An evaluation of alternative scenarios for the Gazprom monopoly of Russian gas exports

In June 2006, Russian federal law legalized the exclusive right of Gazprom to export natural gas to Europe, and thus thwarted efforts by the European Union to bring competition to the Russian gas industry. An understanding of the motivation of the Russian government to support this export monopoly is important if Europe wishes to reduce its dependence on Gazprom. The principal aim of this paper is to contribute to a better understanding of this important question. Our analysis employs a theoretical model and several numerical simulations of an alternative organization used for gas exports, where independent gas producers in Russia are permitted to export gas to Europe. We evaluate the effects of this alternative organization on consumer surplus, industry profits, and Russian welfare. The results demonstrate that while export by independent producers reduces Gazprom's export profits, it may also increase the total domestic and export profits earned by the Russian gas industry. However, the results also suggest that Russian gas consumers will not benefit if independent gas producers are able to supply both the domestic and international markets.

Research highlights► We model breaking up the Gazprom monopoly of the Russian gas exports to Europe. ► We evaluate effects on the consumer surplus, industry profit and Russian welfare. ► Gazprom's export profit falls, but total domestic and export profits earned by the Russian gas industry increase. ► Given the current structure of the Russian gas market, reduction in consumer surplus is strong. ► The total effect of the Russian export liberalization on national welfare is negative.