does not reflect

the realities of the modern energy world.58 A related issue is that none of the main suppliers of the

EU, i.e. Norway, Algeria and Russia, have ratified the ECT. The issue is even more pronounced now

that Russia has terminated its provisional application. This puts under question the whole ECT

process.59 On its turn, EU itself seems to be less and less interested in this process. Lack of the

initiative with regard to the Transit Protocol negotiations, deviation of its attention towards other

projects like the European Energy Community and increasing gap between EU energy acquis and ECT,

and resulting intra EU arbitration conflicts seem to illustrate this tendency.60


Policy Issues, III, Cambridge, Intersentia, 2012, (301) 321. 56 A. HADFIELD AND A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 8. 57 A. KONOPLYANIK, “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the


Euroconfidentiel, 2010, (45) 90. 58 Y. SELIVANOVA, “The Energy Charter and the International Energy Governance” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (373) 392. 59 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 238. 60 A. HADFIELD AND A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 9; see also A. KONOPLYANIK, “A Common Russia-EU Energy Space

(The New EU-Russia Partnership Agreement, Acquis Communautaire, the Energy Charter and the New Russian Initiative)” in K. TALUS and

P. L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (45) 71-78.

14

However, Energy Charter process is not terminated yet. Despite domestic pressure Russia has not

fully withdrawn from the ECT and thus remains its signatory.61 As I will discuss in the third part of my

thesis, ECT could still become the basis for the EU-Russia legal energy framework. For now however,

despite its potential as described earlier in this chapter, the impact of the ECT on the EU-Russia

energy relation is limited to the protection of the existing EU investments on the Russian territory

until the year 2029.

1.3 EU-Russia Energy Dialogue

As described in the first chapter, PCA did not provide for an adequate mechanism for the EU-Russia

energy relation. Parties soon recognized a need for a more comprehensive approach. Therefore, at

the sixth EU-Russia Summit in 2000, the EU-Russia Energy Dialogue was established.62 This Dialogue

aimed at providing reliability, security and predictability to the EU-Russia energy relations. This

would be achieved by establishing a forum where all issues of mutual concern in the energy sector

(gas, electricity, nuclear sectors) could be addressed.63

Organization of the Energy Dialogue had been restructured various times throughout its existence.

Initially it was based on three working levels. The Permanent Partnership Council operated at the

highest level and consisted of Russian energy minister, EU Energy Commissioner and two Member

State Energy Ministers. At the political level, regular contacts were maintained between the

Coordinators from both sides. The bulk of the work was done within different Working or Thematic

Groups.64 Also these Groups underwent several transformations. At the present moment the

Dialogue is restructured in two main thematic groups, namely: Thematic Group on Energy Markets

and Strategies (which contains an additional Subgroup on Investments and another one on

Infrastructure) and Thematic Group on Energy Efficiency and Innovation.


Policy Issues, III, Cambridge, Intersentia, 2012, (301) 321. 62 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 243. 63 F. TARRADELLAS ESPUNY, “The EU-Russia Energy Dialogue at the Origin of the European Foreign Energy Policy” in K. TALUS and P. L.

FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (9) 10. 64 Ibid., (9) 13-14.

15

Over 100 expert nominated by Member States and Russia are active in these Groups.65 Their main

activity consists of identifying problems of the energy relations and working on common approaches

to address them. The main issues over the years concerned investment, infrastructure, trade and

energy efficiency. These issues are addressed within the Working Groups through exchanging of

views and information, sharing experience and performing studies. This approach has proven useful

in removing much misunderstandings and even solving some sensitive issues within the EU-Russia

energy relation. The Groups can also make proposals, conclude understandings and cooperation

agreements, and identify key (infrastructure) projects.66

A lot of positive results have been achieved within the EU-Russia Energy Dialogue. An important

achievement was the conclusion of common understanding on the preparation of a road map of the

EU-Russia energy cooperation until 2050.67 Concerning energy efficiency cooperation, an important

project was successfully completed in 2007 in the Arkhangelsk, Astrakhan and Kaliningrad.68 A major

achievement within the Market Development Group was the resolution of the conflict over long-

term gas contracts and the related destination clauses.69

The best known achievement of the Energy Dialogue however, is the so called Early Warning

Mechanism (EWM), which was agreed upon at the EU-Russia Summit of May 2007. This mechanism

is based on establishing direct communication links between the Commission and Russian

Government to notify in advance potential demand, supply or transit problems. On 18th December

2008 this mechanism had been officially activated for the first time. During the gas conflict with

Ukraine, Russian Government warned the EU that a gas interruption could be inevitable. Also the

shortcomings of the EWM had been exposed In this case. Despite the warning, the mechanism did

not provide for any concrete steps in case of a supply disruption, which left the EU unrepaired during

the disruptions on the 6th and 7th of January 2009. For this reason EU and Russia agreed to enhance

65 J.-C. PIELOW, “Les relations entre l’Union européenne et Russi sous l’angle de la politique et du droit de l’énergie“ in C. BLUMANN (ed.),

Vers une politique européenne de l’éenergie, Brussels, Bruylant, 2012, (181) 198. 66 F. TARRADELLAS ESPUNY, “The EU-Russia Energy Dialogue at the Origin of the European Foreign Energy Policy” in K. TALUS and P. L.

FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (9) 16-19. 67 Common understanding on the Preparation of the Roadmap of the EU-Russia Energy Cooperation until 2050, 24 February 2011, retrieved

from http://ec.europa.eu/energy/international/russia/doc/20110224_understanding_roadmap_2050.pdf. 68 F. TARRADELLAS ESPUNY, “The EU-Russia Energy Dialogue at the Origin of the European Foreign Energy Policy” in K. TALUS and P. L.

FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (9) 23. 69 T. ROMANOVA, “Towards a Comprehensive Theory of Legal Harmonization between the EU and a Third Partner: the Case of the EU-

Russia Energy Dialogue” B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012,

(279) 296.

http://ec.europa.eu/energy/international/russia/doc/20110224_understanding_roadmap_2050.pdf

16

the EWM by including to this mechanism practical steps to resolve supply disruptions. In addition,

parties have agreed to consider association of the transit countries to the EWM.70

It cannot be denied that some major results have been achieved under the Energy Dialogue.71 For

this reason both EU and Russia have expressed their satisfaction about the fruitful cooperation

within the Dialogue and plan a further development thereof.72 However, despite positive influence

on various areas of the EU-Russia energy relation, Energy Dialogue is ‘only’ an institutional

mechanism of political cooperation. Thus, all its products bare a rather political, ‘soft-law’ value.73

This lack of legally binding decisions substantially diminishes importance of the Energy Dialogue for

the EU-Russia energy relations.

1.4 World Trade Organization (WTO)

After Russia had terminated its provisional application of the ECT in 2009, the EU-Russia energy

relation was left in a sort of a legal vacuum. The situation changed in July 2012, when after almost

two decades of negotiations, Russia finally became a member of the World Trade Organization. In

this chapter I will firstly discuss the position of energy within the WTO framework. Then I will focus

on several outstanding issues of the EU-Russia energy relation in the light of Russia’s recent

accession. I will conclude by evaluating contribution of this accession to the EU-Russia energy

relation.

1.4.1 Energy within the World Trade Organization

WTO74 emerged on 1 January 1995 as an international organization that functions as an ‘umbrella’

for a number of agreements such as: General Agreement on Tariffs and Trade (GATT), General

Agreement on Trade in Services (GATS), Subsidies and Countervailing Duties agreement (SCM),

70 Commission staff working document of 16 July 2009 Accompanying document to the Proposal for a Regulation of the European

Parliament and of the Council concerning measures to safeguard security of gas supply and repealing Directive 2004/67/EC, COM(2009)977

final, 3-5. 71 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 4; The rate of

success varies substantially between the Energy Efficiency Group and the Market Development Group. While energy efficiency agenda has

thrived (signature of Kyoto Protocol by Russia in 2004 for instance), market development is characterized by conflicts between the EU and

Russia and has not been very efficient. See T. ROMANOVA, “Towards a Comprehensive Theory of Legal Harmonization between the EU and

a Third Partner: the Case of the EU-Russia Energy Dialogue” B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (279) 289-299. 72 F. TARRADELLAS ESPUNY, “The EU-Russia Energy Dialogue at the Origin of the European Foreign Energy Policy” in K. TALUS and P. L.

FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (9) 24. 73 J.-C. PIELOW, “Les relations entre l’Union européenne et Russi sous l’angle de la politique et du droit de l’énergie“ in C. BLUMANN (ed.),

Vers une politique européenne de l’éenergie, Brussels, Bruylant, 2012, (181) 198. 74 Marrakesh Agreement Establishing the World Trade Organization, April 15, 1994, 1867 UNTS 154, 33 ILM 1144 (1994).

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502

http://www.wto.org/english/docs_e/legal_e/04-wto.pdf

http://heinonline.org/HOL/Page?handle=hein.journals/intlm33&collection=ustreaties&id=1158

17

Trade-Related Investment Measures agreement (TRIM), Trade Related aspects of Intellectual

Property Rights agreement (TRIP), Technical Barriers to Trade agreement (TBT) and Sanitary and

Phytosanitary Measures agreement (SPS). WTO administrates these agreements and serves as a

forum for further trade negotiations and for dispute settlement. Purpose of this organization, is to

enhance standard of living and employment, and to encourage sustainable development, which it

tends to reach by virtue of reducing tariff and non-tariff barriers to trade, and by eliminating

discriminatory treatment in international trade relations.75 WTO counts presently 159 members.

Initially, energy was kept outside of the scope of the GATT by virtue of a ‘gentlemen’s agreement’

between the founding members. This was done due to strategic nature of the energy resources and

due to the fact that most of the energy producing countries were not members at that time. The

situation changed since creation of the WTO in 1995, as more and more producing countries became

members of the organization. This led on its turn to a changed status of energy within the

organization.76 There is still no energy specific sectoral agreement and there are very few mentions

of ‘energy’ in the existing WTO agreements. However, energy resources such as oil and gas, and

energy related services are seen as ‘goods’ and ‘services’ within the meaning of these agreements.

Thus general WTO disciplines apply to these goods and services as well, now that there is no special

exemption for energy trade.77

Firstly, trade in energy goods is covered by the GATT, main objective of which is to reduce barriers to

trade. Thus the general Most Favored Nation principle (art. I), National Treatment principle (art. III)

and general prohibition on use of quantitative restrictions (art. IX) apply. No specific exemptions are

provided for energy goods, however the exemptions of national security (art. XXI) and environmental

protection (art. XX(g)) are the most relevant for the energy sector.78

Energy related services such as transmission, distribution and other related services, fall under the

GATS. GATS general obligations, such as the Most Favored Nation treatment (art. II), are applicable

to all Members unless exemptions were made at the accession. No such exemptions were made by

the EU, nor by the Russian Federation with regard to the energy sector.79 As for the Market Access

75 C. REDGWELL“International Regulation of Energy Activities” in M. M. ROGGENKAMP, C. REDGWELL, I. DEL GUAYO and A. RONNE (eds.),

Energy Law in Europe: National, EU and International Regulation, New York, Oxford, 2007, (13) 132-133. 76 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 62. 77 P. MILTHORP and D. CHRISTY, “Energy Issues in Selected WTO Accessions” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (260) 260. 78 C. REDGWELL“International Regulation of Energy Activities” in M. M. ROGGENKAMP, C. REDGWELL, I. DEL GUAYO and A. RONNE (eds.),

Energy Law in Europe: National, EU and International Regulation, New York, Oxford, 2007, (13) 134-135. 79 See for commitments and exemptions of the WTO Members: WTO, Schedules of commitments and lists of Article II exemptions,

http://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm#commit_exempt.

http://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm#commit_exempt

18

(art. XVI) and National Treatment (art. XVII:1) obligations, these are only applicable in so far as a

Member has positively accepted them for a specific sector. No such commitments were made by the

EU for the energy sector.80 Neither were such commitments made by Russian Federation.81 GATS

provides for several exemptions to its provisions as well. The most relevant for the energy sector are

the Public Order exemption (art. XIV) and the National Security exemption (art. XIV bis).82

WTO does not provide for an adequate investment regime. The scope of the TRIMs is limited to the

trade-related effects of the investments only and its application to investments in the energy sector

has been put under question by many. Similarly, other WTO agreements can have an impact on the

energy sector, although less pronounced then the above discussed GATT and GATS.83

An additional part of the WTO regime consists of the so called WTO-plus commitments. The

incumbent WTO Members have been increasingly using their bargaining power to extract specific

commitments from the acceding countries in return for the WTO membership. These extra

commitments only bind the acceding country in question and can clarify the existing WTO

commitments or even go beyond what is required under the WTO Agreements. In this manner

several newly acceded WTO members (such as Saudi Arabia and Ukraine for instance) have made

some energy-related commitments concerning i.a. tariffs on energy products, domestic pricing on

energy and transit of energy.84 However, Russia wields significantly more political and economic

power than the recently acceded countries, which gave it a substantial leverage during the WTO

negotiations.85 For this reason, no major commitments in the energy field were made by Russia in its

accession package.

Last element of the WTO framework that I would like to discuss is the WTO’s dispute settlement

mechanism. The Dispute Settlement Understanding (DSU) constitutes an integral part of the WTO

and it plays a crucial role in reinforcing the whole WTO regime. Art. 1 of the DSU provides that any

dispute that arises out of any of the ‘covered agreements’ can be resolved according to the rules and

procedures of the DSU. Furthermore, art. 23.1 provides that the jurisdiction of the WTO dispute

80 Hungary and Lithuania on their turn did make such commitments for the energy relate services. 81 Except for consulting services related to energy distribution. 82 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the

‘Gazprom clause’ of Directive 2009/73/EC and WTO Law, Swiss National Centre of Competence in Research, May 2010, http://www.nccr-

trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 9-13. 83 C. REDGWELL“International Regulation of Energy Activities” in M. M. ROGGENKAMP, C. REDGWELL, I. DEL GUAYO and A. RONNE (eds.),

Energy Law in Europe: National, EU and International Regulation, New York, Oxford, 2007, (13) 137-138. 84 P. MILTHORP and D. CHRISTY, “Energy Issues in Selected WTO Accessions” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (260) 261. 85 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 1.

http://www.nccr-trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi



19

settlement mechanism is compulsory and exclusive in nature. The DSU provides for several methods

of dispute settlement, varying from negotiations to arbitration and adjudication. Strict timeframes

are established for various stages of the dispute settlement process. The final remedy for a breach of

the WTO provisions established by the WTO adjudication is the withdrawal or amendment of the

WTO-inconsistent measure. DSU also provides for temporary remedies like compensation and

suspension of concessions (retaliation).86

1.4.2 Outstanding issues

Russia’s WTO accession gave the above described arsenal of provisions to both EU and Russia, which

they now can use to address some of the key outstanding issues in their energy relation.

First issue concerns energy transit through the territory of Russia. Central Asian countries that sell

gas to the EU face various problems when transporting it through Russian pipeline network.

Moreover, after regulatory changes in 2006, these countries were practically deprived from

transiting their gas through Russia.87 As I described earlier, attempts to address this issue in the ECT

framework have largely failed. Within the WTO framework art. V of the GATT seems to concern the

same issue. Art. V provides for freedom of transit across the territory of a WTO Member for goods

that temporary enter its territory and that are destined for consumption in another Member State.

However, as the GATT does not specifically address energy, it has been doubted whether energy

transit falls within the scope of art. V. The popular opinion is that this article only concerns mobile

means of transportation and does not apply to transport through a fixed infrastructure like gas

pipelines.88 Thus, the issue of gas transit though Russia remains unresolved.

Another key outstanding issue in the EU-Russia energy relation concerns Russian dual pricing policy.

Russia keeps the domestic gas price low, while export supplies are significantly more expensive. EU

believes that this creates and unfair competitive advantage for the Russian goods, especially in

energy intensive sectors, which are subsequently being dumped on the EU market.89 Some of the

86 NAPPERT, S. and ORTINO, F., “International Resolution of Energy Trade and Investment Disputes” in SELIVANOVA, Y. (ed.), Regulation of

Energy in International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (303) 304-307. 87 P. MILTHORP and D. CHRISTY, “Energy Issues in Selected WTO Accessions” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (260) 294; A. V. BELYI, “The Energy

Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, III, Cambridge,

Intersentia, 2012, (301) 317. 88 R. LEAL-ARCAS and A. FILIS, “Conceptualizing EU Energy Security through an EU Constitutional Law Perspective”, Fordham

International Law Journal 2013, (1125) 1291-1292; P. MILTHORP and D. CHRISTY, “Energy Issues in Selected WTO Accessions” in Y.

SELIVANOVA (ed.), Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer,

2012, (260) 295. 89 Council of the European Union, Key outstanding issues for the EU in its relations with Russia, 28 November 2011, 17649/11; V. VAN

HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for Europe”,

European Energy and Environmental Law Review, February 2009, (51) 74.

20

WTO Member States are of the opinion that this practice is in breach of the existing SCM

provisions.90 However, a closer analysis under SCM agreement does not provide for a clear answer.

Although dual pricing policy can be seen as a subsidy under art. 1.1 of the SCM, it could be

considered as WTO consistent due to the fact that Russia applies it in a non-discriminatory manner to

all economic sectors and enterprises. WTO panel has yet to clarify this issue however. For the lack of

legal certainty under the WTO agreements, incumbent Member States have been tackling dual

pricing by virtue of the WTO-plus requirements as described above. This approach has been

successfully applied to the WTO accession of the Saudi Arabia, which had succumbed to the pressure

and gave up its dual pricing policy.91 However EU was not successful in its efforts towards Russia.

Despite some apparent progress being made92, Russia refused to give up its pricing policy and

eventually EU had to drop its demands. During the press release of November 10, 2011, WTO

representatives stated that “The Russian Federation would continue to regulate price supplies to

households and other non-commercial users, based on domestic social policy considerations”.93 Thus

it seems that also the Russian dual pricing issue cannot be adequately addressed under the WTO

framework.94

Lastly, Russia’s accession to the WTO gives it a legal venue to address its grievances concerning some

of the provisions introduced by the Third Energy Liberalization Package and more precisely, the new

unbundling regime. Russia considers that this regime creates obstacles to trade in services and thus

breaches several GATS provisions.95 I will elaborate in detail on this subject in the part 2 of my thesis.

For now it suffices to say that while GATS enables Russia to effectively address some aspects of the

new unbundling regime, this issue is not fully covered by the WTO agreements.

1.4.3 Conclusion

Both sides have recognized that Russia’s recent WTO accession was an important step in

modernization of the EU-Russia relationship. The WTO covered agreements provide a legal

framework for the economic cooperation in a range of sectors including the energy sector.

Importance of these agreements for the EU-Russia energy relation should not be overestimated

90 P. MILTHORP and D. CHRISTY, “Energy Issues in Selected WTO Accessions” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (260) 289. 91 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 19-20. 92 P. MILTHORP and D. CHRISTY, “Energy Issues in Selected WTO Accessions” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (260) 293-294. 93 Press Release World Trade Organization, “Working Party seals the deal on Russia’s membership negotiations”, 10 November 2011,

http://www.wto.org/english/news_e/news11_e/acc_rus_10nov11_e.htm. 94 Russia did commit to gradually raise domestic gas price for industrial users. However, this raise was already foreseen in the Russian

strategy until 2030, so it is hardly a real concession on its part. See G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to

Tango?”, Legal Issues of Economic Integration 2013, (7) 20. 95 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 63.

http://www.wto.org/english/news_e/news11_e/acc_rus_10nov11_e.htm

21

however. Firstly, lack of reference to energy within the existing WTO agreements complicates

application of their general provisions to the energy sector96 and can make these provisions rather

ineffective (which is the case with the above described transit issue). On the other hand, lack of

specific energy provisions results in a situation where existing WTO agreements do not cover several

important facets of the EU-Russia energy relation in the first place (such as energy investments for

example). For these reasons many of the outstanding issues remain unresolved. Energy trade and

related questions currently form a part of the ongoing Doha round negotiations and a specific Energy

Agreement may be concluded in the future.97 At the present moment however, despite being an

important step in formalizing EU-Russia energy relations, Russia’s WTO accession has a rather limited

impact thereon.

1.5 EU legislation

As opposed to the instruments described in the previous chapters, EU legislation as such is not often

considered as a part of the legal framework of the EU-Russia energy relations. However, several

provisions of the EU law affect some rather important aspects thereof. Recent developments around

a particular EU regulation have led me to consider it as a part of the current discussion. The

legislation in question is the new unbundling regulation of the Third European Energy Package (TEP).

Although it could be argued that many EU provisions can have some sort of influence on the EU-

Russia energy relation, like for instance general EU competition rules or environmental regulation,

the new unbundling regime has a truly unique impact on Russian property on the EU soil.

The unbundling regime regulates ownership and management of the energy infrastructure, and puts

certain constraints on the energy undertakings that are active in the production or supply branch of

the gas value chain. Russian state owned energy company Gazprom, as a major gas supplier and

owner of gas infrastructure within the EU, has to abide by these new rules or suffer the

consequences. Evidence of the substantial relevance of the new EU legislation for the Russian

Gazprom is the name that was informally given to one of the provisions of the unbundling regime,

namely ‘the Gazprom clause’.

96 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 11; V. VAN HOORN,

“Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for Europe”, European

Energy and Environmental Law Review, February 2009, (51) 63. 97 C. REDGWELL, “International Regulation of Energy Activities” in M. M. ROGGENKAMP, C. REDGWELL, I. DEL GUAYO and A. RONNE

(eds.), Energy Law in Europe: National, EU and International Regulation, New York, Oxford, 2007, (13) 137; P. LAMY, Doha Round will

benefit energy trade, WTO Speeches, 16 November 2007, http://www.wto.org/english/news_e/sppl_e/sppl80_e.htm.



http://www.wto.org/english/news_e/sppl_e/sppl80_e.htm

22

The implications of this new sector specific EU regulation on the relations with Russia will be the

subject of a detailed discussion in the second part of my thesis. Without giving too much away at this

stage, I need to anticipate somewhat on the further findings and note that this EU sector specific

legislation adds very little to the legal framework of the EU-Russia energy relation. Not only it covers

a single aspect thereof (ownership and management of the energy infrastructure), but it does so

rather inefficiently. The reason behind this is the fact that where EU seeks to address such a sensitive

issue as Russian property, even if only on the EU territory, it should be brought to the negotiation

table with Russia and not regulated unilaterally by virtue of secondary EU legislation. Otherwise EU

risks a rather inadequate implementation of its legislation, among other unpleasant consequences.

Ultimately, this recent legislation seems to create a new irritant for the EU-Russia energy relation

rather than complement the existing legal framework. For the detailed elaboration I refer once more

to the Part 2 of my thesis.

1.6 Bilateral Investment Treaties (BIT)

Bilateral Investment Treaty is an international law instrument that has a substantial impact on the

energy relations between the contracting countries. Although not specifically aimed at energy, its

provisions apply to a broad range of different assets that BITs consider as ‘investments’ and as such,

they have a direct influence on the investments in the energy sector.98 Thus BITs constitute a legal

frame for the energy investments between the contracting parties. At the present day Russia has

concluded BITs with 24 EU Member States.99

1.6.1 Origins, aim and content of the BITs

First BIT was signed between Germany and Pakistan and dates back to 1959. As consequence of the

decolonization process, a lot of European property was exposed to the massive expropriations. The

first BITs were developed for securing European investments on the territory of these newly

decolonized states. To achieve this goal, BITS implemented three types of measures.100 Firstly,

contracting parties committed to apply a certain standard of treatment toward foreign investments.

Rather than relying on local property law and customary international law, specific standards of

protection were established by virtue of these treaties.101 Secondly, a direct right of action was

98 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 116. 99 See the list at http://unctad.org/Sections/dite_pcbb/docs/bits_russia.pdf. 100 Ibid., (115) 120. 101 T. EILMANSBERGER, “Bilateral Investment Treaties and EU Law”, Common Market Law Review 2009, (383) 385.

http://unctad.org/Sections/dite_pcbb/docs/bits_russia.pdf

23

provided for the investors, which gave them a direct claim vis-á-vis the host country. This enhanced

credibility of the States’ commitments as to the standard of protection which it has contracted to

respect. This credibility was further enhanced by the third element, subjection of all disputes to the

external and impartial arbitration.102 While through the course of time these treaties have evolved,

virtually every contemporary BIT is based on these 3 principles. There are now basically 2 BIT-

models, the European and the North-American. Key distinction between the two is that European-

model BITs are mainly limited to the post-investment protection103, while North-American BITs also

cover investments at the pre-establishment-phase.104

Amongst the typical provisions of the specific regime created by the BITs are the National and Most

Favoured Nation treatment, fair and equitable treatment, prohibition of unlawful expropriations, and

guarantee of free transfer of funds.105 These provisions have a major impact on the energy sector. A

host country cannot discriminate against BIT-foreigners, who invest in i.a. energy infrastructure, in

favour of similarly situated local or other 3rd country investors (NT, MFN). Expropriation of energy

assets without proper compensation is forbidden. A powerful tool for attracting foreign investors is

by making guarantees of regulatory stability. Under the ‘fair and equitable treatment’ provision the

State is bound by these guarantees, excluding even non-discriminatory government energy

regulations, which can grant foreign investors a level of protection that even local investors do not

enjoy106. A powerful private right of action under BITs allows the affected investor to seek monetary

compensation through binding international arbitration if a host State breaches these obligations.107

1.6.2 New foreign investment competence of the EU

As mentioned earlier, BITs are concluded between Russia and EU Member States and thus regulate

energy investments on the Russia-Member State level. However, the EU’s position on the side-lines

concerning foreign investments has recently changed. Lisbon treaty extended by virtue of art 207(1)

102 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 126. 103 A. BOUTE, “Wederkerigheid in Europese en Russische energie-investeringen: Een Juridische analyse van de ‘Gazprom-clause’”,

Tijdschrift voor Energierecht 2007, (247) 250. 104 T. EILMANSBERGER, “Bilateral Investment Treaties and EU Law”, Common Market Law Review 2009, (383) 386. 105 United Nations Conference on Trade and Development, Bilateral Investment Treaties 1959-1999,

http://unctad.org/en/docs/poiteiiad2.en.pdf, 20. 106 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 129-130; A. BOUTE,

“Case C-264/09, Commission v. Slovakia, Judgment of the Court (First Chamber) of 15 September 2011, Not Yet Reported”, Common

Market Law Review 2012, (1179) 1192-1194. 107 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 238.

http://unctad.org/en/docs/poiteiiad2.en.pdf

24

and art 206 of the TFEU108 the scope of common commercial policy to the area of ‘foreign direct

investment’, which brings them under the exclusive competence of the EU ( art 3(1) TFEU).109

The term ‘foreign’ refers to relation of the EU and third countries, and needs no explanation. ‘Direct

investments’ is interpreted by the ECJ as investments that confer possibility of effective participation

in the undertaking’s management and control, which corresponds with the widely accepted

definition of the IMF and OECD. This means that ‘portfolio investments’, which are made with a sole

goal of financial participation without any intention to influence undertakings management, are left

outside the scope of the new exclusive competence.110 The exact scope of this competence regarding

‘direct investments’ provoked a lot of interest and debate among the scholars.111 However, it is

largely accepted that it entails all of the above mentioned provisions which are commonly found in

BITs. This means that the new EU exclusive competence extends to all forms of protection but not to

all forms of investments.112

These recent changes however, do not have an immediate influence on the existing BITs between

Russia and the EU Member States. Regulation No. 1219/2012113 adopted on December 2012

established a transitional regime for these BITs. By virtue of art 2 and art 3 of this Regulation, BITs

signed before December 1, 2009, or before a Member-State’s accession to the EU may remain in

force until replaced by an investment agreement between the European Union and the third State in

question. New BITs or renegotiations of the existing ones will be led by Commission by virtue of art

7-11 of the Regulation. Seen that EU does not yet poses an exclusive competence for concluding

comprehensive investment treaties, these negotiations will have to be assisted by the Member

States.114 Thus in time and in spirit of the new art. 207 TFEU, all existing BITs, including those

concluded with Russia, will be replaced by new agreements concluded with the EU.115

108 Treaty on the Functioning of the European Union, P.B. C 326/47, 26 October 2012 109 B. DELVAUX, EU law and the development of a sustainable, competitive and secure energy policy – opportunities and shortcomings,

doctoral dissertation Law studies K.U.Leuven, 2011, 395-396. 110 P. EECKHOUT, EU External Relations Law, Oxford, Oxford University Press, 2011, 63-64. 111 For a detailed overview of different opinions see W. SHAN and S. ZHANG, “The Treaty of Lisbon: Half Way towards a Common

Investment Policy”, The European Journal of International Law 2011, (1049) 1060-1065. 112 P. EECKHOUT, EU External Relations Law, Oxford, Oxford University Press, 2011, 66. 113 Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional

arrangements for bilateral investment agreements between Member States and third countries, OJ L 351/40. 114 W. SHAN and S. ZHANG, “The Treaty of Lisbon: Half Way towards a Common Investment Policy”, The European Journal of

International Law 2011, (1049) 159. 115 M. BUNGENBERG, “Going Global? The EU Common Commercial Policy After Lisbon” in C. HERMAN and J. P. TERCHECHTE (eds.),

European Yearbook of International Economic Law, Berlin, Springer, 2010, (123) 143-145.

25

1.6.3 Conclusion

BITs create an investment regime that protects almost all EU investments (24 Member States) on the

territory of Russia and vice versa, Russian investments are protected in almost all EU countries. From

the point of view of Russia-Member States relations, BITs comprise a solid legal frame for protection

of the energy investments. However, on the EU-Russia level, investment regime created by BITs does

not have the same value. Under the EU law, Member States are obliged to comply with their EU

obligations even if it leads to a breach of their obligations under international law.116 These kind of

international commitments are very susceptible to the changes in the EU law. This is also illustrated

by the above mentioned change in competence of the EU, which will eventually lead to complete

renegotiation of the whole BIT regime between Russia and the EU Member States. So despite their

importance, current BITs do not provide for an adequate investment framework for the EU-Russia

energy relations.

1.7 Conclusion

Findings made in this part show that the EU-Russia energy relation comprises of many different

aspects, some of which have been subject to lengthy conflicts between the parties. Energy transit,

dual pricing, investment protection and recently also infrastructure ownership are some of the main

issues that characterize the current situation. A reliable and comprehensive legal framework that

would address these and other aspects is a necessary ingredient for a healthy EU-Russia energy

relation. It would enhance transparency, legal certainty and mutual trust, and encourage necessary

market reforms, investment and technology transfer, all of which would contribute to the

development of both parties’ economies and improve the general relationship. 117 This legal

framework has to be concluded on the EU-Russia level. As the cases of EU unbundling regime shows,

a unilateral approach by one of the parties only further aggravates an already complicated situation.

On the other hand, in the view of ever increasing emergence of the EU on the international scene118,

116 This is for instance the case with application of the new unbundling regime which I will discuss in the next part. 117 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 14. 118 Lisbon treaty gave new competences to the EU in the field of energy and foreign investments for instance.



26

conclusion of bilateral agreements with separate EU Member States will not lead to a reliable

framework either.119

However, a closer analysis of the main legal instruments reveals that the current EU-Russia energy

relation is not based on such a framework. The PCA is a rather deficient legal instrument, which

moreover has very little to offer to the energy sector. ECT, despite its potential, has largely lost its

importance due to Russia’s recent termination of the provisional application. Energy Dialogue,

despite being an important forum for discussions and negotiations, does not produce any legally

binding norms. A breakthrough in formalizing EU-Russia energy relation was accomplished by the

Russia’s recent WTO accession. However, energy sector is rather complex and it creates specific

issues that need specific regulation. The fact that energy is not addressed as such in the WTO

framework reduces its importance for the EU-Russia energy relation.

So instead of a comprehensive and reliable legal framework, there is a patchwork of legal

instruments that only covers some less important and problematic aspects of the EU-Russia energy

relation (such as trade in goods and services under WTO or protection of certain EU investments on

the Russian soil under the ECT). Thus even after Russia’s WTO accession, this relation basically relies

on non-legally binding dialogues and commitments.120 For this reason the key outstanding issues

remain unresolved and continue to hamper EU-Russia cooperation in the energy sector.

The main reason behind this thorny EU-Russia energy relation and absence of a solid legal framework

to adequately address it I will discuss in the third and the last part of my thesis. There I will also

briefly reflect on the prospects of a future legal framework. Before that however, in the next chapter

I will examine in detail one of the most recent issues of the EU-Russia energy relation that I have

discussed in this chapter as a part of the current legal framework, namely the new unbundling

regime.

119 This concerns the BIT regime as described in previous chapter. Also individual EU Member State commitments under the WTO

framework are similarly inadequate. On the same line of reasoning, Russia should refrain from making agreements with separate EU

Member States (as the case is with the recent South Stream project for instance) by which it tends to avoid confrontation with the EU. As this

approach only shifts the confrontation to a later date and aggravates the current situation. See J.-C. PIELOW, “Les relations entre l’Union

européenne et Russi sous l’angle de la politique et du droit de l’énergie“ in C. BLUMANN (ed.), Vers une politique européenne de l’éenergie,

Brussels, Bruylant, 2012, (181) 199-202. 120 P. VAN ELSUWEGE, Towards a Modernization of EU-Russia Legal Relations?, CEURUS EU-Russia Papers No. 5, June 2012,

http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf, 6.


27

2 THE NEW UNBUNDLING REGIME

The new unbundling regime introduced by the Third Energy Package constitutes one of the most

recent issues of the EU-Russia energy relation. In this second part of my thesis I am going to describe

in detail this regime and how it affects the EU-Russia relation, in particular its impact on Russian

Gazprom. Three main questions that I will tend to answer in this part are: what is the exact content

of the unbundling regulation, what is the controversy surrounding it and how is this new regime

applied on Russian Gazprom. In conclusion, I am going to evaluate the new unbundling regime in the

light of the EU-Russia energy relation and its legal framework.

In order to answer these questions I am going to start by 1) describing the roots of the unbundling

and the consecutive steps that led to the current regulation. 2) Then I wills focus on the provisions of

the TEP’s unbundling regime and introduce Russia’s interests on the EU market. 3) In what follows I

am going to elaborate on conflicting points of view of the EU and Russia as well as describe some

legal flaws of the new regime. 4) I am going to conclude with current application of the unbundling

regime on Gazprom, and 5) some additional thoughts.

28

2.1 Liberalization road towards Third Energy Package

In order to understand unbundling and how it would apply on Russian Gazprom it is necessary to

begin with the roots thereof and elaborate on the consecutive steps that were made in order to get

to the current regulation. It will also help to understand the reasons behind Russia’s opposition

against it.

2.1.1 Liberalization of the EU energy market

Common EU Market was established as the backbone of the European integration in the EEC treaty

in 1957. Former Member States decided to create mutual economic interdependence in order to

achieve piece on the European continent. Thus the basic economic principles of free movement of

goods and services without distortion of competition were the driving forces behind early EU

integration. In addition, Treaty of Rome required Member States to address their state monopolies in

order to contribute to the internal liberalized market. Gradually liberalization was reached in various

economic sectors.

This was not the case for the European energy sector though. Energy undertakings refused to adjust

to the European liberalization process, claiming for many years that due to the special tasks assigned

to them they were exempt from these rules.121 As a result of these self-proclaimed exemptions EU

energy Market comprised of mostly publicly owned utilities122 that operated as national or regional

monopolies, enjoying exclusive rights to supply all customers within their specifically defined area.

These utilities also controlled all major transmission lines and gas pipelines. UK for instance, had a

model where two public utilities were responsible for the whole chain of activities from production

to final distribution, within gas and electricity sector respectively. A common characteristic in the

structure of all these companies was a strong vertical linkage between the energy production/supply

chain and transmission/distribution chain.

The tide changed in the late 80’s. General drive during this period towards common internal market

created a new dynamic and with support of the EU institutions and enterprises the energy

liberalization process begun. Major idea behind this liberalization was that free and fair competition

between energy supply companies would lead to a lower price for the consumers and increase

121 M. M. ROGGENKAMP and F. BOISSELEU, “The Liberalisation of the EU Electricity Market and the Role of Power Exchange” in M. M.

ROGGENKAMP and F. BOISSELEU (eds.), The Regulation of Power Exchanges in Europe, Antwerp, Intersentia, 2005, (1) 1. 122 Others were privately owned like Belgian Electrabel but still kept under public control.

29

welfare in the EU by enabling the consumer to freely choose between these companies and get

competitive deals from them.123

A necessary condition to reach this freedom of choice was ensuring free access to the transportation

infrastructure for all suppliers, thus enabling them to reach each and every client without barriers.

Achieving this would be problematic seen the historically grown structure of the dominant vertically

integrated energy undertakings (VIU)124. At the time these had a 100 percent share of the market.

Any market share gained by the newly introduced competitor meant a market loss for the incumbent

and thus loss of profitability. It is thus natural for these incumbents to prevent any introduction of

competition.125 Three concrete anticompetitive behaviors are inherent where a supply company

controls a network. First of all, where other supply companies require access, vertically integrated

operator of this network is naturally inclined to give preference to its own integrated supply chain

and thus discriminate for the same access against the outsiders. Another problem lies with

information flows, where the integrated network operator would be tempted to release sensitive

information (firstly) to its own supply branch rather than to competing suppliers. These two conducts

can be described as cross-subsidizing of the vertically integrated supply chain. Lastly, a network

operator has an intrinsic interest in restricting investments in new network capacity when it benefits

the competing suppliers. Tendency for these behaviors is caused by the so called basic conflict of

interests within a vertically integrated structure.126

Tackling these VIUs and ensuring free access to the transportation infrastructure became a primary

concern in establishing free competition in the European energy market. Various proposals were

made in order to achieve this goal.

One way to achieve it was by using the EU Competition Law (art. 101 and 102 TFEU). These

provisions have always been a very powerful tool in the hands of the European Commission in other

sectors. An effective way for achieving free access could have been by using these treaty provisions

in order to aggressively attack the dominant players and impose in each case free access obligations

or even for good dismantle these VIUs. However, an important reason for limited success of this

123 P. O. EIKLAND, “EU Internal Energy Market Policy: Achievements and Hurdles” in V. L. BIRCHFIELD and J.S. DUFFIELD (eds.), Toward a

Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, (13) 15-17. 124 For definition of ‘vertically integrated undertaking’ see art 2(21) Electricity and art. 2(20) Gas Directives. 125 C. JONES, “Introduction” in C. JONES, EU Energy Law: The Internal Energy Market – The Third Liberalization Package, I, Leuven,

Clayes & Casteels, 2010, (1) 10. 126 J. GARCIA, “The Internal Gas Market according to the Law of Competition, Provisions of the Community’s Third Package”, European

Energy and Environmental Law Review, August 2010, (175) 180; T. COTTIERS, S. MATTEOTTI-BERTUKOVA and O. NARTOVA, Third

Country Relations in EU Unbundling of Natural Gas Markets: the ‘Gazprom clause’ of Directive 2009/73/EC and WTO Law, Swiss

National Centre of Competence in Research, May 2010, http://www.nccr-trade.org/publication/third-country-relations-in-eu-unbundling-of-

natural-gas-markets-the-gazprom-clause-of-directi, 3.



30

approach was the immature state of the EU energy market at the time. In a market structure that is

characterized by dominant, anticompetitive behavior the load would have been too heavy for the

Commission to address these issues on a case by case basis. Another hurdle for the competition

approach was the constraint put by the ECJ at the time on the Commission. As energy liberalization

process had started, Commission was enthusiastically taking initiatives in order to introducing

competition. Inspired by developments taking place in the telecommunications sector, it established

in the Ijsselcentrale case127 that although energy producers were providing a service of general

economic interest, it did not however gave them immunity against competition rules. This was a

major step forward in the energy sector. In a subsequent Almelo128 case however, while ECJ

acknowledged that energy companies were in breach of competition rules (art. 85 and 86 of the EC

Treaty (art 101 and 102 of the TFEU)), it subsequently decided that they were still exempted from

these rules due to the public service character of their activities. These elements have significantly

constrained Commission in playing an active role in the liberalization process of the European energy

market by means of competition provisions.129 Despite limited role of the general competition rules

in this period, they will play an ever rising role in the internal energy market later on and eventually

even affect operations of the Russia energy giant Gazprom.

As EU competition approach was unable to introduce free competition, and more particularly free

access for the energy suppliers to the transport infrastructure controlled by the VIUs, another option

was presented. The sector could have been restructured by virtue of specific directives which would

target anticompetitive behaviors of the incumbents. A way of adopting these directives was also

debated. Where DG Competition opted for a faster liberalization by adopting these directives under

unilateral procedure of art. 90 (3) EEC, the rest of the Commission alongside Member States and the

European Parliament preferred a more paced approach of consensus seeking between the parties by

virtue of the procedure of art. 100a (114 TFEU).130 Partially due to constraints put on the Commission

in the beginning of this period, a more paced approach was chosen. Through this procedure three

consecutive liberalization packages were adopted. A different array of market liberalization

measures were introduced in these packages. Two of these measures were specifically aimed at the

anticompetitive behaviors of the VIUs. These were the so called ‘Third Party Access’ (TPA) regulation

and the ‘Unbundling’.

127 Commission Decision 91/50/EEC of 19 January 1991, OJ L 28/32 128 ECJ, Case C-393/92, Almelo [1994] ECR I-1477. 129 P. O. EIKLAND, “EU Internal Energy Market Policy: Achievements and Hurdles” in V. L. BIRCHFIELD and J.S. DUFFIELD (eds.), Toward a

Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, (13) 18. 130 Ibid., (13) 18.

31

The TPA provisions consist of different rules that facilitate non-discriminatory access to the

transmission network of the vertically integrated incumbent for any electricity or gas supplier.131

These rules are applicable to every TSO that is operating on the EU soil. Despite positive results

achieved by this approach in the telecom sector, it was not very successful in achieving non-

discriminatory access to the grid in the energy sector. Contrary to the telecom sector, where some

competition was already present, the energy sector had a too dominant structure basis in order for

TPA regulation to succeed on its own. There was no way to resolve the above describe conflict of

interests in the energy sector unless by virtue of much stronger intrusive regulations that would put

vertically integrated companies under severe pressure, but this on its turn could have made the cure

worse than the illness.132 So despite some positive results, TPA regulation was unable to ensure free

access to the grid and thus to introduce free competition to the European energy market. A different

approach was needed.

In 1988 the Commission issued its first Green Paper on the internal energy market. In this paper it

proposed an ‘open carrier system’ by which it wanted the existing energy infrastructure, which was

in hands of the vertically integrated companies, to be operated and developed independently from

the production-and supply-interest in the future.133 Separation or the ‘unbundling’ of these activities

was seen as the best way of achieving this independence. Unbundling and the resulting

independence would ensure free access to the grid for all interested parties by eliminating from the

vertically integrated energy companies incentives to misuse control of the transportation

infrastructure and discriminate against other energy suppliers. This would make a more effective

approach then the TPA regulation which is aimed at the concrete anti-competitive behavior and

which is also more difficult to survey. Besides ensuring free access, unbundling would eliminate other

anticompetitive behaviors inherent to a VIU, such as releasing of sensitive information and strategic

underinvestment. Unbundling is thus the process of separating grid operations that would still have a

natural monopoly character, from the commercial business of energy sales where free competition

would be introduced.134 This Unbundling became one of the Commissions favorite arms in its

Liberalization arsenal.

131 A. HADFIELD AND A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 10. 132 J. GARCIA, “The Internal Gas Market according to the Law of Competition, Provisions of the Community’s Third Package”, European

Energy and Environmental Law Review, August 2010, (175) 180. 133 P. O. EIKLAND, “EU Internal Energy Market Policy: Achievements and Hurdles” in V. L. BIRCHFIELD and J.S. DUFFIELD (eds.), Toward a

Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, (13) 13. 134 Ibid., (13) 14.

32

Unbundling was, and still is, a rather sensitive issue on the Member State level, which had to be

addressed with caution. This is why unbundling, next to being adopted by virtue of art. 114 TFEU,

was introduced gradually through subsequent liberalization waves. These elements made the

unbundling process more acceptable for the Member States. In what follows I am going to elaborate

on the different unbundling regimes introduced in the EU through subsequent liberalization

packages.

2.1.2 Unbundling in the First, Second and Third Energy Packages

The first unbundling regime was introduced in the First Energy Liberalization Package which

consisted of Directive 96/92/EC concerning electricity135 and Directive 98/30/EC concerning gas136

market. It was the so called ‘account unbundling’ which implied that transmission and supply unit of

the VIU should have separate accounts.137 The objective was to ensure more transparency in the

financial practices of the natural gas and electricity undertakings by setting up of the so called

‘Chinese walls’. But no further rules were introduced to substantially facilitate free access for the

third parties to the grid. So despite being an important first step towards free competition between

the energy suppliers, it had very little firepower creating only a kind of quasi-independence between

the supply and transmission activities.138 Thus after most Member States had introduced this regime

by September 2000, Commission concluded that there still was discrimination for access and

proposed further measures in March 2001.

The second unbundling regime was introduced in the Second Energy Liberalization Package in June

2003.139 This unbundling regime required ‘functional and legal unbundling’. This firstly implied that

the transmission unit of vertically integrated undertaking, the Transmission System Operator (TSO),

should become a company with own legal personality within the VIU. This separate legal personality

would also have a management board independent from the rest of the undertaking.140 The

objective of this unbundling was to create independency of the transmission from supplying activity,

at least in terms of their legal form, organization and decision-making. However there was still no

change in asset ownership required, so the vertically integrated companies were not required to sell

135 Directive 96/92/EC of the European Parliament and the Council of 19 December 1996 concerning common rules for the internal market in electricity, OJ L 27/10. 136 Directive 98/30/EC of the European Parliament and the Council of 22 June 1998 concerning common rules for the internal market in

natural gas, OJ L 204/1. 137 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 51. 138 Ibid., (51) 57. 139 Directive 2003/54/EC of 26 June 2003 concerning the common rules for the internal market in electricity and repealing Directive

96/92/EC, OJ L 176/37; Directive 2003/55/EC of the European Parliament and the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC, OJ L 176/57 (Second Gas Directive). 140 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 57.

33

off their transmission arms.141 Legally and functionally unbundled network operator can be very well

compared to a full-function joint venture in the sense of EU merger law. These joint ventures have

their own management dedicated to the day-to-day operations and have access to sufficient

resources. They possess thus a certain amount of independence. But a full-functioning joint venture

forms a part of a concentration or merger within the meaning of the EU Merger Control

Regulation.142 This means that a parent company still controls its joint venture, exercising decisive

influence on their subsidiaries conduct. Together they form a competitive unity which means that

they will act as one vis-à-vis their competitors. So although definitely having some independence,

this joint venture structure still differs from a situation where the ownership of two entities is

separated which would result in true independence. A joint venture structure is thus insufficient to

ensure full independence.143 The same stands for the vertically integrated companies. The managers

although active in different legal personalities still form a part of the same corporate division, so it is

unrealistic to expect them to neglect their own careers and collegiality in order to favor competitors

that threaten their corporations’ interests.144

After concluding various studies 145 Commission decided that the market deficiencies which

prevented free and fair competition, had not adequately been dealt with by the subsequent first and

second unbundling regimes. Despite clear improvements, even after legal unbundling the basic

conflict of interests within the vertically integrated incumbents was not resolved, so these kept on

discriminating against suppliers concerning the use of their infrastructure and held back on new

investments. Thus Commission decided that the time was ripe for the next step in the unbundling

process and proposed its 3rd energy package on 19 September 2007.

The Third Energy Liberalization Package (TEP)146 was adopted on July 13 2009. In contrast to previous

packages, three different regimes of unbundling were introduced leaving the final choice to the

141 P. D. CAMERON, “Completing the Internal Market in Energy: an Introduction to the New Legislation” in P. D. CAMERON (ed.), Legal

Aspects of EU Energy Regulation: Implementing the New Directives on Electricity and Gas Across Europe, New York, Oxford, 2005, (7) 18. 142 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L 24/1. 143 M. ALBERTS, “The New EU Directives on Energy Liberalization from a Competition point of View” in P. D. CAMERON (ed.), Legal

Aspects of EU Energy Regulation: Implementing the New Directives on Electricity and Gas Across Europe, New York, Oxford, 2005, (41)

44. 144 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 79. 145 Communication from the Commission of 10 January 2007 to the Council and the European Parliament, Prospects for the Internal Gas

and Electricity Market, COM (2006) 841 final; Communication from the Commission of 10 January 2010, Inquiry pursuant to art. 17 of the

Regulation (EC) No. 1/2003 into the European Gas and Electricity Sectors (Final Report), COM(2006) 851 final; Green Paper of 8 March 2006, A European Strategy for Sustainable, Competitive and Secure Energy, COM(2006) 105 final; Communication from the Commission to

the European Council and the European Parliament of January 10 2007, An energy Policy for Europe, COM(2007)1 final. 146 Directive 2009/72/EC of the European Parliament and the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L 211/55 (Electricity Directive); Directive 2009/73/EC of the European Parliament and

the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, OJ L

211/94 (Gas Directive).

34

Member States. Although all three of these regimes were adopted as equal alternatives, they differ

substantially as to their effect on a VIU.

First option is the so called Independent Transmission Operator model (ITO).147 This model is the

closest one of the three alternatives to the previously introduced legal and functional unbundling. As

under the Second Energy Package, maintenance, development and operation of the networks is laid

upon the Independent Transmission Operator, which on its turn remains in the hands of the

shareholders of the vertically integrated parent company. There is thus still no changing of

ownership of transmission assets required under this model.148 Despite not bringing any structural

changes into a vertically integrated incumbent this model is a somewhat developed version of the

previous legal and functional unbundling model due to additional safeguards that result in larger

autonomy for the transmission chain (TSO) with regard to its parent incumbent. But although a small

step forward, ITO approach is considered by some as business as usual model.149

Second option, the Independent System Operator model (ISO)150, provides for a structural change

within vertically integrated incumbents which results in more independence then what is offered by

the ITO model and further reduces incentives to discriminate against competing suppliers. Under this

option the network assets still remain the property of the vertically integrated entity, but this

network has to be managed by an Independent System Operator that performs all the operating

functions, and which must be entirely separated, not sharing any shareholders with the vertically

integrated parent company.151 Although a big step forward, this model still cannot guarantee full

independence. Where VIU legally cannot exercise any control over transmission, in practice simple

ownership of the network assets gives it possibilities to do so.152

In both ISO and above mentioned ITO model the network assets are leased to the network operators

(ITO or ISO) but these assets stay in the same corporate group as the supplier. These lessor network

operators manage the network and are i.a. responsible for granting and managing third-party access.

The main difference between the two models lies in the fact that while under ITO model beside

147 Article 17 to 23 of the Electricity Directive and of the Gas Directive. 148 P. O. EIKLAND, “EU Internal Energy Market Policy: Achievements and Hurdles” in V. L. BIRCHFIELD and J.S. DUFFIELD (eds.), Toward a

Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, (13) 25; A. JOHNSTON and G.

BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 39. 149 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 82. 150 Article 13 and 14 of the Electricity Directive and Articles 14 and 15 of the Gas Directive. 151 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 39; P. O. EIKLAND, “EU Internal Energy Market

Policy: Achievements and Hurdles” in V. L. BIRCHFIELD and J.S. DUFFIELD (eds.), Toward a Common European Union Energy Policy:

Problems, Progress, and Prospects, New York, Palgrave, 2011, (13) 25. 152Interview, Frederik Vandendriessche (Stibbe), Brussels, 17 April 2014.

35

network assets also the TSO remains in the same corporate group of the VIU, network operator

under the ISO model has to be entirely separated from the latter.153

The third and the most far reaching option is the ‘ownership unbundling’ (OU).154 Simplistically

explained, this model obliges a vertically integrated undertaking to transfer ownership of the

transmission system to another legal person that is completely separated from the (former) VIU and

that also will acts as the TSO.155 Ownership unbundling would completely remove incentives for non-

competitive behavior and is therefore promoted by the Commission as the best way to achieve

independence of the transmission branch of a vertically integrated incumbent and ensure free

competition between energy suppliers.

2.1.3 Conclusion

Unbundling is a product as well as one of the main tools of the liberalization of the EU energy

market. As liberalization is its main focus, it is not surprisingly that it would come in conflict with

interests of some 3rd countries that pursue a different energy policy where it would affect their

interests on the EU market. Through three subsequent liberalizations waves the current unbundling

regime was adopted. As opposed to what Commission was so eager to achieve156, this new regime is

not that of a Mandatory Ownership Unbundling. Instead, subject to some restrictions, Member

States are free to choose between three alternative models. In the next chapter I will elaborate more

closely on the provisions in question.

2.2 The new unbundling regime and concerned Russian interests

In this chapter, I firstly want to elaborate in detail on what is exactly expected of a VIU under the new

unbundling regime, and more particularly under the OU model. Then I will discuss the related ‘3d

country clause’ which specifically addresses undertakings from 3d countries, and thus relates to

Russian presence in the EU. After that, I would like to elaborate on some additional provisions and

derogations, which make an indispensable part of the new regime. All these elements together

153 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 43-46. 154 Articles 9 of Electricity Directive and of the Gas Directive. 155 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 52. 156Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC of the European Parliament and of

the Council of 26 June 2003 concerning common rules for the internal market in electricity, COM(2007)528; Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/55/EC of the European Parliament and of the Council amending Directive

2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas,

COM(2007)529.

36

comprise the ‘new unbundling regime’ that would have to be applied on Russian interests in the EU. I

will present these interests in the last part of this chapter.

2.2.1 Ownership unbundling

All three of the TEP’s unbundling models are presented as equal alternatives for Member States to

choose from. Seen the debate leading up to the 3rd package it seems that OU model will not be as

widely applied as Commission would want it to. However in what follows, I will focus exactly on this

model. Later I will demonstrate that ownership unbundling and its implications for Russia has

become the core of controversy around TEP. For this reasons I will only elaborate in detail on the OU

in this chapter. Effects of the ITO and ISO models on Gazprom will be discussed as well, but the

explanation on these two models given in the previous chapter will suffice for this purpose.

Ownership unbundling obliges vertically integrated undertakings to abandon their transmission

activities. But contrary to what the name suggests a nuance has to be made, as it is not prohibited to

retain certain amount of ownership of the transmission assets. This regime obliges to split the

ownership in a way which effectively eliminates possibilities for the vertically integrated incumbent

to discriminate against competing suppliers by ensuring a full independence of the transmission

chain.

Art. 9 of the Gas Directive prescribes ownership unbundling in the following manner:

1. Member States shall ensure that … :

(a) each undertaking which owns a transmission system acts as a transmission system

operator;

(b) the same person or persons are entitled neither:

(i) directly or indirectly to exercise control over an undertaking performing any of

the functions of production or supply, and directly or indirectly to exercise control

or exercise any right over a transmission system operator or over a transmission

system; nor

(ii) directly or indirectly to exercise control over a transmission system operator or

over a transmission system, and directly or indirectly to exercise control or

exercise any right over an undertaking performing any of the functions of

production or supply;

(c) the same person or persons are not entitled to appoint members of the supervisory

board, the administrative board or bodies legally representing the undertaking, of a

37

transmission system operator or a transmission system, and directly or indirectly to

exercise control or exercise any right over an undertaking performing any of the functions

of production or supply; and

(d) the same person is not entitled to be a member of the supervisory board, the

administrative board or bodies legally representing the undertaking, of both an

undertaking performing any of the functions of production or supply and a transmission

system operator or a transmission system.

2. The rights referred to in points (b) and (c) of paragraph 1 shall include, in particular:

(a) the power to exercise voting rights;

(b) the power to appoint members of the supervisory board, the administrative board or

bodies legally representing the undertaking; or

(c) the holding of a majority share.

Art. 9(1) defines ownership unbundling. Requirements of paragraph 1(a) to 1(d) are cumulative.

Paragraph 2 defines ‘rights’ as referred to in paragraph 1(b) and 1(c).

Art. 9(1) (b) (i) forbids a company engaging in supply activity to exercise control or any right over a

Transmission System Operator or a transmission system.

Definition of control is given in art. 2 (34) of the Gas Directive and as recital 10 states, it is the same

‘control’ as defined in art. 3(2) of EC Merger Regulation. Control is thus the ability to exercise decisive

influence on an undertaking, in particular, through (a) the ownership or right to use all or part of its

assets; or (b) the existence of rights or contracts conferring decisive influence on the composition,

voting or other decisions of the undertaking.157 This decisive influence includes i.a. a possibility to

affect strategic decisions of an undertaking, like for example approval of the budget, by virtue of

blocking veto rights of a minority shareholder.158

Art 9(2) gives a non-exhaustive list of the rights that are forbidden to exercise over a transmission

system. This list implies that shareholding of the transmission activity stays possible, but it can only

provide financial rights for the holder, excluding all voting rights. Thus the shareholder only has the

right to receive dividends, but cannot exercise any influence on the undertaking, including influence

157 Commission staff working paper of 22 January 2010, Interpretative note on Directive 2009/72/EC concerning common rules for the

internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas – The unbundling

regime, 8. 158 Commission staff working document of 25 June 2013, Towards more effective EU merger control, SWD(2013) 239 final.

38

which does not amount to being decisive.159 For clarification it is important to note that exercise of

the shipper rights under a transportation agreement as such is naturally allowed, but again on

condition that these rights acquired by a contract between the supplier and the transmission

operator and do not amount to control of the part of the former. Rights meant in art 9(1) (b) (i) thus

refer to shareholding rights.160

The requirements of the ownership unbundling of art 9 (1) thus amount to a situation where a

(former) VIU is admitted to retain up to fifty percent of its assets in the network system or its TSO

(minority shareholding), but all the voting rights attached to these shares should be done away with.

This undertaking also cannot appoint any key personnel, nor can it have any other form of control. It

is important to add that prohibition of exercising control and rights includes direct, as well as indirect

exercising through an intermediate subsidiary for example. These rules apply equally to private and

public entities.161 In order to comply with the above mentioned ownership unbundling requirements

a VIU would have to divest its shares and all the rights attached to the remaining shares, as well as

any other rights attained by any means which allow the undertaking to exercise control over a

transmission network.162 From an economic point of view, ownership of the remaining assets comes

down to a sort of a loan, coupled to profit expectations as remuneration.163

2.2.2 Third country clause

The separation requirements imposed by the unbundling models under art. 9 (OU), art. 14 and 15

(ISO), and art. 17 to 23 (ITO) of the Gas Directive are applicable to any company that seeks to be

active on the EU territory. However, art. 11 or the so called ‘3rd country clause’ places 3rd country

undertakings under a specific regime. Art. 11 of the Gas Directive stipulates:

1. Where certification is requested by a transmission system owner or a transmission system

operator which is controlled by a person or persons from a third country or third countries,

the regulatory authority shall notify the Commission. The regulatory authority shall also

notify to the Commission without delay any circumstances that would result in a person or

persons from a third country or third countries acquiring control of a transmission system or a

transmission system operator.



regime, 9. 160 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

3. 161 Ibid., 718, 8-10. 162 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 42. 163 Interview, Frederik Vandendriessche (Stibbe), Brussels, 17 April 2014.

39

2. The transmission system operator shall notify to the regulatory authority any circumstances

that would result in a person or persons from a third country or third countries acquiring

control of the transmission system or the transmission system operator.

3. The regulatory authority shall adopt a draft decision on the certification of a transmission

system operator within four months from the date of notification by the transmission system

operator. It shall refuse the certification if it has not been demonstrated.

a. that the entity concerned complies with the requirements of Article 9; and

b. to the regulatory authority or to another competent authority designated by the Member

State that granting certification will not put at risk the security of energy supply of the

Member State and the Community. In considering that question the regulatory authority

or other competent authority so designated shall take into account:

(i) the rights and obligations of the Community with respect to that third country

arising under international law, including any agreement concluded with one or

more third countries to which the Community is a party and which addresses the

issues of security of energy supply;

(ii) the rights and obligations of the Member State with respect to that third country

arising under agreements concluded with it, insofar as they are in compliance

with Community law; and

(iii) other specific facts and circumstances of the case and the third country

concerned.

Art 11. §3 sets out the conditions to be complied with by a 3rd country undertaking, comprising the

core section of this provision. Burden of proof of compliance with these conditions is carried by the

applicant in question.164 The rest of the article covers the certification procedure. NRAs are

responsible for the application of this procedure on the foreign controlled companies, while

Commission functions as an advisory body.165

Art. 11 §3 a. “extends”166 the unbundling regime to third country undertakings. A network owner or a

TSO controlled from a third country and operating on the EU territory thus has to comply with the

same unbundling conditions as the EU undertakings as discussed earlier.167



regime, 23. 165 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 61-62. 166 Interview, Yohan Benizri (Sidley Austin LLP), Brussels, 6 April 2014.

40

Art. 11 §3 (b) imposes an additional condition on foreign undertakings. Besides complying with the

applicable unbundling regime, a foreign controlled undertaking has to demonstrate that if certified

and operating on a Member State’s territory it would not jeopardize this Member State’s and EU’s

security of supply. In assessment by the relevant NRA of compliance with this condition, art. 11 §3 (b)

stipulates three elements that should be taken in consideration. These three criteria are not

cumulative but Commission does have a strong preference for the first one (i).168

An agreement between the EU and the relevant 3rd country relating to energy security (art. 11 §3 (b)

(i)) is the preferred option as it would be the most certain guarantee that granting certification

would not put at risk EU’s security of supply. Existence of such an agreement would thus significantly

increase likelihood of certification169, while absence thereof would make an approval much less

likely.170

In cases where such an agreement does not exist, the assessment will have to be made on the basis

of remaining criteria, such as an agreement between the relevant Member State and the 3rd country

which would give the latter certain rights (art. 11 §3 (b) (ii)). An important restriction on use of such

an agreement is included in the provision itself, by which a competent authority may only take

account of such agreements “insofar as they are in compliance with EU law”.171 Later I will discuss in

what way this provision, or rather rationale behind it, has an impact on the application of the

unbundling regime on Gazprom.

In case none of the above mentioned agreements exist, the assessment will solely depend on “other

specific facts and circumstances” (art. 11 §3 (b) (iii)). No further guidance is given concerning this

provision, so it will have to be applied by the NRAs on a case-by case basis considering any relevant

167 It is relevant to notice that this provision is addressed directly to the 3rd country undertakings and not to its Governments, which limits the

application of the unbundling regime to the operations of these undertakings within the EU. Contrary to the proposed version of the 3rd

country clause, the adopted version thus does not presume any reciprocity. The name ‘reciprocity clause’ is thus wrongly used when

referring to the adopted version of the 3d country clause. See T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country

Relations in EU Unbundling of Natural Gas Markets: the ‘Gazprom clause’ of Directive 2009/73/EC and WTO Law, Swiss National Centre

of Competence in Research, May 2010, http://www.nccr-trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-

markets-the-gazprom-clause-of-directi, 5-6. 168 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

9. 169 Herbert Smith, Energy, Infrastructure and Mining newsletter, July 2012, http://www.herbertsmithfreehills.com/-/media/HS/T-250712-

10.pdf. 170 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 20. 171 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

9.



http://www.herbertsmithfreehills.com/-/media/HS/T-250712-10.pdf


41

elements.172 In its communication with Mr. Shmatko, Commission gave as examples of such facts and

circumstances “the level of dependence of the EU or an individual Member State on energy supplies

from a third country, the factual treatment of both domestic and foreign trade and investment in

energy in a particular third country, or the market behavior of natural gas undertakings controlled by

a person and persons from a third country…”.173 An important consideration in this assessment, not

mentioned by the Commission, is the applicable unbundling regime on the TSO in question.

Though none of the 3 elements is presented to an assessing NRA as a necessary condition, it seems

that Commission would rather push for an agreement as meant in art 11 §3 b. (i). This approach

allows it to impose certain obligations on the 3rd country in question and secure its interest in return

for a right to operate a network within the territory the EU.174

This so called ‘3rd country clause’ clearly puts an extra restriction on the foreign energy undertakings

that seek to hold or manage a transmission network on the territory of the EU (which is arguably its

only contribution). Aside from the applicable unbundling requirements, these undertakings have to

comply with the security of supply condition. Before introducing Russian presence on the EU market

that could be affected by this clause, I firstly need to elaborate on some additional provisions of the

3rd Energy Package that have a substantial influence on the application of the above described

unbundling.

2.2.3 Additional provisions and derogations

Concluding from the foregoing, it seems that the new unbundling regime will have a substantial

impact on the presence of the 3rd country energy undertakings on the EU market. This finding needs

to be nuanced somewhat though. In this section I will discuss some additional provisions of the TEP

that to some point alleviate application of the new unbundling regime.

2.2.3.1 Limited freedom of choice

As already mentioned, Member States are free to choose which of the 3 unbundling models to apply

on their territory. The freedom of choice is further extended by enabling Member States to opt for

different model for each TSO on their territory. This broad freedom of choice is not without its limits

172 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 19. 173 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

9. 174 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 7.



42

though. An important restriction is posed by the fact that from the entry into force of the Directive

on 3 September 2009, a Member State cannot choose to apply a less strict model on a TSO that was

already in place at that date. This means that a TSO operating on 3 September 2009 under the OU

model cannot regress to the ISO or ITO model. Another limitation, which is of greater importance for

Gazprom, is the compulsory application of the OU model for the transmission systems that did not

yet exist on 3 September 2009 (art. 9(8) of the Gas Directive). A Member State is thus prohibited

from applying ITO or ISO model on new pipelines built on its territory.175 It is partially for this reason

that the OU model is the most relevant one when discussing effects of the new regime on Russia.

2.2.3.2 Derogations

Since the beginning of the energy liberalization process, derogations and exemptions have been an

important nuance to the development of the internal energy market. Some derogations were

introduced as result of the pressure by the powerful incumbents, other to accommodate diversity in

market and industrial structures of the different Member States, yet other tend to promote

investment in new infrastructure securing energy supplies to the EU.176 Whatever the reason for such

derogations may be one thing is certain, they form an obstacle to the development of the Internal

European Energy Market as envisioned by the Commission.177 By doing so, these derogations

substantially facilitate undertakings active on the EU market to set aside generally applicable rules of

unbundling. It would fall outside the scope of my thesis to elaborate on each exception and

derogation contained in the Gas Directive. Instead I will only discuss derogation under art 36 of this

Directive, which is by far the most relevant when discussing Gazprom’s presence on the European

market.

Article 36 of the Gas Directive introduces a possibility for major new gas infrastructure to temporary

derogate from the unbundling rules, provided that specific conditions are met.178 Besides derogating

from art.9, this provision also allows to diverge from other provisions of the Gas Directive, such as

the related TPA of art. 32. The exemption decision is made by a NRA, while the Commission retains

the right to amend or withdraw this decision (art. 36 §9 of the Gas Directive).



regime, 5. 176 A. DE HAUTECLOCQUE and N. ANHER, “’Opt-Out’ Clause for EU Energy Islands in the Third Liberalisation Package: striking balances?”

in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, IV, Cambridge, Intersentia, 2014, (3) 4. 177 J. GARCIA, “The Internal Gas Market according to the Law of Competition, Provisions of the Community’s Third Package”, European

Energy and Environmental Law Review, August 2010, (175) 181. 178 This provisions replaced art. 22 of the Second Gas Directive.

43

An Interconnector is the kind of “infrastructure” that can be exempted. An interconnector is defined

in art. 2 (17) of the Gas Directive as a gas pipeline which is meant to connect EU Member States.

“New” infrastructure refers to infrastructure not completed by 4 August 2003 (art. 2 (33) Gas

Directive). TEP did not provide any quantitative criteria in order to determine what could be seen as

a “major” infrastructure. As no financial or volumetric criteria were given, and due to the fact that all

infrastructure projects in gas sector are costly and transport substantial volumes it could be argued

that any infrastructure could be exempted.179

In order to enjoy an exemption this infrastructure would have to meet the criteria stipulated under

art. 36 § 1 (a) – (e). These conditions mainly amount to safeguarding competition and security of

supply within the EU. An important condition to mention is the one under art 36 §1 (b), which

requires that the project would not be invested in unless an exemption is granted. As I will discuss

later, compliance with this condition could have a negative impact on Gazprom’s projects in the EU.

Priority rights granted under this article in form of exemptions are necessary in order to obtain

investments in the gas infrastructure within the EU. This is the rationale of the merchant investment

mechanism.180 Granting of such an exemption is thus a result of a compromise between two

interrelated aims on the part of the EU: promotion of network investments and establishment of the

free competition in the internal energy market. By exchanging rights to extra profit and extended

monopoly for new facilities on its territory, EU chooses to favor long-term efficiency gains over short

term advantages. But since the free competition is put on the scale, the granted derogations are only

temporary and not absolute. EU will see to the right balance being struck, avoiding situation where

anti-competitive effects might outweigh the benefits. This is why such an exemption is much less

likely, or will be considerably limited where the owner of the infrastructure is a vertically integrated

incumbent seeking to further increase its market dominance.181 Another nuance closely related to

the safeguarding of competition is the fact that derogation from art. 9 does not per se entails

derogation from the entire unbundling regime. As I mentioned earlier, infrastructure built after 3

September 2009 is subject to MOU. For these interconnectors art. 36 only grants a possibility to

179 Exemption of a Bacton-Balgzand project, a UK-Netherlands interconnector which had a relatively low cost of 0.5 billion €, is an

illustration of the fact that a relatively insignificant project can be exempted. See K. YAFIMAVA, The EU Third Package for Gas and the Gas

Target Model: major contentious issues inside and outside the EU, Oxford Institute for Energy Studies, April 2013,

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 49-50. 180 A. DE HAUTECLOCQUE and N. ANHER, “’Opt-Out’ Clause for EU Energy Islands in the Third Liberalisation Package: striking balances?”

in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, IV, Cambridge, Intersentia, 2014, (3) 4. 181 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 96-97.

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf

44

derogate from the OU requirements while ITO provisions should apply without possible derogation

and ISO model remaining a possibility as well.182

All the elements expressed in the conditions of art 36 will be assessed in order to decide on the

extent and the duration of derogation in each case. After expiry of this period, the rules on

unbundling applicable in the relevant Member State will have to be complied with. An extension of

exemption is very unlikely.183

2.2.3.3 Procedure under article 11

Art. 11 § 5 of the Gas Directive obliges a NRA prior to adopting a final decision on certification of a 3rd

country undertaking to request an opinion of the Commission concerning compliance of this

undertaking with the unbundling and security of supply conditions. Contrary to the above described

situation under art. 36 of the Gas Directive, this opinion of the Commission is not binding. Art. 11 §8

provides only that “In adopting its final decision the national regulatory authority shall take utmost

account of the Commission’s opinion”. Competence for the ultimate decision is thus entrusted upon

the Member State NRA, which simply has to provide justification in case its final decision diverges

from the Commission’s opinion.

While seemingly of lesser importance when assessing compliance with unbundling requirements, it

will have a greater impact on assessment of the second criterion under art. 11. As discussed earlier,

Commission has set certain guidelines for assessment of the security of supply condition. However a

NRA is not bound by these guidelines nor by the Commissions opinion, which enables it to

contemplate its own assessment on the basis of the criteria under art 11 §3 b. It means that NRA

could assess the security of supply criterion in a different fashion, not paying as much importance to

a preexisting agreement between the EU and the 3rd country in question. This would help a 3rd

country undertaking to pass the test under art. 11 §3 b. of the Gas Directive more easily than what

was initially envisaged by the Commission.

2.2.3.4 Deadlines

Transposition deadline for the Gas directive was set at March 3rd, 2011 (art. 54 §1 °1 of the Gas

Directive). However, unbundling provisions only had to be applied by 3 March 2012 (art. 9 §1).

Application of art. 11 on the 3rd country undertakings has been postponed even further to 3 March

182 A. DE HAUTECLOCQUE and N. ANHER, “’Opt-Out’ Clause for EU Energy Islands in the Third Liberalisation Package: striking balances?”

in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, IV, Cambridge, Intersentia, 2014, (3)) 13-14. 183 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

7-8.

45

2013 (art. 54 §1 °2). Although these deadlines have already passed for some time, far from all

relevant energy undertakings are being approached and assessed on the basis of the above

described criteria.184 NRAs as the main trigger of the unbundling procedures have to observe

whether conditions under art 9 and 10 (for the EU undertakings) or 11 (for the 3rd country

undertakings) are complied with on their territory. As long as these NRAs do not take initiative to

start compliance procedures, they possibly facilitate illegal transmission operations on the EU

territory. This impedes the proper application of the unbundling regime on the 3rd country

undertakings as envisaged by the TEP.

2.2.3.5 Conclusion

This section shows that application of the unbundling regime is more complicated than the first

examination of the art 9 and art. 11 of the Gas Directive might suggest. Elements mentioned in this

section mainly aid energy undertakings in their adjustment to the unbundling provisions. All of the

mentioned provisions in this chapter comprise the new unbundling regime, which will have to be

applied on Russian Gazprom. In the next section I am going to introduce the exact Russian interests

that will be affected by these provisions.

2.2.4 Russian interests on the European market

The current system of natural gas production and distribution in Russia is run by the OAO Gazprom.

Gazprom is organized as a joint-stock company in which the Russian Federation owns a 50.002%

stake. Due to the significant control exercised by the Russian Government, Gazprom operates much

like a quasi-governmental agency.185 Gazprom’s core activities include exploration, production,

transportation, storage, processing and marketing of gas. It controls approximately 70 % of Russian

gas reserves and 14 % of the world’s reserves. The company is a major constructor and operator of

pipelines whose infrastructure reaches out far into the EU energy market. Gazprom has a monopoly

on the export of Russian Gas to the EU and it is the only one who manages the relevant transmission

pipelines. Gazprom consortium is a textbook example of a vertically integrated energy undertaking

and it is the biggest one in the world.186

Russian Gazprom has established its presence on the EU market in several ways. Through concluding

long term supply contracts with its EU partners it has created links with the EU customers which in

some cases run until 2035. Through creating an array of subsidiary companies and joint ventures and

184 This will be further illustrated in chapter 4. 185 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 5. 186 Y. GRIGORYEV, “The Rusian gas Industry, its legal structure, and its influence on world markets”, Energy Law Journal 2007, (125) 132.


46

through a technique of asset-swaps Gazprom has established itself in every section of EU energy

chain, from production to distribution.187 It is not the purpose of my thesis to make a listing of all

interests which Gazprom holds on the European market, seen that unbundling regime that I am

discussing only applies to the transmission activities. Neither am I going to give an exhaustive

overview of all transmission networks in which Gazprom is involved. Instead, I will rather focus on

the pipelines on which application of the new unbundling regime can be best illustrated. In what

follows I will present ownership of transmission systems and their operators in a rather simplified

manner. It is a difficult task, which would fall outside the scope of my thesis, to extensively elaborate

on the complex market structure and precise corporate interconnections, which are besides being

held in secret to some point by the energy undertakings. It is also assumed that Gazprom exercises

all the rights that are normally attached to the (partial) ownership of an undertaking. The focus is

made on the new gas infrastructure invested in by Gazprom and Gazprom’s presence on the

German, Lithuanian and the Polish energy markets.

2.2.4.1 North-Stream

Nord Stream is a 1224 kilometer long twin pipeline that runs from Vyborg, Russia through the Baltic

Sea to Lubmin near Greifswald in Germany. The Nord Stream route crosses the Exclusive Economic

Zones of Russia, Finland, Sweden, Denmark and Germany, as well as the territorial waters of Russia,

Denmark, and Germany. The project has been promoted by the developers as one of strengthening

the EU energy market and reinforcing security of supply188, for which it has been designated a status

of ‘European interest’ by the European Parliament and Council. Construction of the twin pipeline

system began in April 2010, and transport through both pipelines started in October 2012. Nord

Stream delivers Russian gas to the receiving terminal in Germany, where it is transported onwards to

Check Republic and other EU Member States.189

North-Stream pipeline is owned by Nord Stream AG (incorporated under Swiss law), which also acts

as the TSO. Gazprom is the majority shareholder of North Stream AG with a 51% stake190. If

translated for our purposes, ownership of this 51% stake means that Gazprom controls the owner of

the NS pipeline as well as its operator. Seen that this pipeline is located within the EU market, it falls

under the Gas Directive and its unbundling regime.

187 For detailed elaboration see J. MEIJKNECHT, Bedrijfsbelangen Gazprom in EU-27 in 2007, CIEP, April 2008,

http://clingendael.info/publications/2008/20080400_ciep_misc_gazprom%20-n-eu27.pdf. 188 C. JOHNSON and M. DERRICK, “A Splintered Heartland: Russia, Europe, and Geopolitics of Networked Energy Infrastructure”,

Geopolitics 2012, (482) 488. 189 Nord Stream, The Pipeline, http://www.nord-stream.com/pipeline/. 190 The rest of the shares is divided between German Wintershell (15.5 %) and E.ON (15.5%), Dutch Gasunie (9%) and French GDF SUEZ

(9%);

http://clingendael.info/publications/2008/20080400_ciep_misc_gazprom%20-n-eu27.pdf

http://www.nord-stream.com/pipeline/

47

2.2.4.2 South Stream

The South Stream project, which commenced with a memorandum of understanding between ENI

and Gazprom in June 2007191, is a 2,446 kilometers pipeline that would run from Russkaya

compressor station on the Russian coast, through Bulgaria, Serbia, Hungry and Slovenia ending at

Tarvisio gas metering station in Italy. The offshore section that runs under the Black Sea through the

exclusive economic zones of Russia, Bulgaria and Turkey and connects Russia to Bulgaria is already

under construction and is scheduled to start operating in 2015. This section of the pipeline is owned

by South Stream Transport B.V. (incorporated under Dutch Law), which will be the operator of the

transmission system as well. Gazprom owns 50 % of this TSO.192 Intergovernmental agreements were

signed with Bulgaria, Serbia, Hungary, Greece, Slovenia, Austria and Croatia in order to implement

the onshore gas pipeline section. In the meanwhile, construction of the Bulgarian and Serbian parts

of the project has started as well. The onshore pipelines will be owned and managed by joint

ventures with the respective energy companies of each MS (and Serbia), of which Gazprom holds

50% of the shares.193 As the South Stream runs through several Member State’s territories, this

project falls under the Gas Directive.

2.2.4.3 OPAL & NEL

OPAL pipeline transports Russian natural gas from the landfall point of the Nord Stream Pipeline in

Lubmin to the Brandov (CZ) on the German-Czech border. This pipeline aims to supply Check

Republic with Russian gas. NEL pipeline departs from the same point in Lubmin and connects North-

Stream with the German transmission system in Rehden. OPAL is owned and managed by OPAL

Gastransport GmbH & Co. KG (OPAL GT) and NEL is owned and managed by NEL Gastransport GmbH

(NEL GT). Both these companies are on their turn fully owned by W&G Beteiligungs-GmbH & Co

(W&G) which is a joint venture between Russian Gazprom (49.98%) and German Wintershell

(50.02%). Through ownership of the W&G, Gazprom controls both OPEL and NEL pipelines.194 Also

these networks are subject to the new unbundling regime, which affects Gazprom as the controlling

shareholder.

191 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 335. 192 The rest is divided between ENI (20%), Wintershell (15%) and EDF (15%). 193South Stream, Gas pipeline, http://www.south-stream.info/en/pipeline/. 194 W&G, Organization and Management, http://www.w-und-g.com/home.html; GASCADE, Portrait,

http://www.gascade.de/home.html?L=1; OPAL, Portrait, http://www.opal-gastransport.de/index.php?id=portrait&L=1; NEL, Portrait,

http://www.nel-gastransport.de/index.php?id=20&L=1.

http://www.south-stream.info/en/pipeline/

http://www.w-und-g.com/home.html

http://www.gascade.de/home.html?L=1

http://www.opal-gastransport.de/index.php?id=portrait&L=1

http://www.nel-gastransport.de/index.php?id=20&L=1

48

2.2.4.4 Yamal-Europe

The Yamal I or Yamal-Europe gas pipeline passes through Russia, Belarus, Poland and Germany and is

4.196 km long. The line originates from the Torzhok gas transportation unit in the Tver region of

Russia and ends in the Malnow compressor station near Frankfurt an der Oder. Before North Stream

pipeline started to operate this was the only natural gas export route to Europe that did not cross

Ukrainian territory.195 Yamal remains a major transporting root of Russian gas to West-Europe,

although its importance has been declining since NS became operational.196

The Polish section of the pipeline is owned by EuRoPol Gas, which is a joint venture of Gazprom (48

%) and Polish companies PGNiG (48%) and Gas Trading SA (4%).197 Initially this joint venture was also

managing the pipeline. However, from 2010 on, Polish state owned OGP Gaz-System SA has been

managing the Polish section of the Yamal- Europe pipeline.198

German section of Yamal-Europe is owned and operated by GASCADE Gastransport GmbH (GASCADE

GT), which is fully owned by the same W&G that owns OPAL and NEL TSO’s. Therefore Gazprom as a

49.02% owner of the W&G exercises control over the German part of the Yamal-Europe pipeline.

Both German and Polish sections of Yamal will illustrate in a different way how the new unbundling

regime applies to Gazprom.

2.2.4.5 Lithuanian Energy market

Lithuanian Gas market is dominated by a previously state owned company Lietuvos Dujos UAB. This

energy company deals with gas purchase, transmission, distribution and marketing in the Republic

of Lithuania. Except fulfilling the role of a TSO for the Lithuanian transmission network, Lietuvos

Dujos also manages transit of the Russian gas to Kaliningrad by the Minsk – Vilnius – Kaunas –

Kaliningrad gas pipeline which runs through its territory. Gazprom owns 37.1 % of the shares of this

TSO199. Recent regulatory changes in Lithuania have provoked a heated discussion with Russian

Gazprom. This is probably the most interesting case where new unbundling provisions are being

applied to a 3rd country undertaking.

195 K. BORISOCHEVA, Analysis of the Oil- and Gas-Pipeline-Links between EU and Russia: An account of intrinsic interests, CERE,

November 2007, http://www.isn.ethz.ch/Digital-Library/Publications/Detail/?ots591=0C54E3B3-1E9C-BE1E-2C24-

A6A8C7060233&lng=en&id=47031, 7. 196 K. YAFIMAVA, The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford

Institute for Energy Studies, April 2013, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 35. 197 J. MEIJKNECHT, Bedrijfsbelangen Gazprom in EU-27 in 2007, CIEP, April 2008,

http://clingendael.info/publications/2008/20080400_ciep_misc_gazprom%20-n-eu27.pdf, 32. 198 Polish Energy Regulatory Office, National Report 2013, http://www.ure.gov.pl/en/communication/news/207,The-National-Report-of-the-President-of-ERO-is-now-available.html?search=420312268, 43. 199 The rest is divided between E.ON (38.9 %), Lietuvis Energia (17.7%) and other shareholders (6.3%). See Lietuvos Dujos, Business

Profile, http://www.dujos.lt/.

http://www.isn.ethz.ch/Digital-Library/Publications/Detail/?ots591=0C54E3B3-1E9C-BE1E-2C24-A6A8C7060233&lng=en&id=47031




http://www.ure.gov.pl/en/communication/news/207,The-National-Report-of-the-President-of-ERO-is-now-available.html?search=420312268


http://www.dujos.lt/

49

2.2.4.6 Summary

The above described examples comprise only a fraction of Gazprom’s presence on the EU energy

market. However, they allow to illustrate Russia’s exposure to changes in the Internal European

Energy Market introduced by the TEP. As from 3 March 2013 these Gazprom subsidiaries should not

be able to operate on the EU market if the conditions of art. 11 are not complied with. What occurs

in reality however will be discussed in chapter 4 where I will elaborate on the current situation with

regard to the above described pipelines and TSOs.

2.2.5 Conclusion

In this chapter I gave a detailed presentation of the new unbundling regime which will have to be

complied with by the 3rd country undertakings that seek to operate on the EU market. As I have

shown, ownership unbundling model requires divestment of the shares by a VIU which would result

in full independence of its transmission system. 3rd country undertakings will not only have to comply

with the unbundling regime chosen by a MS, but also with an additional criterion under art. 11,

which tends to safeguard security of the EU energy supply. As rigorous as this new regime may seem,

it is somewhat nuanced by some additional provisions of the Gas Directive. Still, it seems like this

new regime will have a substantial impact on the Russian interests within the EU.200 Before going into

the concrete application of the above described provisions on Gazprom’s subsidiaries, I am going to

look into controversy around TEP’s new unbundling regime.

2.3 Controversy around TEP’s unbundling regime

TEP has provoked some strong reaction from across the border. Not the least of the complaints was

made by the Russian neighbors. It is safe to say that liberalization in general is contrary to the

Russian domestic and external energy policy. As I will discuss in the last part of my thesis, this is

probably the main reasons behind the Russia-EU difficulties in the field of energy, the unbundling

discussion being only a part thereof. In this chapter however I will specifically concentrate on

controversy around the new unbundling regime and its application on Russian Gazprom. Starting

with rationale behind art. 11 of the Gas Directive, I will go on and present Russia’s most important

grievances as to application thereof. In the second part I will discuss main legal issues of the new

regime, some of which have already been identified by Gazprom.

200 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS


50

2.3.1 Conflicting points of view

Application of the ‘third country clause’ has two parts to it. Firstly a 3rd country undertaking has to

comply with the unbundling criteria as set out in the art 9 of the Gas Directive (art. 11 §3 (a)). Then

additionally it has to ensure security of the EU energy supply (art. 11§3 (b)).

2.3.1.1 EU

Third country clause was initially proposed by the Commission as an incentive for the Member States

to accept and implement proposed unbundling regime (mandatory ownership unbundling). There

was a fear that while European undertakings would go on and unbundle their activities, Russian

Gazprom would seize the opportunity and buy their networks on sale.201 By virtue of art 11 §3 a., EU

sees to it that 3rd country undertakings abide by the same unbundling rules as the EU

undertakings.202 This is needed seen that Gazprom has been suspected for some time now of i.a.

discriminating against other energy suppliers by preventing access to its pipelines.203 Art. 11 §3 a.

would thus cure this kind of anticompetitive behavior by braking up vertically integrated Gazprom,

and ensure a level playing field within the EU.

Leaving this gap unclosed and allowing Russian Gazprom to take control of strategically vital assets204

would not only give it a competitive advantage, but also significantly endanger EU’s security of

supply.205 In recital 22 of the Gas Directive EU legislator elaborates on its concerns: “The security of

energy supply is an essential element of public security and is therefore inherently connected to the

efficient functioning of the internal market in gas and the integration of the isolated gas markets of

Member States. Gas can reach the citizens of the Union only through the network. Functioning open

gas markets and, in particular, the networks and other assets associated with gas supply are essential

for public security, for the competitiveness of the economy and for the well-being of the citizens of the

Union. Persons from third countries should therefore only be allowed to control a transmission system

or a transmission system operator if they comply with the requirements of effective separation that

apply inside the Community”.

201 P. O. EIKLAND, “EU Internal Energy Market Policy: Achievements and Hurdles” in V. L. BIRCHFIELD and J.S. DUFFIELD (eds.), Toward a

Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, (13) 29. 202 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 58. 203 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 11-12. 204 K. BORISOCHEVA, Analysis of the Oil- and Gas-Pipeline-Links between EU and Russia: An account of intrinsic interests, CERE,


A6A8C7060233&lng=en&id=47031, 12. 205 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 15; S. S. HAGHIGHI, “Establishing an External Policy to Guarantee Energy Security in Europe?

A Legal Analysis” in M. M. ROGGENKAMP and U. HAMMER (eds.), European Energy Law Report VI, Antwerp, Intersentia, 2009, (155) 178.




51

The same security of supply considerations incited EU to go even further and adopt an additional

condition under art 11 §3 b., which would serve as an extra insurance for the European energy

security. Recital 22 of the Gas directive further stipulates: “… the Community considers that the gas

transmission system sector is of high importance to the Community and therefore additional

safeguards are necessary regarding the preservation of the security of supply of energy to the

Community to avoid any threats to public order and public security in the Community and the welfare

of the citizens of the Union…”. This threat posed to the fundamental interest of society by foreign

control of the transmission networks is addressed by way of imposing on 3rd country undertakings an

obligation to prove that the supplies to the EU would not be jeopardized if they are allowed to

operate on its territory.206

By combining these two conditions under art. 11 EU seeks to secure its interests207, which are the

enhancement of the competition on the European energy market and security of its energy supply.208

2.3.1.2 Russia

While the Commission has been persistently advocating to Russia that with its new unbundling

regime proposed in TEP it seeks to create an open integrated and competitive energy market which

would create new business opportunities for Russian companies, Russia does not seem to agree,

suspecting 3rd country clause of being full of suspicion towards it.209

Russia’s dissatisfaction with the unbundling requirements has been strongly expressed by the

allegations that this new regime amounts to robbery of Russian property.210 By robbery Russian

Government refers to the asset value losses which would result from forced sales of assets in

question. Even where Gazprom would not have to unbundle its ownership and could keep its

transmission assets, TEP would still deprive it of the right to manage these assets. This, according to

Russia, also devaluates Gazprom’s investments in its pipelines (conversion from ordinary/voting to



trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 3-4. 207 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 83. 208 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 20. 209 S. YASTRZHEMBSKY, “Trust, not double standards: What Russia expects from the EU” in K. BARYCH (ed.), Pipelines, politics and power:

the future of EU-Russia energy relations, London, CER, 2008, 35; G. S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B.

DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, (9) 20. 210 G. BYANSLY, “Russia may contest EU Energy rules in WTO”, Reuters, 16 November 2011,

http://www.reuters.com/article/2011/11/16/russia-wto-energy-idUSL5E7MF3ZE20111116.



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preferred/nonvoting shares).211 These allegations seem to be relevant where a MS choses to apply

OU or ISO model on a transmission system which is owned and operated by a Gazprom subsidiary.

The same is true for a situation where despite ITO model had been applied by a Member State,

Gazprom would be prohibited from controlling its pipeline due to not complying with an additional

security of supply condition under art. 11 of the Gas Directive.

Apart from obvious direct financial losses that stem from the claimed robbery, there are some other,

less obvious consequences that pose an even larger threat to Gazprom. Gazprom supplies gas to its

European customers by virtue of long-term supply contracts that provide various advantages to both

parties, security of supply being one of them.212 In order to fulfill its obligations under these LT

contracts, Gazprom has to ensure sufficient transportation capacity through existing transmission

network, which is why Gazprom strongly relies on controlling its mass gas distribution system.213

Under the new unbundling regime together with the reinforced TPA regulation and the subsequent

loss of control over its pipelines, Gazprom is faced with a challenge to secure necessary capacity to

deliver on its supply commitments.214 Where Gazprom would not be able to secure enough capacity,

supply disruptions could occur. In that case not only would Gazprom suffer financial and reputation

damage, but it could also negatively affect European security of supply. Gazprom believes that these

disadvantages could very well outweigh the advantages of the perceived increased

competitiveness.215

Financial losses resulting from the obliged divestments and from subsequent loss of control over

transmission could on its turn have severe internal consequences in Russia. Gazprom is responsible

for 6 percent of Russian GDP and 8 percent of total tax revenue. By high revenues from gas export

Russian Government was also able to keep the domestic gas prices below the cost-recovery levels. As

a result of the new regulatory changes and subsequent decrease of Gazprom’s profitability, Russian

Government risks losing a substantial part of its budget, which it spends on the social and supporting

211 S. KOMLEV, Third Energy Package and Impact on Gazprom Activities in Europe, Essen, 18 March 2011,

http://www.gazpromexport.ru/en/presscenter/speech/. 212 For advantages of the LT supply contracts see A. KONOPLYANIK, ”Gas Transit in Eurasia: Transit Issues between Russia and the

European Union and the Role of the Energy Charter”, Journal of Energy & Natural Resources Law 2009, (440) 447-448. 213 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 18-19. 214 K. YAFIMAVA, The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford

Institute for Energy Studies, April 2013, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 29-36. For similar

reasons Russia did not agree with EU on the Transit Protocol of the ECT as discussed earlier. 215 S. KOMLEV, Third Energy Package and Impact on Gazprom Activities in Europe, Essen, 18 March 2011,

http://www.gazpromexport.ru/en/presscenter/speech/.

http://www.gazpromexport.ru/en/presscenter/speech/




53

services. This on its turn could provoke an internal political conflict which Russia obviously would

rather avoid.216

It is for these reasons that Gazprom not only fears “robbery” of the current control, but also

impediment of the future investment opportunities in the EU energy market. Russian president also

could not help but notice that the new European regulation not only violates property rights, but also

discriminates against Russia.217 Russian point of view seems to be clear, as well as its underlying wish

to maintain control over natural gas delivery system to its largest trading partner.218 This objective on

its turn completely opposes EU’s rationale behind the new unbundling regime, and its underlying

objective to release itself of Russian control. For this reason, from the moment Commission made its

proposal in 2007, Russian Government together with Gazprom have been closely monitoring TEP’s

legislative process and lobbying within the EU in order to secure its interests.219 Russia has argued for

special treatment of Gazprom as an important strategic supplier of the EU, pushing for

extraterritorial application of its national law or specific exemption from the unbundling regime.220

Despite these efforts, the final version of TEP did not provide for any special treatment for Russian

interests within the EU. While the final outcome did not adhere to the Russian grievances, Gazprom

was however able to identify various legal shortcomings of the new regime in order to back up its

position.

2.3.2 Legal flaws of the new regime

In what follows I am going to analyze several legal venues for a 3rd country undertaking seeking to

address obligations which are imposed on it by the new unbundling regime. This regime shows first

of all some vulnerability under the primary EU law221 as to its legal basis, competence of the EU and

its consistency with the fundamental European rights and freedoms. However, in what follows I

would rather focus on some of the most important international legal instruments which could be

216 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 21-22. 217 C. ISKAUSKAS, “Third Energy Package: dispute between Russia and the EU”, Geopolitika, 23 March 2011, http://www.geopolitika.lt/?artc=4561. 218 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 24. 219 S. KOMLEV, Third Energy Package and Impact on Gazprom Activities in Europe, Essen, 18 March 2011,

http://www.gazpromexport.ru/en/presscenter/speech/. 220 L. VINATIER, Gazprom and the Kremlin: Russia’s Double Approach to Europe’s Energy Markets?, Thomas More Institute, May 2013,

http://www.institut-thomas-more.org/en/actualite/gazprom-and-the-kremlin-russias-double-approach-to-europes-energy-markets.html. 221 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS



http://www.geopolitika.lt/?artc=4561



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used directly by OAO Gazprom.222 In view of the recent WTO accession of Russia, it is interesting to

start by assessing 3rd country clause in view of the WTO provisions. Then, I will assess the unbundling

regime in view of the property rights protection under the ECHR. Subsequently, a scrutiny under

Bilateral Investment Treaties (BIT) between Russia and Member States will form an important part of

this chapter.223 As until today PCA remains the legal basis of bilateral relations between Russia and

EU, I will finish this chapter by looking into the legal flaws of the new regime under its provisions.

2.3.2.1 General Agreement on Trade in Services of the World Trade Organization (WTO-GATS)

As I have mentioned in the first part of my thesis, Russian WTO membership gave it an opportunity

to address its grievances as to the latest changes in the regulatory framework in the EU energy

sector. In the framework of the WTO’s dispute settlement mechanism (DSM) TEP’s unbundling

regime now has to undergo a WTO scrutiny.

Energy transmission constitutes a service under WTO law and thus falls within the GATS224. GATS

aims at liberalization of services trade by ensuring that foreign service providers will be granted

market access and will not be discriminated against by other WTO members.225 For these purposes

WTO member states have to comply with an array of provision under the GATS. For our purposes,

the most favored nation (MFN) and national treatment (NT) provisions are of importance. It is mainly

with these provisions that the new unbundling regime comes in conflict. The problem seems to be

situated around the additional security of supply condition imposed under art 11 §3 b. that only

applies to the 3rd country undertakings.226

2.3.2.1.1 Most Favored Nation (MFN)

Art. II of the GATS requires a Member State that confers any advantage to a service or services

suppliers of a WTO or non-WTO member to accord that advantage immediately and unconditional to

222 See for detailed elaboration on consistency with EU law in A., A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence

Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS and P.L FRATINI (eds.), EU-Russia Energy Relations, Brussels,

Euroconfidentiel, 2010, (227) 229-237; A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 67-68.; K.

TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 84-88; S. S. HAGHIGHI, “Establishing an External Policy

to Guarantee Energy Security in Europe? A Legal Analysis” in M. M. ROGGENKAMP and U. HAMMER (eds.), European Energy Law Report

VI, Antwerp, Intersentia, 2009, (155) 180-183; A. BOUTE, “Wederkerigheid in Europese en Russische energie-investeringen: Een Juridische

analyse van de ‘Gazprom-clause’”, Tijdschrift voor Energierecht 2007, (247) 250-251. 223 A similar scrutiny would have applied under the ECT, as its investment protection provisions resemble those of BITs. 224 General Agreement on Trade in Services, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B,

1869 UNTS 183, 33 ILM 1167 (1994). 225 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 8. 226 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 21.

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55

the like services or service suppliers of any other WTO member.227 This article thus obliges a WTO

member to treat other members not less favorably then it treats any other 3rd country.228 This is a

general GATS obligation that applies to all WTO members and EU did not claim any exemptions for

the energy sector.229 MFN seems to concern a situation where an EU member state choses to apply

ITO model and two non-EU 3rd country undertakings apply for certification under art 11 of the Gas

Directive. While both of them comply with the unbundling (ITO) requirement under art. 11 §3 a., one

of them does not comply with an additional requirement under art 11 §3 b. and thus only one of

them can operate as a TSO in this member state.230 In order to examine whether this situation

amounts to an infringement of art II of the GATS, a three-step test should be applied.

The first step, whether a provision in question (art. 11 §3 b.) is covered by GATS, and the second

step, both 3rd country undertakings and the services they supply should be alike, are likely to be

fulfilled and do not need further elaboration.231 Third step requires a less favorable treatment of one

of the applicants. Art. XVII: 3 GATS states that ‘formally identical or formally different treatment shell

be considered to be less favorable if it modifies the condition of competition in favor of services or

service suppliers of the Member compared to the like services or service supplier of any other

Member’.232 When applied by analogy to art II this means that less favorable treatment under the

MFN includes both de jure as well as de facto discrimination.233 For this reason, although art 11

seems to apply the same conditions on all 3rd country undertakings, and thus does not discriminate

de jure, it could still amount to a de facto discrimination seen the circumstances under which

certification could take place. As discussed earlier, compliance with art 11 §3 b. and subsequent

certification could strongly rely on existence of an agreement between the EU and the 3rd country in

question.234 This factual consideration could very well violate the requirement that any advantage

must be granted immediately and unconditionally and should not lead to a less favorable treatment,

227 ORTINO, F. and SHEPPARD, F., “International Agreement Covering Foreign Investment in Services: Partners and Linkages” in BARTELS,

L. and ORTINO, F. (eds.), Regional trade agreements and the WTO legal system, Oxford, Oxford University press, 2006, (201) 209. 228 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 9. 229

C. VAN DEN BERGH, “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural Resources Law 2009, (228) 241. 230 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 11-12. 231 For detailed explanation see C. VAN DEN BERGH, “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural

Resources Law 2009, (228) 242-249 and V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO

Consistency and Broader Implications for Europe”, European Energy and Environmental Law Review, February 2009, (51) 67-69. 232 P. VAN DEN BOSSCHE, The law and policy of the World Trade Organization: text, cases and materials, New York, Cambridge University

Press, 324. 233 Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, (1997) WT/ DS27/AB/R, para. 231-234. 234 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 20.





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which does not require existence of an agreement as a pre-condition to its application.235 Therefore,

as soon as EU certifies a 3rd country undertaking due to an existence of an agreement between them,

all other WTO members are entitled to the same treatment and can use WTO’s dispute settlement

mechanism to protect their MFN-rights.236 This situation could possibly occur, in view of the

existence of the Energy Community Treaty between the EU and Balkan countries.237 Another

example is the Joint Declaration on Energy Security between the EU and China of May 2012. These

agreements could substantially facilitate undertakings from those countries to easily obtain

certification.238

2.3.2.1.2 National Treatment (NT)

In order to assess whether the NT of art XVII GATS has been breached, a 3 step test has to be

performed. This test is very similar to the MFN test as regards to the 1st and the 2nd step (scope of the

GATS and ‘likeness’).239 The third step, also similarly, requires that the provision in question gives no

less favorable treatment to the third country undertakings then it gives to like domestic

undertakings, which would put them in a competitive disadvantage.240 Art. 11 of the Gas Directive

requires 3rd country undertakings to comply with two criteria, the unbundling and the security of

supply. Domestic undertakings however, only have to comply with the first criterion. The European

Union thus grants here a formally different treatment to the 3rd country undertakings which amounts

to a less favorable treatment and subsequent competitive disadvantage.241 The imminent conclusion

is that the 3rd country clause, and more precise the provision of art. 11 §3 b. of the Gas Directive,

violates the NT principle of the GATS.

Although infringement of the NT principle is less questionable then that of the MFN, its particle

relevance is less important. Unlike MFN, NT provision is only applicable if specific commitments were

made by a WTO member. EU did not make such commitments for the energy sector, so it is not

bound by art. XVII of the GATS. However, two of the EU member states, Lithuania and Hungry, did

make such commitments, which makes these WTO member states responsible for ensuring NT to the

235 C. VAN DEN BERGH, “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural Resources Law 2009, (228) 249-

250. 236 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 65. 237 Ibid., (51) 72. 238 Herbert Smith, Energy, Infrastructure and Mining newsletter, July 2012, http://www.herbertsmithfreehills.com/-/media/HS/T-250712-

10.pdf. 239 C. VAN DEN BERGH, “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural Resources Law 2009, (228) 252. 240 Ibid., (228) 254. 241 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


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3d country undertakings on their territory.242 The overall conclusion is that the third country clause

of the TEP violates specific commitments of Hungary and Lithuania on National Treatment.243

2.3.2.1.3 Justifications

Breach of the MFN and NT principles can nevertheless be justified under general exceptions of art

XIV and art XIV bis. Both, justification and chapeau requirements have to be fulfilled.244 By adding

condition of art 11 § 3 b., EU aims to avoid threats to public order and public security (Recital 22 of

the Gas Directive). Art. XVI and art XVI bis recognize both of these policy objectives. However,

regarding public order argument, in order to fully comply with the justification requirement EU has

to prove seriousness of the threat to the protected objective and importance of the interest of

society (or the necessity of the measure).245 In addition, a rather procedural246 chapeau requirement

has to be complied with, which prescribes that provision in question cannot be applied ‘arbitrary’ or

‘unjustifiable’, comprising a disguised restriction on trade in services.247 Here, existing agreements

and ongoing negotiations with Russia have to be considered.248 The national security exception (art

XIV bis) on its turn, can only be used in very exceptional circumstances.249 Overall, there is no clear

vision among the scholars on possible justification under art XVI and XVI bis of the violation of MFN

and NT provisions by an additional requirement under art. 11 of the Gas Directive.250

2.3.2.1.4 Conclusion

Due to its WTO accession Russia could now have a solid legal ground to challenge the 3rd country

clause. A thing to keep in mind for a NRA when certifying under art 11 of the Gas Directive. Even

before its accession Russia has indicated that it is analyzing whether WTO instruments could be used

to protect its interests in the EU market.251 On 30 April 2014, Russia took the step and formally

242 C. VAN DEN BERGH, “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural Resources Law 2009, (228) 250-

251. 243 Ibid., (228) 255. 244 Ibid., (228) 255. 245 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 13 246 Appellate Body Report, United States - Standards for Reformulated and Conventional Gasoline, (1996) WT/DS2/AB/R, para 22. 247 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 13. 248 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 71. 249 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 14. 250 While the majority agrees that justification test would fail, most have assessed the more stringent reciprocity clause proposed by the

Commission. The adopted, 3rd country clause could have more chances of withstanding this test. 251 G. BYANSLY, “Russia may contest EU Energy rules in WTO”, Reuters, 16 November 2011,

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initiated dispute settlement within the WTO against the discriminatory unbundling provisions.252

However, the exact grievances are yet unknown.253

2.3.2.2 European Convention on Human Rights (ECHR)

Another legal venue that I would like to discuss is the fundamental rights protection. As both Russia

and all of the EU member states are signatories of the European Convention on Human Rights254,

they are responsible for ensuring respect of its provisions within their national legal order. Thus

Russian Gazprom can directly go to the European Court of Human Rights in order to address a breach

of ECHR provisions.255

The new unbundling regime regulates access to property in a way that could come in conflict with

the right to property laid down in Article 1 of Protocol No. 1 ECHR.256 This article provides that ‘Every

natural or legal person is entitled to the peaceful enjoyment of his possessions’. European Court of

Human Rights (ECtHR) has developed extensive case law on this article, considering a variety of

measures that go far beyond blunt governmental expropriation measures.257 Under the OU and ISO

model a VIU is excluded from ownership of assets in a transmission system and/or a TSO, and would

have to sell of its stakes subsequently. In the case James v UK ECtHR qualified this kind of compulsory

transfer of property as interference with the right to property under art. 1 of Protocol No. 1 ECHR.

258An ECHR member state that would apply unbundling could thus risk a claim under this article. The

key issue here is the proportionality test.259 In case of a deprivation, proportionality will depend to a

large extend on amount of compensation received by the involved undertaking.260 Provided that

transmission assets are sold off, a VIU will surely receive some compensation.261 Nevertheless, it is

likely that due to the forced nature of the transaction, not the full market value will be reimbursed

which could amount to a disproportional interference.262 However, ECtHR adds that “Legitimate

objectives of public interest, such as pursued in measures of economic reform ... may call for less than

reimbursement of the full market value”.263 Thus when applying ownership unbundling on Gazprom,

a member state would have to justify a less than full reimbursement by legitimate objective of public

252 B. FOX, “Russia to file WTO lawsuit against EU energy laws”, EUobserver, 5 May 2014, http://euobserver.com/news/123984. 253 WTO, Russia files dispute against EU over regulations in the energy sector, 30 April 2014, http://www.wto.org/english/news_e/news14_e/ds476rfc_30apr14_e.htm.. 254 Convention for the Protection of Human Rights and Fundamental Freedoms, November 4, 1950, Europ.T.S. No. 5, 213 UNTS 221. 255 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 69. 256 Ibid., 69. 257 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 136-139. 258 ECHR, James v. United Kingdom, (1986) A 098 B, para. 40; K. TALUS, EU Energy Law and Policy: A Critical Account, New York,

Oxford, 2013, 87. 259 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 137. 260 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 87. 261 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 69. 262 ECHR, James v. United Kingdom, (1986) A 098 B, para. 54. 263 Ibid., 54.

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interest pursued by this unbundling. Otherwise deprivation of assets could be seen as

disproportionate and make the member state in question liable for breach of Article 1 of Protocol

No. 1 ECHR.

For completeness it is also worthwhile mentioning that as ISO and MOU unbundling models deprive

a VIU from pursuing network activities (TSO), it can constitute a possible violation of freedom to

pursue economic activity. The ECHR does not explicitly provide for protection of this right, but ECtHR

developed a case law which protects the economic enterprise by means of Article 1 of Protocol No. 1

ECHR.264

2.3.2.3 Bilateral Investment Treaties (BITs)

As I described in the first part of my thesis, Bilateral Investment Treaties (BITs) concluded between

Russia and EU member states have a direct influence on their energy relation. Essentially, these BITs

and EU law pursuit the same goal, liberalization of the cross-border investments. So tensions

between member states BIT obligations with respect to Russia and their EU law obligations are

unlikely to arise. However, EU law contains also an array of provisions of a more regulatory or

interventionist type, which tend to protect specific EU interests and by doing so tend to have a

restrictive influence on the cross-border investments.265 This seems to be all the more relevant for

the energy sector, where the interests of investors, that require regulatory stability, clash with the

completion of the internal EU energy market, which is inherently unstable and thus affects the

vested rights of these investors.266 Recently introduced unbundling regime which applies to the 3rd

country undertakings is a good example of such potentially investment-adverse norms. In what

follows I am going to analyze the unbundling regime in light of three classic BIT provisions, i.e. the

national treatment (NT), most favored nation (MFN) and expropriation clauses. As a reference I am

going to use the Russia-Lithuania BIT of 1999. Due to recent developments this BIT seems to be the

most relevant one for the moment. Also, as I mentioned in part one, all EU BITs are very similar so

this analysis is representative for the rest of the BITs concluded with Russia.

2.3.2.3.1 MFN and NT

Art. 3 of the Russia-Lithuania BIT states:

264 See case ECHR, Van Marle v. The Netherlands, (1986) A 101; K. TALUS, EU Energy Law and Policy: A Critical Account, New York,

Oxford, 2013, 87-88. 265 T. EILMANSBERGER, “Bilateral Investment Treaties and EU Law”, Common Market Law Review 2009, (383) 394-397. 266 A. BOUTE, “Case C-264/09, Commission v. Slovakia, Judgment of the Court (First Chamber) of 15 September 2011, Not Yet Reported”,

Common Market Law Review 2012, (1179) 1179-1181.

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1. Each Contracting Party shall accord in its territory to the investors, investments made by

investors of the other Contracting Party and activities related to such investments fair and

equal treatment, which excludes the application of discriminatory measures impeding

management, maintenance, use, enjoyment and disposal of the investment.

2. The treatment, set forth in the paragraph 1 of this Article, shall be at least no less favorable

than the treatment accorded by the Contracting Party to the investments and activities

related to such investments of its own investors or the investors of third state.

3. Each Contracting Party in accordance with its laws and regulations reserves a right to

determine the branches of the national economy and the spheres of activities where the

activities of foreign investors are restricted or limited.

4. The most favored nation treatment, provided in accordance with paragraph 2 of this Article,

is not extended to the benefits which are provided or will be provided in the future by the

Contracting Party:

a) by virtue of any existing or future customs, monetary and payment union, free trade and

common tariff areas, common market or other forms of regional economic integration

agreements, to which the Contracting Party is a party or may become a party in the

future;

b) on the basis of the treaties on the avoidance of double taxation or other agreements on

taxation.

The MFN and NT principles of §2 are self-explanatory and they are very similar to the WTO

provisions. Consequently, in the view of the WTO elaboration made earlier and for the same reasons

it is safe to assume that the additional condition under art 11 §3 b. of the Gas Directive set for the 3rd

country undertakings is potentially in conflict with MFN and is clearly in conflict with NT obligations

of art 3§2 of the BIT. However, this finding has to be nuanced somewhat in the view of §4 of this

article. This is a so called ordinary ‘Regional Economic Integration Organization’ clause (REIO), which

excludes applicability of the MFN principle with regard to the preferential treatment granted to the

other members of the REIO, which is the EU in our case (similarly to the WTO). However, this clause

does not remove the NT obligation, or the MFN obligation with regard to other, non-REIO 3rd country

undertakings.267

2.3.2.3.2 Expropriation clause

As discussed earlier, Mr. Putin made some pronounced accusation comparing application of the new

regime to a robbery. It seems that Russia, dissatisfied with investments value losses, would qualify

267 T. EILMANSBERGER, “Bilateral Investment Treaties and EU Law”, Common Market Law Review 2009, (383) 407-408.

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application of OU model to Gazprom’s assets as an unlawful expropriation. It is thus interesting to

see how application of this OU model would hold up under scrutiny of the expropriation clause which

is found in art. 6 of the Russia-Lithuania BIT. This article goes as follows:

1. The investments of the investors of one Contracting Party made in the territory of the other

Contracting Party shall not be subject to expropriation, nationalization or other measures

equivalent to expropriation or nationalization (hereinafter referred to as "expropriation")

unless these measures are carried out in the public interest and under due process of law, are

carried out without discrimination and are accompanied by the payment of prompt,

adequate and effective compensation.

2.3.2.3.2.1 Expropriation

First question is whether application of OU on a subsidiary of Gazprom, in Lithuania for example,

would amount to an expropriation. Expropriation envisaged by the BITs does not only entail blunt

expropriation measures, but also certain regulatory measures268, which is more of the case in our

situation. The key question here is where to draw the line between regulatory expropriation and

normal regulation, the consequences of which should be borne by the investor. The criterion is the

severity of the impact on the foreign investor. An expropriation occurs when the regulatory change

deprives the investor of all or almost all benefits of his investment. This seems to happen where a

TSO controlled by Gazprom would be denied certification due to not meeting the OU requirements

(or ISO requirements).269 However, a possible contrary argument would be that these effects do not

deprive Gazprom of the benefits of its investment. Where Gazprom makes an investment in a

network and its management, he does so to facilitate sales of gas to its clients, which is its main

activity. This sale of goods (gas) has been recognized in arbitrary practice as a protected ‘investment’.

Consequently, when Gazprom is deprived of its right to own network assets and/or manage those, it

is still able to use this network to sell gas to its customers by following the same procedures as other

suppliers.270 This means that by applying OU to Gazprom it is not deprived of its main investment, the

sales of gas, due to the fact that it does not depend on ownership or management of the network.

Although maybe a long stretch, dependent on the exact objectives which Gazprom pursues by its

investments in the EU network, it can make a sound argument.

268 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 128. 269 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 238-239. 270 A. BOUTE, “Case C-264/09, Commission v. Slovakia, Judgment of the Court (First Chamber) of 15 September 2011, Not Yet Reported”,

Common Market Law Review 2012, (1179) 1191-1193.

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2.3.2.3.2.2 Remuneration

Even when qualified as expropriation, it is only forbidden when it amounts to an ‘unlawful’

expropriation.271 Relevant criteria are set out in the same art 6 §1 of the BIT. A possible discussion

could arise around requirement of adequate and effective compensation. There is no regulated

approach as to actions to be taken after establishing a breach of the unbundling requirements.

However it is not very likely that it would lead to blunt seizure of Gazprom’s assets or immediate

withdrawal of its subsidiary’s certificate. It is most likely that a 3rd country undertaking and the

member state in question would come to an agreement whereby the former would be awarded a

period of time in order to sell its assets.272 It seems that Gazprom however could argue that forced

sales would not result in a full compensation of the lost asset value. However, in their assessment of

the compensation criterion, arbitration tribunals have drawn inspiration from ECtHR and its

jurisprudence around property rights protection under Article 1 of Protocol No. 1 ECHR.273 Thus

similarly, arbitration tribunals will apply proportionality test. This means that under certain

conditions, a less than full compensation will be sufficient to comply with the compensation criterion

under art. 6 of the BIT.274

2.3.2.3.2.3 Discrimination

Although apparently fulfilling the compensation requirement, application of the OU model could still

amount to an unlawful expropriation if it is discriminatory. Here again it seems that the requirement

under art 11 §3 b. puts the whole regime applicable to third countries in conflict with international

law, as it discriminates with regard to domestic undertakings and possibly with regard to other 3rd

country undertakings.

2.3.2.3.3 Conclusion

Scrutiny of the new unbundling regime that applies to 3rd country undertakings by virtue of art 11 of

the Gas Directive reveals that its application potentially breaches the NT, MFN and expropriation

provisions of the BITs. This has been on its turn identified by Russia as a possible legal venue.275 As

described in the first part, BITs give parties a strong claim under international law (art. 10 of the

Russia-Lithuania BIT). Thus in case a member state would apply art 11 of the Gas Directive,

271 Ibid., (1179) 1192. 272 Interview, Frederik Vandendriessche (Stibbe), Brussels, 17 April 2014. 273 A. LEHAVI AND A. N. LICHT, “BITs and Pieces of Property”, The Yale Journal of International Law 2011, (115) 131. 274 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 238. It is worthwhile mentioning that German

BIT with Russia contains much stronger provisions and additional compensation clause, which give both parties more rights than a standard

BIT 275 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 17.


63

international arbitration could be triggered by the affected 3rd country. It will be this tribunal that will

ultimately decide whether BIT provisions were breached. Compliance with EU law as such, will not

exonerate a Sate from its international investment obligations. However, it can be taken in

consideration to some point to determine whether interference with investments could be

justified.276 If a breach of BIT provisions is established, the claimant will be awarded financial

compensation.

2.3.2.4 Partnership and Cooperation Agreement (PCA)

President Putin has on different occasions accused the new unbundling regime of violating art. 34 (1)

of the PCA277 according to which the contracting parties commit to ‘use their best endeavors’ to

avoid taking measures which would restrict the operations of their companies more than what was

the case on the day preceding the signature of the PCA.278

In his writing to European energy Commissioner Gunter Oettinger, S. Shmatko also questioned

whether the special requirement imposed to 3rd country undertakings under art 11 §3 b. complies

with art. 28 PCA by virtue of which both parties committed to not discriminate against each other’s

undertakings.279

Finally, by virtue of art 58 §1 PCA, parties aim at creating a positive climate for domestic and external

investments. Art 52 §2 on its turn, safeguards a free movement of capital.280

Although there is no doubt that the new regime is flawed in different ways under the PCA, due to the

flawed nature of this legal instrument itself, its provisions cannot really be relied on by Russia in

order to contest TEP’s unbundling regime.281

276 AES v. Hungary, ICSID (2010) ARB/07/22, para. 7.6.6.-7.6.9; A. BOUTE, “Case C-264/09, Commission v. Slovakia, Judgment of the

Court (First Chamber) of 15 September 2011, Not Yet Reported”, Common Market Law Review 2012, (1179) 1188. 277 One of the most memorable moments being the EU-Russia summit of 21/12/2012, where President Putin, after Barroso’s long statement

on the legality of TEP at the end of the press conference, made a late grab for the microphone and stated “My friend from many years, Mr

Barroso, has for so long and so emotionally spoken, because he knew that he is not right, he is guilty,”. Accompanied by laughter from the

present journalists, Putin invited to open and read art. 34 of the PCA. See EurActive, “Putin slams Barroso: ‘You know you are wrong,

you’re guilty’”, 21 December 2012, http://www.euractiv.com/energy/putin-barroso-right-guilty-news-516827. 278 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 20-21. 279 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

10. 280 A. BOUTE, “Wederkerigheid in Europese en Russische energie-investeringen: Een Juridische analyse van de ‘Gazprom-clause’”,

Tijdschrift voor Energierecht 2007, (247) 249. 281 Ibid., (247) 250.

http://www.euractiv.com/energy/putin-barroso-right-guilty-news-516827

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2.3.3 Conclusion

Having discussed different point of views on the new regime, it is clear that EU’s and Russia’s

agendas contradict each other. Where EU seeks to introduce more competition and enhance its

security of supply, Russia seeks to retain its dominance on the EU energy market. In its rhetoric

against the recent changes, Russia has identified various legal issues that it could potentially use in its

quest against unbundling.

However, after taking a closer look at the above mentioned international instruments it seems that

unbundling as such, even in its most extreme form (OU), cannot be really contested by Gazprom.282

Even though it can be seen as a rather far going measure, its effects on property rights can be

reconciled with the international protection thereof where a proportionate compensation is

obtained by Gazprom for the lost asset value. As enforcement of compliance with unbundling rules is

likely to take place by means of forced sales of the affected assets, this compensation should suffice

in order to comply with the property protection rules. If not, an award of an additional financial

compensation by a member state would prevent breaches of international law.

The problem however lies in the additional condition under which 3rd country undertakings have to

unbundle, which is found in art 11 §3 b. of the Gas Directive. This condition discriminates 3rd country

undertakings with regard to the EU undertakings and possibly also with regard to other 3rd country

undertakings that have an agreement with the EU. Discrimination is prohibited under various

international instruments, some of which are discussed above. This gives Gazprom a legal avenue to

challenge application of art 11 on its European subsidiaries and claim compensation or annulment of

the measures.283 So even though Russian robbery accusations do not seem to hold up, its claims of

discrimination seem to make sense.

This on its turn forms a serious incentive for the member states to avoid applying art 11, at least in a

way which was foreseen by the Commission. However, a prospect of a hanging international claim

doesn’t release member states from their duty to apply EU law. This situation seems to be

anticipated by the EU legislator in the same art. 11 §3 (b) ii, which states that shall be taken into

account ‘the rights and obligations of the Member State with respect to that third country arising

under agreements concluded with it, insofar as they are in compliance with Community law’.284 A

282 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 88. 283 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 241. 284 Ibid., (227) 241.

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reference is made here to art. 351 TFEU and art 4(3) TEU285, which is an expression of the primacy of

EU law.286 Although validity of conflicting international obligation of a member state is not

questioned (art. 351 (1) TFEU)287, they are still obliged to apply a conflicting EU provision. This matter

has been previously addressed in the so-called BITs cases.288 In these cases, several MS were found in

breach of EU law where they were not willing to apply EU measures which were in conflict with their

international obligations under BITs concluded with 3rd countries.289 Similarly, in the light of Portugal

v. Commission290, Member States will not be able to challenge the EU measure under their WTO

obligations.291 However a more recent case has put somewhat in question the classic approach taken

by the ECJ. In Commission v. Slovakia292 ECJ ruled that a potential violation of an international

obligation of a member state justified not applying EU law.293 Interestingly, the EU provision in

question was the non-discriminatory TPA obligation of Directive 2003/54/EC which came in conflict

with priority access right that was granted to a Swiss electricity supplier. This right was granted

before Slovakia’s accession, and it was a protected investment under the Slovakia-Switzerland BIT.294

However, due to strong criticism expressed towards this judgment295, it is unlikely that this case

would become a precedent for subsequent exemptions of member states from their EU law

obligations.

Thus it seems that the member states are caught between 2 crossfires when faced with application

of art 11 of the Gas Directive. On one hand they face possible arbitration and WTO-DSM claims from

Russia, which does not make them too eager to discriminate against Gazprom when applying

unbundling provisions. On the other hand, they face infringement procedures that Commission could

initiate under art 258 and 260 of the TFEU. Where Commission would decide to pursue application of

art. 11 together with its discriminatory provision, a member state, under the weight of substantial

financial penalties of art 260 TFEU, would eventually have no choice but to apply it on Gazprom and

285 Treaty on European Union, P.B. C 326/13, 26 October 2012. 286 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

9. 287 W. SHAN and S. ZHANG, “The Treaty of Lisbon: Half Way towards a Common Investment Policy”, The European Journal of

International Law 2011, (1049) 1069. 288 ECJ, Case C-205/06, Commission v. Austria [2009] ECR I-1301; ECJ, Case C-249/06, Commission v. Sweden [2009] ECR I-1335; ECJ, Case C-118/07, Commission v. Finland [2009] ECR I-10889. 289 A. BOUTE, “Case C-264/09, Commission v. Slovakia, Judgment of the Court (First Chamber) of 15 September 2011, Not Yet Reported”,

Common Market Law Review 2012, (1179) 1193-1194. 290 ECJ, Case C-149/96, Portugal v. Commission [1999] ECR I-8395. 291 Member State can only challenge the WTO consistency of EU legislation where this legislation tends to implement a particular WTO

obligation or where it expressly refers to a particular WTO provision. See ECJ, Case C-280/93, Germany v. Commission [1994] ECR I-4873;

V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 66. 292 ECJ, Case C-264/09, Commission v. Slovakia [2011] ECR I-08065. 293 A. BOUTE, “Case C-264/09, Commission v. Slovakia, Judgment of the Court (First Chamber) of 15 September 2011, Not Yet Reported”,

Common Market Law Review 2012, (1179) 1196. 294 Ibid., (1179) 1180-1181. 295 Ibid., (1179) 1181-1196.

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possibly face legal charges under international law. However, as can be sensed already, the situation

in reality has been developing somewhat differently from the initial Commission’s expectations.

2.4 Application of the new unbundling regime on Gazprom

After giving a detailed overview of the new unbundling regime and looking into the controversy

surrounding it while identifying some of its most important legal flaws, in this chapter I am going to

mix all the previous findings together and see how this new regime applies to Gazprom in practice.

Hereby I will focus on the infrastructure that was introduced in chapter 2. These are the new

pipelines invested in by Gazprom (OU) and networks controlled by Gazprom on the German

(OU/ITO), Lithuanian (OU) and the Polish (ISO) energy markets. Although far not the only Gazprom’s

interests within the EU, these however allow to illustrate how the new regulatory changes

introduced by TEP affect Russian interests.

2.4.1 New infrastructure

North Stream, South Stream, OPAL and NEL are all transmission systems that did not yet exist on 3

September 2009. As I have explained earlier, these kind of new pipelines fall under a compulsory OU

model (Article 9(8) of the Gas Directive). This means that Gazprom would have to give up its control

and all rights in these networks as prescribed under art. 9 of the Gas Directive.

2.4.1.1 North Stream

Through its subsidiary North Stream AG, Gazprom holds 51% of North Stream pipeline (NS) and its

management. In order to comply with OU model, Gazprom would have to completely divest in 1% of

its shares (as holding of a majority share is prohibited) and give up all the voting rights that are

coupled to the remaining shares and any other forms of control that it exercises over North Stream

AG. It is important to notice that this situation cannot be legalized where North Stream AG would

just hand over management of the pipeline to an independent undertaking. This would be a

possibility under the ISO model. But under applicable regime, Gazprom is prohibited from owning the

network as well, not just from managing it. The logic solution would thus be where Gazprom would

67

give up its control and rights over the NS AG, which would then unable NS AG to legally own and

operate the NS pipeline.296

This divestment by Gazprom however, is yet to happen. To this day Gazprom has not unbundled its

ownership of NS AG, nor did it ask for any exemptions297, despite expressing interest to do so.298

Neither it has been approached by the German NRA in order to legalize operations of NS, nor did

Commission take any special interest in this pipeline. A possible explanation for the current

indifference could lie in the NS’s location. As it mainly runs through Baltic Sea, and only touches soil

in German Greifswald, access possibilities and needs for other energy suppliers are limited. This is in

contrast with other 3 new pipelines that I will discuss further. Thus if we look at the North Stream

pipeline from the legal perspective, none of the criteria under art 11 have been applied.

2.4.1.2 OPAL and NEL

2.4.1.2.1 OPAL

Gazprom owns and manages OPAL pipeline through its subsidiary OPAL GT. In July 2008, OPAL GT

has applied for an exemption for its pipeline from TPA obligations under art 22 of the Second Gas

Directive. As OPAL connects Germany to Check Republic, it was found to comply with conditions of

art 22 and was granted an exemption.299 Since TEPs unbundling regime became applicable, OPAL’s

exemption has been put under revision.300 It is yet to be seen what exemptions will be granted, and

more precisely, whether it would enjoy an exemption from the applicable unbundling requirements.

However it’s clear that under current situation, TSO OPAL GT does not comply with OU model.

2.4.1.2.2 NEL

Similarly to OPAL, Gazprom owns and manages NEL pipeline through its subsidiary NEL GT. In august

2013 NEL GT, with support of the German NRA, applied for certification under ITO model. However,

when assessing under art. 10 compliance with art. 9 of the Gas Directive, Commission pointed out

296 It is important to add here that besides Gazprom, NS AG is own by other VIUs like Wintershell. These would have to unbundle as well in

order to legalize NS AG as the owner and operator of NS pipeline. For the following pipelines a similar reasoning applies as to partial

ownership by Gazprom and divestment obligation. Thus I will not be concentrating on the exact shares and rights that should be divested. 297 K. YAFIMAVA, The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford

Institute for Energy Studies, April 2013, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 50 footnote 151. 298 Russian Times, “Gazprom wants special case for its pipelines from EU energy package”, 17 December 2012,

http://rt.com/business/gazprom-energy-package-exceptions-203/. 299 100% exemption from TPA was granted by the German NRA. However, Commission has reduced that exemption to 50%. See K.

YAFIMAVA, The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford Institute

for Energy Studies, April 2013, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 28 footnote 101. 300 European Commission, Pending Notifications of National Exemption Decisions,

http://ec.europa.eu/energy/infrastructure/exemptions/doc/exemption_decisions.pdf.


http://rt.com/business/gazprom-energy-package-exceptions-203/


http://ec.europa.eu/energy/infrastructure/exemptions/doc/exemption_decisions.pdf

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that NEL pipeline fell under compulsory OU model by virtue of art 9(8) of the Gas Directive.301 Earlier

in July 2008, alongside OPAL pipeline, NEL GT had also applied for exemption for its pipeline from

TPA rules under art 22 of the Second Gas Directive. However, since NEL is exclusively located within

the territory of Germany, it cannot be qualified as an ‘interconnector’. Partially for this reason,

German NRA rejected its request.302 For the same reasons NEL cannot be considered for unbundling

exemption under art 36 of the new Gas Directive. However, Russia has not given up seeking an

exemption for this pipeline.303 In the meantime though, it seems that NEL has run out of options. In

order to comply with the OU requirements, Gazprom would have to divest its shares in NEL GT.

2.4.1.3 South Stream

South Stream pipeline (SS) runs through North Sea and various member states’ territories. Each part

of this pipeline is owned by a joint venture established between Gazprom and a corresponding

member state’s energy company. Gazprom is a 50% shareholder of each joint venture.304 These joint

ventures are also foreseen to become the TSO for their part of SS. First of them, South Stream

Transport BV, is scheduled to start operating the offshore part of the pipeline in 2015. This however

infringes the applicable OU model on SS pipeline, as Gazprom would be controlling those TSOs.

For some time now Russia has been expressing its interest in pursuing exemptions on different

grounds for the SS pipeline.305 Some key elements can be highlighted concerning possibility of

derogation under art 36 of the Gas Directive. To enjoy this exemption, South Stream doesn’t exactly

meet the definition of ‘interconnector’ (art 2 (17) of the Gas Directive) as it originates outside the EU

and runs through a non-EU country (Serbia). However, the same issues did not seem to impede

Commission from grating an exemption to the Nabucco pipeline. In addition, seen that Serbia is a

Contracting party to the Energy Community Treaty, its territory could be viewed as forming a part of

the EU for the purpose of art 36.306 Granting Nabuco pipeline this exemption has made it somewhat

difficult for the Commission to refuse it to the South Stream pipeline on these grounds. However,

another requirement under art 36 1 (b) states that ‘the investment must be such that the investment

would not take place unless an exemption was granted’. Thus by taking a Final Investment Decision

301 Commission Opinion (2013) pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10 of Directive 2009/73/EC – Germany – Certification of the Operators of the Nordeuropaische Erdgas-Leitung (NEL),

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2013_083_084_085_de_en.pdf, 4-5. 302 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 312. 303 Russian Times, “Gazprom wants special case for its pipelines from EU energy package”, 17 December 2012,

http://rt.com/business/gazprom-energy-package-exceptions-203/. 304 In the Serbian joint venture Gazprom holds 51% of the shares. 305 EurActive, “Russian pipeline breaks free from EU rules”, 14 July 2011, http://www.euractiv.com/energy/russian-pipeline-breaks-free-eu-

news-506568. 306 Communication from the Commission of 30 July 2010, Reply to questions from Mr Shmatko on the Third package, HH/cg D(2010) 718,

6.

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2013_083_084_085_de_en.pdf


http://www.euractiv.com/energy/russian-pipeline-breaks-free-eu-news-506568


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and starting construction in 2012, South Stream has possibly undermined its chances of obtaining an

exemption under art 36.307

Nonetheless, if we look at the Nabucco example, it seems that these hurdles could be surpassed with

support from Commission. In order to get that support however, Gazprom will need to convince it

that this pipeline is in the best interest of the EU.308 Until now Gazprom has been unsuccessful in its

efforts. Although until recently Commission did not exclude a possibility of an exemption in the

future309, the EU seems to get more and more defensive against Russian pipelines in the view of the

current crisis in Ukraine.310

In the meantime, South Stream project is advancing and Russian gas is expected to flow true the first

segment in 2015. Future will tell whether SS will further pursue and obtain an exemption from the

unbundling requirements, but under current plans of Gazprom, this pipeline does not meet the OU

requirements.

2.4.2 Lithuanian Energy Market

Lithuanian Litvos Dujos, which is controlled by Gazprom, manages all transmission networks on the

territory of Lithuania. In August 2011, pursuing compliance with the New Gas Directive, Lithuania

enacted ownership unbundling model on its territory.311 Immediately this new regulation was

protested by Gazprom, as it meant that it would now have to give up its control over the Lithuanian

transmission network.312 Gazprom reacted by charging Lithuania higher Gas prices than Latvia and

Estonia. It never tried to hide the fact that this discrimination was based on Vilnius’ choice for OU

model.313 Gazprom followed this up by installing an arbitration claim at the UN, according to

UNCITRAL rules.314 However, as I have discussed earlier, Gazprom does not really have a strong legal

claim against unbundling as such as long as it is not discriminatory and compensated. It is probably

partially for this reason why in May 2012 a partial agreement between Gazprom and Lithuania was

reached that unbundling will proceed. This agreement will most likely provide for a period of time in

307 K. YAFIMAVA, The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford

Institute for Energy Studies, April 2013, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 50. 308 Ibid., 50. 309 PR Newswire Europe Including UK Disclose, “EU Commission: Ready to Discuss Solutions in South Stream Negotiations”, 5 December

2013, http://www.prnewswire.com/news-releases/eu-commission-ready-to-discuss-solutions-in-south-stream-negotiations-234578401.html. 310 EuObserver, “New Russian pipeline is ‘no priority’ for EU”, 6 May 2014, http://euobserver.com/tickers/124015. 311 OAO Gazprom v. Republic of Lithuania, Stockholm Chamber of Commerce (2012) V 125/2011, para. 151. 312 J. CWIEK-KARPOWICZ, “Russia’s Gas Sector: In Need of Liberalization in the Context of the Shale Gas Revolution and Energy Relations

with the European Union”, Journal of East-West Business 2012, (54) 58. 313 OAO Gazprom v. Republic of Lithuania, Stockholm Chamber of Commerce (2012) V 125/2011, para. 154; A. GRIGAS, The Gas

Relationship between the Baltic States and Russia: politics and commercial realities, Oxford Institute for Energy Studies, October 2012,

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/10/NG_67.pdf, 14. 314 See PCA case listing at http://www.pca-cpa.org/showpage.asp?pag_id=1470.


http://www.prnewswire.com/news-releases/eu-commission-ready-to-discuss-solutions-in-south-stream-negotiations-234578401.html

http://euobserver.com/tickers/124015

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/10/NG_67.pdf

http://www.pca-cpa.org/showpage.asp?pag_id=1470

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which Gazprom would have to sell its assets in Litvos Dujos to Lithuanian State (which at the moment

holds a minority share of 17%).315 However, Gazprom has not yet renounced his arbitration rights316,

possibly hoping that some legal arguments could hold up and at least delay the required OU. This

case is currently pending at the Permanent Court of Arbitration.

Although Lithuanian Market is not as significant to Gazprom compared to other EU MS317, Lithuanian

network is responsible for transit of Russian gas to Kaliningrad. It is thus easy to understand why

Gazprom is reluctant to give up its control over Lietuvos Dujos. Russia’s discontent for Lithuania’s

selection for the most stringent model of unbundling could also be explained by the fact that

Lithuanian Government had an option to opt out from the entire unbundling regime by virtue of art

49 §1 of the Gas Directive, seen that it can be considered as an ‘isolated market’.318 This was for

instance done by Estonia and Latvia, which then opted for an ITO model. However, it should be

noticed that Estonia has recently changed its position also pursuing OU. Estonian legislation, which

was passed in June 2012, forces a Gazprom controlled (37%) TSO Eesti Gaas to sell its pipeline by

2015. Gazprom along with another shareholder (E.On 34%) are considering taking legal action against

this legislation.319 For now however, all eyes are on the Gazprom’s dispute with Lithuania, which has

been heralded as a ‘test case’ on EU energy policy.320

2.4.3 Polish Energy Market

Polish part of the Yamal-Europe pipeline is owned by EuRoPol Gas, which is controlled by Gazprom.

TSO of this pipeline however is a Polish state owned OGP Gaz-System. Only recently has Poland

transposed the Gas Directive in its legislation. The first certification procedure started in February of

this year. Only two TSO’s have been certified since then, both of them transmit electricity. A first Gas

TSO is yet to be certified in Poland under the new Directive. However, if we apply the new regulation

at Yamal pipeline, it seems that it is currently operated under an ISO model.321 As I have mentioned

earlier, from 3 September 2009 on (entry into force of the Gas Directive), a member state cannot

choose to apply a less strict model on a TSO that was already in place at that date. Although,

operation of Yamal pipeline under seemingly ISO model started after this date, it still can be argued

315 A. GRIGAS, The Gas Relationship between the Baltic States and Russia: politics and commercial realities, Oxford Institute for Energy

Studies, October 2012, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/10/NG_67.pdf. 14-15. 316 Ibid.. 15. 317 L. VINATIER, Gazprom and the Kremlin: Russia’s Double Approach to Europe’s Energy Markets?, Thomas More Institute, May 2013,

http://www.institut-thomas-more.org/en/actualite/gazprom-and-the-kremlin-russias-double-approach-to-europes-energy-markets.html. 318 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 94-95. 319 A. GRIGAS, The Gas Relationship between the Baltic States and Russia: politics and commercial realities, Oxford Institute for Energy

Studies, October 2012, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/10/NG_67.pdf, 15. 320 Investment Arbitration Reporter, “Lithuanian Claims Round-up: Lesser known arbitrations move forward alongside high-profile gas unbundling battles”, 2 September 2012, http://www.iareporter.com/articles/20120903_4. 321 Polish Energy Regulatory Office, National Report 2013, http://www.ure.gov.pl/en/communication/news/207,The-National-Report-of-the-

President-of-ERO-is-now-available.html?search=420312268, 43.




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that ITO model could not be applied anymore. Nor is Gazprom likely to contest application of ISO

model seen that its pipeline has been operated like this for almost 4 years now. Therefore, it seems

that unless the legislator chooses to apply OU model on Yamal pipeline, there would be no problem

for Gazprom to adopt its activities on the Polish energy market to the new regime.

2.4.4 German Energy Market

The German section of Yamal-Europe is owned and managed by a German TSO GASCADE GT, which

is on its turn controlled by Gazprom. In December 2012 GASCADE GT was granted certification under

ITO model, which was approved by the EU Commission.322 This means that Gazprom is permitted to

retain its control of Yamal in Germany.

Although GASCADE GT was certified under procedure of art. 10 of the Gas Directive (procedure

applicable to exclusively EU controlled undertakings), it is interesting to examine this TSO in light of

hypothetical application of procedure under art 11 (under which GASCADE GT would have to be

assessed now due to partial control by Gazprom). Application of the 3rd country clause in Germany is

particularly interesting for several reasons. As the biggest supporter of vertical integration of the

energy sector, Germany has chosen to mainly apply the ITO model on TSOs that operate on its

territory. It is under this model that security of supply condition of art 11 §3 (b) is most relevant. It is

not that likely that a 3rd country undertaking could pose a threat to EU energy security if it is not

controlling the transmission system, which is the case under OU and to a lesser extent under ISO

model. ITO model however allows a 3rd country undertaking to keep or obtain this control,

potentially endangering EU security of supply. Due to German position towards Gazprom’s presence

on its market, in its assessments of compliance with the security of supply condition German NRA

would be rather reluctant to refuse certification to a Gazprom controlled TSO like GASCADE.

Commission, which has to be consulted, would on the other hand push for an agreement with Russia

in order to secure its interests and refuse certification if this agreement is not concluded (this

situation would amount to discriminatory unbundling). However as I discussed earlier, Commission’s

opinion is not binding for the NRA. There is an additional element that facilitates German NRA to

oppose the Commission. Under the English version of the Directive, a NRA has to take ‘utmost

account’ of the Commissions opinion (art. 11 §8 of the Gas Directive). However, a German version of

the New Gas Directive provides for a much weaker hurdle by only obliging it to take account of

322 Commission Opinion (2012) pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10 of Directive 2009/73/EC – Germany

– Certification of GASCADE Gastransport GmbH,

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2012_040_de_en.pdf.

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2012_040_de_en.pdf

72

Commission’s opinion ‘in as far as possible’ (soweit wie möglich). As all language versions have the

same force, a German NRA could use this discrepancy when applying art 11.323

These considerations are purely hypothetical however as art 11 has yet to be applied by a German

NRA. For now it seems that Gazprom was able to retain its grip on the German part of the Yamal

pipeline.

2.4.5 Influence of the EU Competition Law

Before making conclusions over the realities of application of the new unbundling regime on Russia’s

Gazprom, I want to elaborate on the contribution of the EU competition law to the unbundling

process. As this whole process is inspired by an objective of limiting power of the VIUs to

discriminate against its competitors, a link with art. 102 of the TFEU on the abuse of dominant

position is obvious.

2.4.5.1 Development of Competition Law in the Internal European Energy Market

As I discussed earlier, competition law had initially a lesser role to play on the EU energy market.

Only in the early 90s Commission’s DG Competition started to take some initiatives (see cases

Ijsselcentrale and Almelo).324 However, in its pre liberalization faze EU energy market was yet too

immature. For this reason a regulatory approach was chosen to pursue liberalization, while

competition law remained on the sidelines. However, throughout implementation of the

Liberalization Directives, EU energy market matured and EU DG Competition began to play an ever

increasingly role in it.

Today it can be argued that more is being accomplished by Commission through the use of general

competition law then what it was able to reach on the regulatory front. 325 Where energy

undertakings are reluctant to comply with the applicable unbundling requirements, Commission

encourages them to do so by virtue of art 102 TFEU.326 However, Commission has been recently

using this provision to go even further and secure commitments from the VIU that go beyond than

what is required under the unbundling provisions.327 After acquiring evidence of anticompetitive

323 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 19. 324 . M. ROGGENKAMP and F. BOISSELEU, “The Liberalisation of the EU Electricity Market and the Role of Power Exchange” in M. M.

ROGGENKAMP and F. BOISSELEU (eds.), The Regulation of Power Exchanges in Europe, Antwerp, Intersentia, 2005, (1) 3. 325 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 83. 326 Ibid., 67. 327 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 71.

73

behavior by a VIU (mainly through its Sector Inquiry)328, Commission would approach its TSO that

operates under ITO model. This VIU is then faced with a choice of facing antitrust prosecution under

art 102 TFEU with a prospect of reputation damage and substantial financial fines or agreeing to

ownership unbundling as settlement.329 This tactic has been already successfully applied to several

European VIUs330 which accepted to sell of (some of) their transmission activities and unbundle

despite the applicable ITO regime.331

2.4.5.2 Application of Competition Law on Gazprom

Gazprom as well has been affected by these recent developments. Where previously the

transmission of gas to the EU by Gazprom was not affected by competition law concerns, today the

situation has changed.332 When Gazprom was searching to obtain a 100% TPA exemption for his

OPAL pipeline, it is under pressure of DG Competition that Commission had lowered this reservation

to only 50% of the capacity.333

Influence of competition law on Gazprom is even better illustrated by the recent developments on

the Baltic energy market. As result of politically motivated price discrimination of Lithuania (see

Lithuanian energy market above), Commission was asked to investigate possible market abuse by

Gazprom.334 Commission followed this up by launching in September 2011 a series of raids on 20

offices belonging to Gazprom and related companies in Easter and Central Europe.335 Also, a number

of informal discussions about Gazprom have taken place with EU governments and companies. After

having collected sufficient evidence, Commission had opened formal proceedings against Gazprom

on September 4, 2012, based on suspicions that Gazprom may be abusing its dominant market

position in upstream gas supply markets in Central and Eastern European Member States in breach

of Article 102 TFEU.336 Although these proceedings did not yet amount to accusations that Gazprom

is in breach of EU Competition law, it is likely that they partially contributed to a conclusion of above

mentioned agreement between Gazprom and Lithuania in which Gazprom agreed to unbundle its

ownership on the Lithuanian energy market. In view of the latest developments in Estonia, it is also

328 J. G. WESTERHOF, “The Third Internal Energy Market Package” in M. M. ROGGENKAMP and U. HAMMER (eds.), European Energy Law

Report VI, Antwerp, Intersentia, 2009, (19) 27. 329 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 340. 330 Case COMP/39.402, RWE [2008] OJ C310/23; Case COMP/39.388, E.ON [2009] OJ C36/8; Case COMP/39.315, ENI [2010] OJ C55/13. 331 A. JOHNSTON and G. BLOCK, EU Energy Law, Oxford, Oxford University Press, 2012, 71. 332 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 241. 333 K. YAFIMAVA, The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford

Institute for Energy Studies, April 2013, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf, 35. 334 OAO Gazprom v. Republic of Lithuania, Stockholm Chamber of Commerce (2012) V 125/2011, para. 155. 335 The Economist, “Burst valves: The European Union squeezes Gazprom. Russia retaliates”, 15 September 2012, http://www.economist.com/node/21562940; European Commission, Antitrust: Commission confirms unannounced inspections in the natural

gas sector, 27 September 2011, MEMO/11/641. 336 European Commission, “Antitrust: Commission opens proceedings against Gazprom”, Press Release, 4 September 2012, IP/12/937.


http://www.economist.com/node/21562940

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likely that pressure from this probe will provide a substantial incentive for Gazprom to agree to

ownership unbundling on Estonian energy market as well.

Although it is unlikely that Commission would go on and secure far reaching commitments from

Gazprom that go beyond the applicable unbundling provisions337, it is clear that by utilizing

competition rules it can contribute to Gazprom’s compliance with the normally applicable regime.

2.4.6 Conclusion

It seems that the realities of the new regime, with regard to 3rd country undertakings, do not exactly

coincide with what has been foreseen by the EU legislator and the Commission. If we examine in

detail unbundling provisions (chapter 1&2) and we add the controversy around their application

(chapter 3), one might expect a situation where Member State NRAs would from March 2013 on

consistently apply article 11 of the Gas Directive to the Gazprom controlled subsidiaries that hold

and operate transmission networks on the EU soil. Gazprom would then retaliate by installing legal

proceedings against application of this new regime, especially targeting markets where ITO model is

applied, where incentives and possibilities to impose discriminatory unbundling by virtue of art 11 §3

(b) are the strongest. In exceptional cases, Gazprom would try to get an exemption for its pipelines

that comply with strict requirements of the derogation provisions. The above described findings

however, show that this is not exactly the case in reality. Three main conclusions can be drawn from

the practical application of the new unbundling regime on Gazprom.

First observation is that although application deadlines have passed for some time now (art. 9 March

2012 and art. 11 March 2013), far from all relevant TSO’s are being approached by the NRAs.338 This

lack of initiative from the side of NRAs is facilitating some potentially illegal transmission operations

in the EU. This is best illustrated by above mentioned North Stream pipeline and Polish section of the

Yamal-Europe pipeline.339 It is expected however that implementation process will take full speed in

2014.340

Second, those of the above mentioned TSOs that have been approached were exclusively dealt with

on the basis of art 9 and 10 of the Gas Directive, even those that were approached after March 2013

337 On the German market for example, like it did with European companies. The reason for that are the peculiarities of the EU-Russia

energy relation. See K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 137. 338 European Commission, Certification of TSOs: List of notifications received,

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/certification_en.htm. 339 These would have to be approached on the basis of art 11 now. Strictly speaking, since deadline of March 2013 has passed, NRAs would

also have to reassess all relevant TSOs in the light of art 11 requirements. 340 A. KONOPLYANIK, “Russian gas at European energy market: Why adaptation is inevitable”, Energy Strategy Reviews 2012, (42) 51.

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/certification_en.htm

75

(NEL). Nothing from the wording of art 9 and 10 could lead to a conclusion that these articles do not

apply to Gazprom’s subsidiary TSOs. These articles refer to A ‘person’ AN ‘undertaking’ A ‘vertically

integrated undertaking’.341 The scope of the unbundling requirements is thus not limited ratione

personae by virtue of these provisions. This means that any undertaking, whether it is fully EU

owned, partially 3rd country owned or fully 3rd country owned falls under procedure of art. 10 where

it seeks to own or operate a transmission system which is located in the EU.342 This means that the

above described TSO’s which are partially controlled by Russian Gazprom, almost all of which are in

addition incorporated under EU law343, also would fall within the scope of this procedure.344

However, this ratione personae limitation on the basis of nationality is made by virtue of art 11 which

extracts undertakings that are fully or even partially controlled by a 3rd country national from the

scope of art. 9 and 10, and puts them in its own scope where an additional requirement applies.345

This puts the Gazprom controlled TSOs under the scope of art 11, excluding them from the scope of

art. 10 of the Gas Directive.

Nevertheless, until now these TSOs have only been assessed under procedure of art. 10, which

means that they are only required to comply with unbundling criteria. Reluctance of the member

states to apply art 11 may be explained by the fact that Gazprom holds a legitimate legal claim on the

basis of several international instruments against these member states if they choose to apply the

discriminatory criterion under art 11 §3 b. Also, not all member states are that negative about

Gazprom’s presence in their energy market as the Commission and some event welcome it.346 These

member states may not see the necessity of applying the security of supply criterion. It is also true

that art. 11 has not been applicable for a very long time yet (deadline March 2013), so it is possible

that they would catch on in time.

If they would continue to ignore 3rd country clause however, Commission has the necessary tools to

oblige them to apply art 11 on Gazprom subsidiaries. It has to be questioned though, in the light of

hanging international claims above the member states’ heads, whether it is in Commission’s best

interest to pursue its application. It cannot have been the intention of the EU to expose its member

341 See also definition of VIU art. 2 (20) of the Gas Directive. 342 K. BORISOCHEVA, Analysis of the Oil- and Gas-Pipeline-Links between EU and Russia: An account of intrinsic interests, CERE,


A6A8C7060233&lng=en&id=47031, 12. 343 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 58. 344 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 228; A. BOUTE, “Wederkerigheid in Europese

en Russische energie-investeringen: Een Juridische analyse van de ‘Gazprom-clause’”, Tijdschrift voor Energierecht 2007, (247) 252. 345 This seems to be the only contribution of art 11. Interview, Yohan Benizri (Sidley Austin LLP), Brussels, 6 April 2014. 346 The Voice of Russia, “Russia presses for exempting Gazprom from EU’s third energy package”, 17 December 2012,

http://voiceofrussia.com/2012_12_17/Russia-presses-for-exempting-Gazprom-from-EU-s-third-energy-package/.



http://voiceofrussia.com/2012_12_17/Russia-presses-for-exempting-Gazprom-from-EU-s-third-energy-package/

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states to conflicts with Gazprom that can evolve to a conflict with Russia that exceeds boundaries of

the energy sector. So it seems that Commission might have introduced a provision, which it cannot

afford to enforce. A possible confirmation of this point of view can be implied from the Commissions

opinion on the compliance of German TSO NEL GT with the unbundling requirements. German NRA’s

decision was notified to the Commission by virtue of a procedure under art. 10 of the Gas Directive.

While assessing Gazprom’s participation and influence on this TSO, not once has Commission

mentioned that the procedure under art. 11 should have been applied instead.347 Therefore some

scholars might have been right when questioning whether the third country clause will have any

impact on Gazprom in practice.348

Last point that I would like to highlight, is the way in which Gazprom seems to deal with the new

unbundling regime. Gazprom doesn’t seem to pursue these unbundling provisions on the legal

grounds, but rather seems to accept application of the new regime on his old pipelines (situation in

Lithuania is an exception, however even there an agreement has been reached) and focuses on

obtaining exemptions for the new ones.349 This could be attributed to the fact, that seen that art 11 is

not being applied there is no strong legal ground to oppose unbundling anyway. Whatever the

reasons may be though, it is clear that the best way to solve this conflict of opposed interests is by

negotiations, not by legal proceedings.350 In that outlook, the approach taken by Gazprom seems to

be a correct one.351

To sum up, we see that a lot of situations are not yet approached under the new unbundling regime.

Where Gazprom’s subsidiaries have been approached, they have only had to comply with the

unbundling requirements of the art. 9 this far. When faced with application of these requirements,

Gazprom seeks to obtain derogations for its new pipelines. It is yet to be seen what will be the effect

of the 3rd country clause. The future will also tell how the conflict in Lithuania will play out and

whether Gazprom will be able to obtain exemptions for its new pipelines, and how it would react if it

won’t.

347 Commission Opinion (2013) pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10 of Directive 2009/73/EC – Germany

– Certification of the Operators of the Nordeuropaische Erdgas-Leitung (NEL),

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2013_083_084_085_de_en.pdf. 348 S. GOLDBERG and H. BJORNBYE, “Inorduction and Comment” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy

Issues, III, Cambridge, Intersentia, 2012, (9) 21; ROMANOVA even suggests that this clause, was not so much adopted to strictly apply it to

Gazprom, but rather to use it as a tool to exercise pressure on Russia where needed. See T. Романова, "Третий пакет и будущее

Газпрома", Россия в глобальной политике, 15 декабря 2007, http://www.globalaffairs.ru/number/n_9959. 349 L. VINATIER, Gazprom and the Kremlin: Russia’s Double Approach to Europe’s Energy Markets?, Thomas More Institute, May 2013,

http://www.institut-thomas-more.org/en/actualite/gazprom-and-the-kremlin-russias-double-approach-to-europes-energy-markets.html; A.

JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s Accession

to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 20. 350 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 21. 351 This finding has to be nuanced somewhat now in the view of the recent WTO proceedings initiated by Russia.


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77

2.5 Additional thoughts

To conclude, I would like to add some minor thoughts on the TEP’s unbundling regime. EU sees

Gazprom’s control over its transmission network as a threat to its security of supply. By imposing

requirements under art. 11 on Gazprom EU seeks to secure it. There are some genuine concerns

about Gazprom’s ever increasing control over EU energy infrastructure that could justify this kind of

measures. Recent incidents of gas disruption in Ukraine352, acquisition of minority interests in the

Baltic network and continuous failures to formalize its energy relations with Russia have all

attributed to already existing caution with regard to Gazprom’s presence within the EU.353 However,

there are several consequences attached to fencing off of its energy market that EU might have to

consider.

First observation concerns prospects of Russian gas supplies for Europe. While EU demand will only

increase in the future several elements put these prospects in question. Firstly, as I have pointed out

in Part 1 of my thesis, Russia has committed to raise domestic energy prices in in view of its recent

WTO accession.354 This on its turn will make the domestic market more and more profitable for

Gazprom. Secondly, possibilities to sell energy to new customers are increasing as well. Russia and

Asian countries have already agreed on construction of connecting pipelines. 355 In addition,

Gazprom’s production is expected to decrease in the long run. So with rising competition for Russian

gas, Gazprom will not be able to satisfy all the potential customers.356 In view of these prospects,

maybe EU cannot afford to lose its attractiveness to Gazprom, as it currently does.357

Second element concerns management of the unbundled pipelines. Russian gas is delivered to

Europe through massive infrastructure, operation of which is a rather complex matter. This gas can

only reach its end customers by a very efficient network of distribution, planning and coordination.

This responsibility is currently born by Gazprom. By obliging Gazprom to unbundle and depriving it

352 VAN DEN BERGH, C., “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural Resources Law 2009, (228) 232. 353 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 7. 354 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 73-74. 355 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 243. 356 A. BOUTE, “Energy Efficiency as a New Paradigm of the European External Energy Policy: The Case of the EU-Russia Energy

Dialogue”, Europe-Asia Studies 2013, (1021) 1024-1025. 357 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS




78

from control over the network, it is also released from its responsibilities.358 The question is who

would then take on this heavy load. It is unclear whether under new management the same level of

service could be provided as currently provided by Gazprom subsidiaries. It is very likely that new

TSOs would lack the ability to handle and adequately respond to European energy demands. This

could lead to disruptions in energy supplies to the EU and undermine its security of supply.359

These considerations could lead to a conclusion that application of the new unbundling regime on

Gazprom may eventually harm EU’s energy security.360 Although EU’s objectives of pursuing free

competition and secure energy supply cannot be questioned, doing so by applying unbundling to

Gazprom probably can. While freeing EU network from Gazprom’s control would deprive Russia of its

energy blackmail tool361 , the disadvantages of this approach might outweigh the perceived

advantages. For this reason several authors have questioned whether Commission has made the

right assessment of the economic risks attached to the unbundling of the third country energy

undertakings.362

2.6 General conclusion

In this second part of my thesis I gave a detailed overview of the new unbundling regime introduced

by the TEP, the controversy surrounding it and its implications for the Russian energy undertaking

Gazprom.

Unbundling was inspired by liberalization of the European energy sector that started in the late 80’s.

In its 1988 Green Paper, Commission introduced unbundling as a panacea to reach free and fair

competition in the EU energy market, which would increase welfare of the citizens of the Union.

Through three consecutive Liberalization Packages the current unbundling regime was introduced in

July 2009. Three unbundling models were presented as equal alternatives for the member states to

358 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 12. 359 Ibid., 22. 360 A. WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS

and P.L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 244. 361 T. COTTIERS, S. MATTEOTTI-BERTUKOVA, and O. NARTOVA, Third Country Relations in EU Unbundling of Natural Gas Markets: the


trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 7. 362 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 17.; A.

WILLEMS, J. SUL and Y. BENIZRI, “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in K. TALUS and P.

L. FRATINI (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, (227) 243-244; V. VAN HOORN, “’Unbundling’,

‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for Europe”, European Energy and

Environmental Law Review, February 2009, (51) 73-75.





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choose from, each of them prescribing a different level of separation of the supply and transmission

activities. These unbundling requirements are applicable to all undertakings which seek to operate

on the EU soil. To secure EU energy supply an additional barrier was put up against the 3rd country

undertakings. This was done by virtue of the so called ‘third country clause’. Other provisions of TEP

appease somewhat strict application of the unbundling requirements. This new liberalization regime

provoked a strong reaction from Russia which on its turn seeks to achieve an opposite goal. Where

EU tends to detach Gazprom from its grid, Russia seeks to secure and enhance its grip thereon. In

support of its claims, Russia has identified several legal arguments while also indicating its readiness

to use them in order to secure its interests. When looked at the current application of unbundling

requirements on Gazprom though, it does not seem to correspond with the initial desires of the

Commission. Member states are not too eager to apply discriminatory third country clause on

Gazprom’s subsidiaries. On the other hand, where they seek to apply the most far going of the three

unbundling alternatives Gazprom tries to avoid its application by any means, either by installing legal

proceedings or by lobbying for far reaching exemptions.

Elaborating on the possible future developments as well as giving a detailed assessment of the pros

and the cons of the unbundling provisions and the 3rd country clause would fall outside the scope of

my thesis. However, after reviewing current situation with regard to unbundling, some important

observations have to be made with regard to the overall EU-Russia energy relation and its legal

framework.

As a part of this legal framework, unbundling regulation doesn’t seem to be very efficient. The entire

situation is characterized by conflict, where Russia (and even EU Member States to some point)

seems to be reluctant to abide by the rules enacted by the EU legislator. This is not surprising as

unbundling touches a subject on which strategies of both parties differ significantly (even oppose

each other), namely control of the gas transmission network. This, alongside other pain points of the

EU-Russia energy relation, should be regulated by virtue of negotiations rather than by a unilateral

imposition of conditions. Even though EU’s unbundling regulation is limited ratione loci to its own

territory and does not specifically address Gazprom, a separate agreement on the matter with Russia

would be justified due to Gazprom’s particular presence on the EU energy market and the specificity

of the EU-Russia energy relation. As I have noted in the last chapter, it might be in EU’s own interests

to adjust its position anyway. Thus a regulation concerning ownership and management of the

Russian pipelines might fit better in a bilateral (or a multilateral) agreement between EU and Russia if

expected to function properly.

80

Aside from its limited contribution to the current legal framework, TEPs unbundling regime seems to

have become another thorny issue in the EU-Russia energy relation that hampers further

development thereof.363 As its application creates conflicts between Russian Gazprom and certain

member states, it can i.a. slow down negotiation process of a new EU-Russia energy agreement. The

most striking example of such an energy related conflict was when Lithuania vetoed the negotiation

mandate for the new Partnership Agreement back in 2008.364 Another example is the current WTO

procedure initiated by Russia. Instead of bringing this issue to the negotiation table, it will now only

further obstruct development of the energy cooperation. Thus TEP’s unbundling adds another

obstacle that both parties will have to overcome in order to make progress in their relation.

So it seems that the new regulation does very little for an already complicated energy relation.

However this unbundling issue, as well as other problems of the EU Russia energy relation, could be

resolved through negotiations within the established Energy Dialogue and proper regulation in the

future EU-Russia legal energy framework.

363 K. TALUS, EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 84. 364 A. KASEKAMP, “The Politics of Energy and Memory between the Baltic States and Russia”, Journal of Baltic Studies 2014, (138) 139.

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3 MAIN PROBLEM AND FUTURE PROSPECTS OF THE EU-RUSSIA ENERGY

RELATION

As has been demonstrated, EU-Russia energy relation is characterized by several key outstanding

issues. Some of them have been around for a while now (investment protection, transit, dual

pricing…), while others have appeared more recently (infrastructure ownership). Absence of a

comprehensive and reliable legal framework does not allow to overcome these outstanding issues,

which hampers a healthy development of the energy cooperation. The current situation does not

seem incomprehensible though when looked at the background of the EU-Russia energy relation. In

this third part of my thesis I am going to elaborate on 1) what I assume to be the main reason behind

the difficulties of the EU-Russia energy relation. Then I will briefly reflect on 2) the future prospects

of this relation and its legal framework.

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3.1 Conflicting energy strategies

If we look at the basic position of the EU and Russia in the energy sector we see that they find

themselves at the opposite ends of the same spectrum. EU is not provided with enough energy

resources to satisfy its internal demand, which obliges it to import energy from external sources.

Russia on the other hand, is provided with enough energy resources to satisfy its internal demand

and to export to the other markets365. As a consumer and buyer of the energy resources, EU is mainly

concerned with securing energy supply, which entails consistent delivery of a sufficient amount of

energy resources at an affordable price.366 Russia’s main concern, as a producer and supplier, is the

so called security of demand. This implies on its turn access to a developed and reliable market and

its consumers for sale of energy resources on a long term basis.367

In order to secure their respective interests EU and Russia use divergent strategies. To achieve

security of supply, EU mainly pursues liberalization of the energy markets. By this liberal policy EU

seeks to create fair and free competition amongst the suppliers, avoiding dominance and

monopolistic structures.368 Russia on the contrary, seems to pursue a more static and nationalized

model with less competition, where every part of the gas value chain is controlled by the

monopolistic Gazprom.369 Thus despite mutual interdependence that seemingly provides a favorable

background for development of cooperation in the field of energy370, EU and Russia have adopted

conflicting strategies in order to secure their respective interests.371

Where these opposite strategies cross, the main issues of the EU-Russia energy relation emerge. This

is for instance the case with transit of energy resources. Where EU seeks to introduce freedom of

365 A. GUSEV, EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 27. 366 V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for

Europe”, European Energy and Environmental Law Review, February 2009, (51) 75. For detailed analysis of the EU security of supply see J.

M. MARÍN-QUEMADA, C. VELASCO and B. MUNOZ, “Energy security of supply and EU energy policy” in J. M. MARÍN-QUEMADA, J.

GARCÍA-VERDUGO and G. ESCRIBANO (eds.), Energy Security for the EU in the 21st Century : Markets, geopolitics and corridors,

Abingdon, Routledge, 2012, 195-209. 367 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 13. 368 Communication from the Commission to the European Council and the European Parliament of 10 January 2007, An energy Policy for

Europe, COM(2007) 1 final; R. YOUNGS, “Foreign Policy and Energy Security: Markets, Pipelines, and Politics” in V. L. BIRCHFIELD and J.

S. DUFFIELD (eds.), Toward a Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011,

(41) 47. 369 For this purpose Gazprom was given i.a. a legal monopoly on all gas transportation pipelines as well as on all exports of gas. In addition

all of the Russian gas reserves were renationalized in favor of Gazprom. See V. VAN HOORN, “’Unbundling’, ‘Reciprocity’ and the European

Internal Energy Market: WTO Consistency and Broader Implications for Europe”, European Energy and Environmental Law Review,

February 2009, (51) 73. 370 A. GUSEV, EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 27. 371 In reality the situation is more complex though. EU also utilizes other strategies and at times even refers to protectionist measures in order

to secure its interests. Art 11 of the new Gas directive is a good example thereof. Russia in its turn pursues also other interests then just

security of demand with its strategy. GHALEB gives an interesting point of view (although an extreme one) on the Russian use of its

energypotential as a political tool. See A. GHALEB, Natural Gas as an Instrument of Russian State Power, Carlisle, Book Express Publishing,

2011.

83

energy transit through the existing network, Russia is reluctant to share capacity with other suppliers

in the Gazprom controlled pipelines. Similarly, where EU seeks to break up vertically integrated

structures and forbid ownership of infrastructure, Russia is unwilling to give up control over the gas

network. On the other hand, EU and Russia have been cooperating successfully where their

respective strategies do not come in conflict. This is for instance the case with cooperation in the

fields of environment and climate change, safety concerning infrastructure functioning and energy

efficiency372. These differences are reflected in the cooperation degree within different Working

Groups of the EU-Russia Energy Dialogue.373 Where strategies cross and issues emerge, holding on to

their respective policies prevents EU and Russia from agreeing on these issues and undergoing

binding commitments. The struggle around ECT’s transit protocol is a good example thereof.

As a result, current legal framework of the EU-Russia energy relation is a patchwork of legal

instruments that only cover some less problematic areas of this relation. Certain problematic areas

are being addressed by virtue of unilateral regulation or agreements on the Member State level.

However, as I have discussed in the first part of my thesis, this kind of confrontation avoiding

approach does not resolve the current situation and makes it even more complex. Thus mainly, the

parties only go as far as making political non-binding commitments, which obviously cannot

adequately address the key outstanding issues of the current EU-Russia energy relation. As these

issues remain unresolved, energy cooperation between the EU and Russia remains deficient.

The solution lies in a comprehensive legal framework that would address all main aspects of the EU-

Russia energy relation. However, this framework can only emerge if an agreement on the key

outstanding issues is reached. The parties will have to approach one another and distance

themselves from their respective strategies in order to reach a compromise. Preferably, the

negotiations would lead to a regime based on the EU liberalization model with reciprocal access to

the respective energy markets374. The esteemed EU-Russia Energy Dialogue is a perfect forum for

these negotiations.

For these negotiations to succeed, a political momentum is needed. Some serious obstacles have

been overcome in the past decade375 and until recently it seemed that the EU-Russia relations were

372 A. GUSEV, EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 29. 373 See footnote nr 71. 374 Ibid., 76-79; A. BOUTE, “Wederkerigheid in Europese en Russische energie-investeringen: Een Juridische analyse van de ‘Gazprom-

clause’”, Tijdschrift voor Energierecht 2007, (247) 252. 375 Gas spats in Ukraine and Belarus, Polish meat conflict, issues concerning Russian-speaking minorities in the Baltic States and Russia-

Georgia war, all have complicated political relations between the EU and Russia.

84

finally improving, opening up a window of opportunity for deepening trade relations.376 One of the

most important recent developments was the Russia’s WTO accession, which affirmed its position as

a modern economy that meets WTO standards.377 There has been also an increasing development of

competition on the Russian domestic market. Emergence of new companies like Novatek and

increasing competitiveness of Rosneft, amongst other internal developments, have put in question

the traditional Gazprom model.378 Moreover, it seems that Russian Gazprom is more and more being

led by economic motives of profit maximization instead of strategic political motives.379 Thus it seems

that despite various failed attempts by the EU to convince Russia of the benefits of its liberal

policy380, Russia nevertheless is slowly but steadily moving towards liberalization of its market. All

these elements could have given a necessary momentum for successful negotiations of a

comprehensive legal framework and subsequent improvement of the energy relation.

Most recent developments however, have shut this window of opportunity. The so called Maidan-

revolution in Ukraine has provoked a new conflict between Russia and the Western Countries, the

severity of which has been unseen lately. At the present moment Russia and EU are more occupied

with applying various sanctions to one another then with thinking about further development of the

cooperation in the field of energy. So it seems that the negotiations on a comprehensive legal

framework will not take place any time soon.

Formalization of the energy relations should however remain a priority objective for both parties.

The exact content of a future legal frame is a rather complex subject which will have to be

determined by the negotiating parties. I can only repeat that it is crucial that an agreement is

reached on the key outstanding issues (investment, transit, network ownership, pricing…) and that

the negotiations should be led in the direction of the EU liberal model. In what follows I would like to

shortly elaborate on the form that the future EU-Russia energy framework might take.

376 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 7. 377 A. JURAVLEV, The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s

Accession to the World Trade Organization, December 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502, 8. 378 C. LOCATELLI, “The Russian Gasindustry: challenges to the ‘Gazprom model’?”, Post-Communist Economies 2014, No. 1, (53) 59-62. 379 T. Романова, "Третий пакет и будущее Газпрома", Россия в глобальной политике, 15 декабря 2007,

http://www.globalaffairs.ru/number/n_9959; However, not all scholars agree on this subject, see for instance A. GEREBEN, “Russia’s Energy

Weapon”, Hungarian Review 2013, (33) 34-35. 380 T. ROMANOVA, “Towards a Comprehensive Theory of Legal Harmonization between the EU and a Third Partner: the Case of the EU-

Russia Energy Dialogue” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia,

2012, (279) 294-296.



85

3.2 Future legal framework

There are three venues that are currently being discussed for a future legal framework of the EU-

Russia energy relations. These are a specific Energy Agreement within the WTO framework, an

extensive energy chapter within the new EU-Russia Partnership Agreement and continuation of the

ECT process.

First option is conclusion of a comprehensive sectoral agreement on energy within the WTO

framework. This venue had previously been successfully used to address specific problems in other

areas such as the agriculture sector.381 However, the current Doha negotiation round has been

characterized by various conflicts and disruptions. At the present moment, the future of the Doha

Round and a possible Energy Agreement within the WTO remain unknown.

As I discussed in the first part of my thesis, in order to implement the four common spaces, one of

which concerns integration of the energy markets, EU and Russia decided to adopt a new Partnership

Agreement (PA). This new agreement would replace the current PCA and contain an extensive

energy chapter.382 However, after many rounds of negotiations little progress has been made. There

are several elements that specifically relate to the new PA that prevent its swift conclusion. First and

foremost, this agreement is a rather ambitious project that tends to cover all main areas of

cooperation. Thus besides energy, the parties will have to agree on various other politically sensitive

issues, such as mobility of the citizens for instance (visa issue).383 In addition, several legal and

procedural obstacles have to be tackled. The main questions concern the exact legal basis of the

agreement, its scope and binding nature of its provisions.384 So it is unlikely that a new PA will

emerge and form a legal basis for the EU-Russia energy relations, at least not in the nearest future.

Last and the preferable option is the continuation of the ECT process. Despite strong criticism

expressed in the recent years towards the ECT and eventual termination of the provisional

application, it seems that Russia has not yet completely given up this venue. Dmitry Medvedev’s

‘Conceptual Approach’, which is largely based on the ECT itself385 and the fact that despite internal



trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi, 15. 382 A. KONOPLYANIK, “A Common Russia-EU Energy Space: The New EU-Russia Partnership Agreement, Acquis Communautaire and the

Energy Charter”, Journal of Energy & Natural Resources Law 2009, (258) 260. 383 G. VAN DER LOO, “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, (7) 27. 384 P. VAN ELSUWEGE, Towards a Modernization of EU-Russia Legal Relations?, CEURUS EU-Russia Papers No. 5, June 2012,

http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf, 3. 385 Y. SELIVANOVA, “The Energy Charter and the International Energy Governance” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (373) 397.




86

pressure Russia did not withdraw its signature from the Treaty illustrate willingness to continue with

the ECT process.386 There are several advantages coupled to this approach. First of all, energy transit

forms an important issue of the EU-Russia energy relation. This concerns not only transit of Central

Asian gas through Russia, but also transit of Russian gas through Belarus and Ukraine to the EU. Thus

a truly comprehensive legal framework should include all of these states. For this reason ECT’s

multilateral approach is preferable to the bilateral approach of the new PA.387 Another and arguably

the most important advantage of the ECT, is the fact that it offers a unique opportunity to derogate

from the EU acquis.388 Under EU’s system of Treaty-making with third countries it is extremely

difficult to conclude a new agreement which is not obviously compatible with the EU law. ECT on its

turn was concluded in the beginning of the EU’s energy liberalization process and the gap between

its regime and current EU acquis has increased substantially after adoption of the subsequent

Liberalization Packages.389 The ECT with its ability to trump EU law390 thus provides for a perfect

platform for negotiations where the parties can approach each other and reach a compromise.

Lastly, ECT provides for an adequate mechanism to adopt its regime to the realities of the

contemporary energy market. Besides treaty amendments negotiating parties can make use of other

instruments such as guidelines, recommendations, policy coordination, declarations, protocols and

association agreements.391

In the view of the above described venues it seems like ECT is the best, if not the only, option for a

future EU-Russia legal energy framework. Despite diminished interest in the Energy Charter process

from both Russia and the EU, most authors agree that building further on the ECT is the most

effective and realistic way to create a comprehensive and reliable legal framework.392 If successfully

adopted, it would lift some load from the negotiations of the new PA. The PA on its turn could,

386 A. V. BELYI, “The Energy Charter Process and Energy Security” in B. DELVAUX, M. HUNT and K. TALUS. (eds.), EU Energy Law and

Policy Issues, III, Cambridge, Intersentia, 2012, (301) 321. 387 A. KONOPLYANIK, “A Common Russia-EU Energy Space: The New EU-Russia Partnership Agreement, Acquis Communautaire and the

Energy Charter”, Journal of Energy & Natural Resources Law 2009, (258) 272. 388 Ibid., (258) 273. 389 A. KONOPLYANIK, “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the


Euroconfidentiel, 2010, (45) 87. 390 A. HADFIELD AND A. AMKHAN, “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International

Journal of Energy Security and Environmental Research 2012, (1) 9. 391 Y. SELIVANOVA, “The Energy Charter and the International Energy Governance” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (373) 400. 392 A. KONOPLYANIK, “A Common Russia-EU Energy Space: The New EU-Russia Partnership Agreement, Acquis Communautaire and the

Energy Charter”, Journal of Energy & Natural Resources Law 2009, (258) 258; A. V. BELYI, “The Energy Charter Process and Energy

Security” in B. DELVAUX, M. HUNT and K. TALUS (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, (301) 323; Y.

SELIVANOVA, “The Energy Charter and the International Energy Governance” in Y. SELIVANOVA (ed.), Regulation of Energy in

International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, (373) 399.

87

similarly to the current PCA, refer in its energy chapter to the ECT393 but this time with a completely

different result.

393 A. KONOPLYANIK, “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the


Euroconfidentiel, 2010, (45) 92.

88

CONCLUSION

In my thesis I have focused on the importance of the EU-Russia energy relationship in the gas sector.

Initial connection between the respective energy markets, created in the second part of the last

century, has evolved substantially over the course of history. Current gas trade and related

infrastructure intertwine the EU and Russian energy markets like no other in the world. Relations in

the gas sector form a crucial part of the overall EU-Russia relationship and have a great impact

thereon. Cooperation in this sector however, has not been a very smooth one. It is characterized by a

variety of contentious issues, which have been growing in number and intensity lately. This theme

has become extremely politicized over the years and it has been attracting more and more attention

from various analysts and experts. Notions like ‘gas wars’ have been emerging in the media and

some even go as far as labeling the current situation as a ‘new cold war’.394

In this work I have aimed at attaining a deeper understanding of this complex subject and a specific

component thereof. In order to achieve that I have conducted a research around 3 main questions:

1) What is the legal framework of the EU-Russia energy relation and what is its impact on this

relation?

2) What is the situation around one of the most recent issues of the EU-Russia energy relation,

namely the new unbundling regime?

3) What is the main reason behind the difficulties of the EU-Russia energy relation and what are

its future prospects?

My research has led me to following conclusions:

The current legal framework of the EU-Russia energy relation is a patchwork of legal instruments that

only covers some less important and problematic aspects of the relation. The PCA is a rather

deficient legal instrument, which moreover has very little to offer to the energy sector. ECT, despite

its potential, has largely lost its importance due to Russia’s recent termination of the provisional

application. Energy Dialogue, despite being an important forum for discussions and negotiations,

does not produce any legally binding norms. A slight modernization of the relation has been achieved

by virtue of Russia’s recent accession to the WTO. However, its covered agreements do not address

energy as such, which reduces their impact on the EU-Russia energy relation. These bilateral and

multilateral EU-Russia instruments are complemented by some unilateral regulations and agreement

394 A. GUSEV, EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 3.

89

on the Russia-EU Member State level, which on their turn do not contribute much to the legal

framework and in fact only further aggravate an already complex situation. Thus the relation is

mainly based on non-legally binding dialogues and commitments. Under this current frame the key

outstanding issues remain unresolved and continue to hamper cooperation in the energy sector.

One of the most recent issues of the EU-Russia energy relation is the new unbundling regime

introduced by the Third Energy Package. This regime is a third step in the European liberalization

process that commenced in the late 80’s. By virtue of unbundling EU seeks to introduce competition

amongst energy suppliers that would eventually benefit the general welfare and secure its energy

supply. This is to be achieved through braking up of the dominant vertically integrated structures and

separating their energy transmission activities from the production and supply activities. This

separation on its turn comes in conflict with the strategy pursued by the Russian Gazprom, which

seeks to retain its control over the gas network. Thus Gazprom tends to escape application of this

new regime, and more precisely the ownership unbundling, by all possible means, either by seeking

far reaching exemptions or by installing legal proceedings. The new unbundling regime has already

led to outspoken conflicts between Russia and the EU (recent WTO dispute settlement initiated by

Russia) and separate Member States (arbitration procedure against Lithuania). It is clear that this

new regime constitutes another obstacle for an already complicated relationship.

The above described difficulties of the EU-Russia energy relations are easy to grasp when looked at

the background of this relationship. The EU as an energy importer is concerned with securing supply,

while Russia on the other hand as an energy exporter seeks to secure demand for its energy

resources. Despite obvious interdependence, both parties have adopted conflicting strategies in

order to secure their respective interests. Where the EU pursues a liberal model seeking to create

more competition in the energy sector, Russia applies a more static strategy with less competition.

At the crossroads of these strategies emerge the main issues of the energy relation on which parties

cannot agree and undergo binding commitments. This results in the current situation where the legal

framework only covers some less problematic areas of the relationship. For the rest, parties tend to

avoid confrontation and revert to non-binding commitments, which cannot adequately address the

main issues. In order to get out of this deadlock and finally proceed to proper development of the

energy relations in the gas sector, EU and Russia need to negotiate their way to a comprehensive and

reliable legal framework that would address every major aspect of their energy relation (investment,

transit, pricing, infrastructure ownership…). It seems that the best option for concluding this

framework would be by building further on the existing European Charter Treaty and adopting it to

the realities of the current energy markets.

90

The prospects of such a legal framework however are very uncertain in the view of the current

conflict with Russia. Despite some positive recent developments that could have brought the parties

to the negotiation table, current political situation will most certainly impede any progress in the

bilateral relations for the time being. The future of the energy relation will become more certain

after the Maidan-smoke clears.

The EU seems to be uneasy about the new found energy imperialism of Russia. Russia’s readiness to

use its leverage for political objectives, as has been proven during the gas spats, has substantially

increased these worries. Securing energy supply thus became the cornerstone of the EU’s energy

policy. Through my research I came to understand that the common denominator of the problems

between the EU and Russia in the energy sector is the lack of trust. This I can imagine is also true for

other aspects of the bilateral relationship. This lack of trust is not surprising as it has its obvious

historical reasons. For many generations have the parties perceived each other not only as a threat,

but even as an enemy. It has not been that long since the iron curtain fell and the cold war is still in

the memory and sub consciousness of many people. These people are the ones that are making

decisions on the highest political levels. For this reason I think that Mr. Putin is right when he puts

the stress on the ‘human factor’ of the relationship.395 For this reason I also think that the EU-Russia

energy relations, and for that matter the bilateral relationship in general, will improve when the

ghosts of the past will have passed for good and the people of Russia and the EU will become more

and more integrated. My generation is the first one that did not witness the Soviet Union and for

that it has a very different perception of the ‘West’. Thus in my opinion, true change in the EU-Russia

(energy) relation will come with new generations and a slow but steady liberalization of the Russian

eceonomy. At the present moment I can only sincerely hope that current events do not put us

decades behind.

395 Russian Times, “Russia and the changing world”, 27 February 2012, http://rt.com/politics/official-word/putin-russia-changing-world-263/.

http://rt.com/politics/official-word/putin-russia-changing-world-263/

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Council of the European Union, Key outstanding issues for the EU in its relations with Russia, 28 November 2011, 17649/11.

Commission Opinion (2012) pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10 of Directive 2009/73/EC – Germany – Certification of GASCADE Gastransport GmbH, http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2012_040_de_en.pdf.

European Commission, Main origin of primary energy imports, EU-27, 2002-2010 (% of extra EU-27 imports, 12 October 2012, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Main_origin_of_primary_energy_imports,_EU-27,_2002-2010_(%25_of_extra_EU-27_imports).png&filetimestamp=20121012131852#filehistory.

European Commission, EU Energy in Figures 2013, January 2013 http://ec.europa.eu/energy/publications/doc/2013_pocketbook.pdf.

Commission Opinion (2013) pursuant to Article 3(1) of Regulation (EC) No 715/2009 and Article 10 of Directive 2009/73/EC – Germany – Certification of the Operators of the Nordeuropaische Erdgas-Leitung (NEL), http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2013_083_084_085_de_en.pdf.

Commission staff working document of 25 June 2013, Towards more effective EU merger control, SWD(2013) 239 final.

European Commission, Russian Trade Statistics, 16 April 2014, http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdf

European Commission, Pending Notifications of National Exemption Decisions, http://ec.europa.eu/energy/infrastructure/exemptions/doc/exemption_decisions.pdf.

European Commission, Certification of TSOs: List of notifications received, http://ec.europa.eu/energy/gas_electricity/interpretative_notes/certification_en.htm.

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/certification/2012_040_de_en.pdf

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Main_origin_of_primary_energy_imports,_EU-27,_2002-2010_(%25_of_extra_EU-27_imports).png&filetimestamp=20121012131852#filehistory

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Main_origin_of_primary_energy_imports,_EU-27,_2002-2010_(%25_of_extra_EU-27_imports).png&filetimestamp=20121012131852#filehistory

http://ec.europa.eu/energy/publications/doc/2013_pocketbook.pdf



http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdf

http://ec.europa.eu/energy/infrastructure/exemptions/doc/exemption_decisions.pdf

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/certification_en.htm

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CASES:

European Court of Justice

Case C-393/92, Almelo [1994] ECR I-1477.

Case C-280/93, Germany v. Commission [1994] ECR I-4873.

Case C-149/96, Portugal v. Commission [1999] ECR I-8395.

Case C-205/06, Commission v. Austria [2009] ECR I-1301.

Case C-249/06, Commission v. Sweden [2009] ECR I-1335.

Case C-118/07, Commission v. Finland [2009] ECR I-10889.

Case C-264/09, Commission v. Slovakia [2011] ECR I-08065.

Commission

Case COMP/39.402, RWE [2008] OJ C310/23.

Case COMP/39.388, E.ON [2009] OJ C36/8.

Case COMP/39.315, ENI [2010] OJ C55/13.

European Court of Human Rights

James v. United Kingdom, (1986) A 098 B.

Van Marle v. The Netherlands, (1986) A 101.

International Arbitration

Hulley Enterprises Limited (Cyprus) v. The Russian Federation, PCA (2009) AA 226.

Yukos Universal Limited (Isle of Man) v. The Russia Federation, PCA (2009) AA 227.

Veteran Petroleum Limited (Cyprus) v. The Russian Federation, PCA (2009) AA 228.

Kardassoupulos v. Republic of Georgia, ICSID (2010) ARB/05/18.

AES v. Hungary, ICSID (2010) ARB/07/22.

OAO Gazprom v. Republic of Lithuania, Stockholm Chamber of Commerce (2012) V 125/2011.

WTO

United States - Standards for Reformulated and Conventional Gasoline, (1996) WT/DS2/AB/R.

European Communities – Regime for the Importation, Sale and Distribution of Bananas, (1997) WT/ DS27/AB/R.

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BOOKS AND COMPILATIONS:

BARTELS, L. and ORTINO, F. (eds.), Regional trade agreements and the WTO legal system, Oxford, Oxford University press, 2006, 604 p.

BARYCH, K. (ed.), Pipelines, politics and power: the future of EU-Russia energy relations, London, CER, 2008, 117 p.

BIRCHFIELD, V. L. and DUFFIELD, J. S. (eds.), Toward a Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, 289 p.

BLUMANN, C. (ed.), Vers une politique européenne de l’éenergie, Brussels, Bruylant, 2012, 304 p.

CAMERON, P. D. (ed.), Legal Aspects of EU Energy Regulation: Implementing the New Directives on Electricity and Gas Across Europe, New York, Oxford, 2005, 578 p.

DELVAUX, B., EU law and the development of a sustainable, competitive and secure energy policy – opportunities and shortcomings, doctoral dissertation Law studies K.U.Leuven, 2011, 557 p.

DELVAUX, B., HUNT, M. and TALUS, K. (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, 395 p.

DELVAUX, B., HUNT, M. AND TALUS, K. (eds.), EU Energy Law and Policy Issues, IV, Cambridge, Intersentia, 2014, 358 p.

EECKHOUT, P., EU External Relations Law, Oxford, Oxford University Press, 2011, 572 p.

ESAKOVA, N., European Energy Security: Analysing the EU-Russia Energy Security Regime in Terms of Interdependence Theory, Frankfurt, Springer, 2012, 280 p.

GHALEB, A., Natural Gas as an Instrument of Russian State Power, Carlisle, Book Express Publishing, 2011, 148 p.

GUSEV, A., EU-Russia Energy Relations after Lisbon Treaty: Content, problems and prospects, Saarbrücken, Lambert, 2010, 96 p.

HERMAN, C. and TERCHECHTE, J. P. (eds.), European Yearbook of International Economic Law, Berlin, Springer, 2010, 426 p.

JOHNSTON, A. and BLOCK, G., EU Energy Law, Oxford, Oxford University Press, 2012, 425 p.

JONES, C., EU Energy Law: The Internal Energy Market – The Third Liberalization Package, I, Leuven, Clayes & Casteels, 2010, 1154.

MARÍN-QUEMADA, J. M., GARCÍA-VERDUGO, J. and ESCRIBANO, G. (eds.), Energy Security for the EU in the 21st Century: Markets, geopolitics and corridors, Abingdon, Routledge, 2012, 336 p.

ROGGENKAMP, M. M. and BOISSELEU, F. (eds.), The Regulation of Power Exchanges in Europe, Antwerp, Intersentia, 2005, 311 p.

ROGGENKAMP, M. M. and HAMMER, U. (eds.), European Energy Law Report VI, Antwerp, Intersentia, 2009, 294 p.

ROGGENKAMP, M. M., REDGWELL, C., DEL GUAYO, I. and RONNE, A. (eds.), Energy Law in Europe: National, EU and International Regulation, New York, Oxford, 2007, 1488 p.

SELIVANOVA, Y. (ed.), Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, 416 p.

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TALUS, K. and FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 376 p.

TALUS, K., EU Energy Law and Policy: A Critical Account, New York, Oxford, 2013, 317 p.

VAN DEN BOSSCHE, P., The law and policy of the World Trade Organization: text, cases and materials, New York, Cambridge University Press, 737 p.

CONTRIBUTIONS IN COMPILATIONS:

ALBERTS, M., “The New EU Directives on Energy Liberalization from a Competition point of View” in CAMERON, P. D. (ed.), Legal Aspects of EU Energy Regulation: Implementing the New Directives on Electricity and Gas Across Europe, New York, Oxford, 2005, 41-58.

BELYI, A. V., “The Energy Charter Process and Energy Security” in DELVAUX, B., HUNT, M. and TALUS, K. (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, 301-323.

BUNGENBERG, M. (ed.), “Going Global? The EU Common Commercial Policy After Lisbon” in HERMAN, C. and TERCHECHTE, J. P. (eds.), European Yearbook of International Economic Law, Berlin, Springer, 2010, 123-178.

BUSCHLE, D., “The Effect of the EC-Russia Partnership Agreement in Community Law: Lessons Learned from the Soccer World” in TALUS, K. and FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 181-199.

CAMERON, P. D., “Completing the Internal Market in Energy: an Introduction to the New Legislation” in CAMERON, P. D. (ed.), Legal Aspects of EU Energy Regulation: Implementing the New Directives on Electricity and Gas Across Europe, New York, Oxford, 2005, 7-39.

DE HAUTECLOCQUE, A. and ANHER, N., “’Opt-Out’ Clause for EU Energy Islands in the Third Liberalisation Package: striking balances?” in DELVAUX, B., HUNT, M. and TALUS, K. (eds.), EU Energy Law and Policy Issues, IV, Cambridge, Intersentia, 2014, 3-24.

EIKLAND, P. O., “EU Internal Energy Market Policy: Achievements and Hurdles” in BIRCHFIELD, V. L. and DUFFIELD, J. S. (eds.), Toward a Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, 13-38.

GOLDBERG, S. and BJORNBYE, H., “Introduction and Comment” in DELVAUX, B., HUNT, M. and TALUS, K. (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, 9-31.

HAGHIGHI, S. S., “Establishing an External Policy to Guarantee Energy Security in Europe? A Legal Analysis” in ROGGENKAMP, M. M. and HAMMER, U. (eds.), European Energy Law Report VI, Antwerp, Intersentia, 2009, 155-188.

JONES, C., “Introduction” in JONES, C., EU Energy Law: The Internal Energy Market – The Third Liberalization Package, I, Leuven, Clayes & Casteels, 2010, 1-14.

KONOPLYANIK, A., “A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the Energy Charter and the New Russian Initiative)” in TALUS, K. and FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 45- 103.

MARÍN-QUEMADA, J. M., VELASCO, C. and MUNOZ, B., “Energy security of supply and EU energy policy” in MARÍN-QUEMADA, J. M., GARCÍA-VERDUGO, J. and ESCRIBANO, G. (eds.), Energy Security for the EU in the 21st Century : Markets, geopolitics and corridors, Abingdon, Routledge, 2012, 195-209.

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MILTHORP, P. and CHRISTY, D., “Energy Issues in Selected WTO Accessions” in SELIVANOVA, Y. (ed.), Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, 260-302

NAPPERT, S. and ORTINO, F., “International Resolution of Energy Trade and Investment Disputes” in SELIVANOVA, Y. (ed.), Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, 303-333.

NAPPERT, S., “EU-Russia Relations in the Energy Field: The Continuing Role of International Law” in TALUS, K. and

FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 103-119.

ORTINO, F. and SHEPPARD, F., “International Agreement Covering Foreign Investment in Services: Partners and Linkages” in BARTELS, L. and ORTINO, F. (eds.), Regional trade agreements and the WTO legal system, Oxford, Oxford University press, 2006, 201-214.

PIELOW, J.-C., “Les relations entre l’Union européenne et Russi sous l’angle de la politique et du droit de l’énergie“ in BLUMANN, C. (ed.), Vers une politique européenne de l’éenergie, Brussels, Bruylant, 2012, 181-212.

REDGWELL, C., “International Regulation of Energy Activities” in ROGGENKAMP, M. M., REDGWELL, C., DEL GUAYO, I. and RONNE, A. (eds.), Energy Law in Europe: National, EU and International Regulation, New York, Oxford, 2007, 13-144.

RILEY, A., “Can Nordstream and Southstream Eurvive in a Changing European Gas Market?” in TALUS, K. and

FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 327-350.

ROGGENKAMP, M. M. and BOISSELEU, F., “The Liberalisation of the EU Electricity Market and the Role of Power Exchange” in ROGGENKAMP, M. M. and BOISSELEU, F. (eds.), The Regulation of Power Exchanges in Europe, Antwerp, Intersentia, 2005, 1-29.

ROMANOVA, T., “Towards a Comprehensive Theory of Legal Harmonization between the EU and a Third Partner: the Case of the EU-Russia Energy Dialogue” DELVAUX, B., HUNT, M. en TALUS, K. (eds.), EU Energy Law and Policy Issues, III, Cambridge, Intersentia, 2012, 279-300.

SEDAT, C., “Reciprocity and Provisional Application under the Energy Charter Treaty: legal aspects” in ROGGENKAMP, M. M. and HAMMER, U. (eds.), European Energy Law Report VI, Antwerp, Intersentia, 2009, 189-226.

SELIVANOVA, Y., “The Energy Charter and the International Energy Governance” in SELIVANOVA, Y. (ed.), Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter, Alphen aan den Rijn, Kluwer, 2012, 373-406.

TARRADELLAS ESPUNY, F., “The EU-Russia Energy Dialogue at the Origin of the European Foreign Energy Policy” in

TALUS, K. and FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 9-24.

WESTERHOF, J. G., “The Third Internal Energy Market Package” in ROGGENKAMP, M. M. and HAMMER, U. (eds.), European Energy Law Report VI, Antwerp, Intersentia, 2009, 19-36.

WILLEMS, A., SUL, J. and BENIZRI, Y., “Unbundling as a Defence Mechanism Against Russia: Is the EU Missing the Point?” in TALUS, K. and FRATINI, P. L. (eds.), EU-Russia Energy Relations, Brussels, Euroconfidentiel, 2010, 227-244.

YASTRZHEMBSKY, S., “Trust, not double standards: What Russia expects from the EU” in BARYCH, K. (ed.), Pipelines, politics and power: the future of EU-Russia energy relations, London, CER, 2008, 35-40.

YOUNGS, R., “Foreign Policy and Energy Security: Markets, Pipelines, and Politics” in BIRCHFIELD, V. L. and DUFFIELD, J. S. (eds.), Toward a Common European Union Energy Policy: Problems, Progress, and Prospects, New York, Palgrave, 2011, 41-60.

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CONTRIBUTIONS IN LAW JOURNALS:

BOUTE, A., “Case C-264/09, Commission v. Slovakia, Judgment of the Court (First Chamber) of 15 September 2011, Not Yet Reported”, Common Market Law Review 2012, 1179-1196.

BOUTE, A., “Energy Efficiency as a New Paradigm of the European External Energy Policy: The Case of the EU-Russia Energy Dialogue”, Europe-Asia Studies 2013, 1021-1054.

BOUTE, A., “Wederkerigheid in Europese en Russische energie-investeringen: Een Juridische analyse van de ‘Gazprom-clause’”, Tijdschrift voor Energierecht 2007, 247-255.

CWIEK-KARPOWICZ, J., “Russia’s Gas Sector: In Need of Liberalization in the Context of the Shale Gas Revolution and Energy Relations with the European Union”, Journal of East-West Business 2012, 54-65.

EILMANSBERGER, T., “Bilateral Investment Treaties and EU Law”, Common Market Law Review 2009, 383-429.

ENGLE, E., “From Russia with Love: The EU, Russia, and Special Relationships”, Richmond Journal of Global Law and Business 2011, 549-596.

GARCIA, J., “The Internal Gas Market according to the Law of Competition, Provisions of the Community’s Third Package”, European Energy and Environmental Law Review, August 2010, 175-199.

GEREBEN, A., “Russia’s Energy Weapon”, Hungarian Review 2013, 33-40.

GRIGORYEV, Y., “The Rusian gas Industry, its legal structure, and its influence on world markets”, Energy Law Journal 2007, 125-146.

HADFIELD, A. and AMKHAN, A., “From Russia with Cold Feet: the Energy Charter Treaty and EU-Russia Energy Relations”, International Journal of Energy Security and Environmental Research 2012, 1-16.

JOHNSON, C. and DERRICK, M., “A Splintered Heartland: Russia, Europe, and Geopolitics of Networked Energy Infrastructure”, Geopolitics 2012, 482-501.

KASEKAMP, A., “The Politics of Energy and Memory between the Baltic States and Russia”, Journal of Baltic Studies 2014, 138-140.

KONOPLYANIK, A. A., “Russian gas at European energy market: Why adaptation is inevitable”, Energy Strategy Reviews 2012, 42-56.

KONOPLYANIK, A., “A Common Russia-EU Energy Space: The New EU-Russia Partnership Agreement, Acquis Communautaire and the Energy Charter”, Journal of Energy & Natural Resources Law 2009, 258-291.

KONOPLYANIK, A., ”Gas Transit in Eurasia: Transit Issues between Russia and the European Union and the Role of the Energy Charter”, Journal of Energy & Natural Resources Law 2009, 440- 156.

LAIDLAW, P., “Provisional Application of the Energy Charter as Seen in the Yukos Dispute”, Santa Clara Law Review 2012, 655-684.

LEAL-ARCAS, R. and FILIS., A., “Conceptualizing EU Energy Security through an EU Constitutional Law Perspective”, Fordham International Law Journal 2013, 1125-1300.

LEHAVI, A. AND LICHT, A. N., “BITs and Pieces of Property”, The Yale Journal of International Law 2011, 115-164.

LOCATELLI, C., “The Russian Gas industry: challenges to the ‘Gazprom model’?”, Post-Communist Economies 2014, No. 1, 53-66.

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SHAN, W. and ZHANG, S., “The Treaty of Lisbon: Half Way towards a Common Investment Policy”, The European Journal of International Law 2011, 1049-1073.

VAN DEN BERGH, C., “Reciprocity Clause and International Trade Law”, Journal of Energy & Natural Resources Law 2009, 228-257.

VAN DER LOO, G., “EU-Russia Trade Relations: It Takes WTO to Tango?”, Legal Issues of Economic Integration 2013, 7-32.

VAN HOORN, V., “’Unbundling’, ‘Reciprocity’ and the European Internal Energy Market: WTO Consistency and Broader Implications for Europe”, European Energy and Environmental Law Review, February 2009, 51-76.

PAPERS:

BORISOCHEVA, K., Analysis of the Oil- and Gas-Pipeline-Links between EU and Russia: An account of intrinsic interests, CERE, November 2007, 25p., http://www.isn.ethz.ch/Digital-Library/Publications/Detail/?ots591=0C54E3B3-1E9C-BE1E-2C24-A6A8C7060233&lng=en&id=47031.

COTTIERS, T., Matteotti-Bertukova, S. and Nartova, O., Third Country Relations in EU Unbundling of Natural Gas Markets: the ‘Gazprom clause’ of Directive 2009/73/EC and WTO Law, Swiss National Centre of Competence in Research, May 2010, http://www.nccr-trade.org/publication/third-country-relations-in-eu-unbundling-of-natural-gas-markets-the-gazprom-clause-of-directi

GRIGAS, A., The Gas Relationship between the Baltic States and Russia: politics and commercial realities, Oxford Institute for Energy Studies, October 2012, 65 p, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/10/NG_67.pdf.

JURAVLEV. A., The Effect of the European Union’s Unbundling Provisions on the EU-Russian Natural Gas Relationship and Russia’s Accession to the World Trade Organization, December 2011, 24 p., http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969502.

MEIJKNECHT, J., Bedrijfsbelangen Gazprom in EU-27 in 2007, CIEP, April 2008, 66p., http://clingendael.info/publications/2008/20080400_ciep_misc_gazprom%20-n-eu27.pdf.

VAN ELSUWEGE, P., Towards a Modernization of EU-Russia Legal Relations?, CEURUS EU-Russia Papers No. 5, June 2012, 28 p., http://ceurus.ut.ee/wp-content/uploads/2011/06/EU-Russia-Paper-51.pdf.

VINATIER, L., Gazprom and the Kremlin: Russia’s Double Approach to Europe’s Energy Markets?, Thomas More Institute, May 2013, http://www.institut-thomas-more.org/en/actualite/gazprom-and-the-kremlin-russias-double-approach-to-europes-energy-markets.html.

YAFIMAVA, K., The EU Third Package for Gas and the Gas Target Model: major contentious issues inside and outside the EU, Oxford Institute for Energy Studies, April 2013, 51 p., http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/04/NG-75.pdf.













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INTERNET SOURCES (last checked 7/05/2014):

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GASCADE, Portrait, http://www.gascade.de/home.html?L=1.

Herbert Smith, Energy, Infrastructure and Mining newsletter, July 2012, http://www.herbertsmithfreehills.com/-/media/HS/T-250712-10.pdf.

KOMLEV, S., Third Energy Package and Impact on Gazprom Activities in Europe, Essen, 18 March 2011, http://www.gazpromexport.ru/en/presscenter/speech/.

LAMY, P., Doha Round will benefit energy trade, WTO Speeches, 16 November 2007, http://www.wto.org/english/news_e/sppl_e/sppl80_e.htm.

Lietuvos Dujos, Business Profile, http://www.dujos.lt/.

NEL, Portrait, http://www.nel-gastransport.de/index.php?id=20&L=1.

Nord Stream, The Pipeline, http://www.nord-stream.com/pipeline/.

OPAL, Portrait, http://www.opal-gastransport.de/index.php?id=portrait&L=1.

Polish Energy Regulatory Office, National Report 2013, http://www.ure.gov.pl/en/communication/news/207,The-National-Report-of-the-President-of-ERO-is-now-available.html?search=420312268.

Sherman & Sterling, Yukos: Landmark Decision on the Energy Charter Treaty, January 2010, http://www.shearman.com/en/newsinsights/publications/2010/01/yukos--landmark-decision-on-the-energy-charter-t__.

South Stream, Gas pipeline, http://www.south-stream.info/en/pipeline/.

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WTO, Russia files dispute against EU over regulations in the energy sector, 30 April 2014, http://www.wto.org/english/news_e/news14_e/ds476rfc_30apr14_e.htm.

WTO, Schedules of commitments and lists of Article II exemptions, http://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm#commit_exempt

PRESS RELEASES:

Романова, Т., "Третий пакет и будущее Газпрома", Россия в глобальной политике, 15 декабря 2007, http://www.globalaffairs.ru/number/n_9959.

ISKAUSKAS, C., “Third Energy Package: dispute between Russia and the EU”, Geopolitika, 23 March 2011, http://www.geopolitika.lt/?artc=4561.

EurActive, “Russian pipeline breaks free from EU rules”, 14 July 2011, http://www.euractiv.com/energy/russian-pipeline-breaks-free-eu-news-506568.


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Press Release World Trade Organization, “Working Party seals the deal on Russia’s membership negotiations”, 10 November 2011, http://www.wto.org/english/news_e/news11_e/acc_rus_10nov11_e.htm

BYANSLY, G., “Russia may contest EU Energy rules in WTO”, Reuters, 16 November 2011, http://www.reuters.com/article/2011/11/16/russia-wto-energy-idUSL5E7MF3ZE20111116.

Russian Times, “Russia and the changing world”, 27 FEBRUARY 2012, http://rt.com/politics/official-word/putin-russia-changing-world-263/.

Investment Arbitration Reporter, “Lithuanian Claims Round-up: Lesser known arbitrations move forward alongside high-profile gas unbundling battles”, 2 September 2012, http://www.iareporter.com/articles/20120903_4.

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Russian Times, “Gazprom wants special case for its pipelines from EU energy package”, 17 December 2012, http://rt.com/business/gazprom-energy-package-exceptions-203/.

EurActive, “Putin slams Barroso: ‘You know you are wrong, you’re guilty’”, 21 December 2012, http://www.euractiv.com/energy/putin-barroso-right-guilty-news-516827.

PR Newswire Europe Including UK Disclose, “EU Commission: Ready to Discuss Solutions in South Stream Negotiations”, 5 December 2013, http://www.prnewswire.com/news-releases/eu-commission-ready-to-discuss-solutions-in-south-stream-negotiations-234578401.html.

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INTERVIEWS:

Frederik Vandendriessche (Stibbe), Brussels, 17 April 2014.

Yohan Benizri (Sidley Austin LLP), Brussels, 6 April 2014.

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The legal framework of EU-Russia energy relations · 2014-12-17 · years. urrently Russia is one of the EUs key trading partners. In 2013 goods exports to Russia amounted to 120

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