Tag: Gazprom

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The Gazprom Song:

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The Russia-Ukraine Gas Row

I haven’t found a great many voices claiming that the Russia-Ukraine gas dispute is some sort of Russian power play. Which is a good thing, because, as a friend recently explained to me, it isn’t. While some of its dynamics are fairly complicated, there’s also a very simple process at work here.

Gazprom is badly over-leveraged from its many acquisitions–some driven by its apparent goal of becoming a Russian zaibatsu.

Gazprom itself is mired in debt, and was recently included on a list of companies eligible for a government bailout. Its shares, which once valued the company at over $300 billion, making it the world’s third largest, have fallen 76% since the financial crisis hit in September.

Gazprom’s wholesale contracts put it in an even worse spot, as Steve LeVine explains:

Regarding the latter, Gazprom’s troubles go far. It doesn’t produce much of the gas it ships to Europe, but markets gas it buys mostly from the Central Asian state of Turkmenistan. In order to obtain long-term rights to that gas, and not have it siphoned off by a covetous West, Gazprom has agreed to pay the Turkmen about $340 per 1,000 cubic meters.

Given market prices, that means that Gazprom might be forced to sell to Europe this year at a loss, unless it unilaterally cuts the price it pays to the Turkmen, who in that case could respond by withholding supplies.

“Gazprom is in a tough spot,” says Kenneth Medlock, a natural gas expert at Rice University’s James A Baker Institute for Public Policy, who helped me with the calculations for this article. If Gazprom loses the Turkmen supplies, Medlock said, “they are going to have trouble meeting their contractual commitments” to Europe.

So it isn’t surprising that Gazprom very much wants to collect what it says are back payments owed by its Ukrainian client, or that we’re seeing a revival of the perennial dispute over how much Ukraine pays for natural gas.

To complicate matters, Ukraine’s gas company, Naftogaz Ukrainy, claims it paid RosUkEnergo, itself half-owned by Gazprom, and that whether Gazprom gets paid is RosUkEnergo’s problem. This kind of stuff is, I imagine, part of why Jerome of The Oil Drum characterizes the dispute as mainly about the distribution of loot among oligarchs.

Gazprom, moreover, seems to be using the quarrel as an excuse to scapegoat Ukraine for its possible implosion. Rumor has it, in fact, that the Kremlin is already funneling money into Gazprom to keep it afloat.

In other words, best to see what’s going on not as a sign of Russian muscle, but of Russian weakness.

The bigger question, frankly, is how serious Russia’s rentier-state blues will be, and what this will mean for Putin’s regime.

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Gas pains

Gazprom has a problem.

We often read about Russia wielding its energy power as a political tool, cutting off energy supplies hither and thither to punish political foes. Last winter’s dispute with Belarus did not fit the usual template. Although the script was similar to the dispute with Ukraine–Gazprom looks to double energy prices in new contract–the scenery was rather different. Belarus has been one of Russia’s closest most reliable allies in recent years–there’s even been serious, highest level talks on unification between Russia and Belarus.

So why would the Kremlin allow Gazprom to potentially destabilize (or, at the very least, smear egg all over the face of) the Lukashenka regime?

To answer this question, you have to leave the realm of politics and head straight for economics.

Yes, Gazprom wanted to double gas prices for Belarus. But under the old contract, Belarus was paying about 1/4 of the market price paid by European customers. But, you, say, isn’t Russia an energy superpower, with nearly limitless supplies of oil and gas?

Ah, and here we arrive at Gazprom’s not-so-little problem.

See, Russia’s gas production is not only not limitless, it’s actually falling. Both domestic and export demand are rising–and some experts estimate as soon as 2010, Russia may not be able to meet both its domestic needs and its export contracts.

In this context, continuing to provide Belarus with as much gas as they can consume at 1/4 market price is clearly not a Good Thing for Gazprom. After a tense few weeks last winter, they came up with a deal: Belarus agreed to pay higher gas prices, while coughing up a significant share in its pipeline operator, Beltransgaz, to cover the costs. This suited Gazprom well, which has sought to shore up its control over pipelines (and thus over exports, which must pass through the pipelines) whenever and wherever possible.

Then last week, Belarus suddenly refused to pay the bill. A Belarusian delegation made its way to Moscow, to plead for a loan to help it make the payment. If Russia would no longer subsidize Belarus via Gazprom, perhaps they would be willing to do so directly–it’s hard to read this as anything other than an attempt to back out of an unfavorable deal. But no dice. Russia’s political arm refused to clean up after the problems created by the economic arm. Belarus then tapped reserved to pay a portion of the bill, promising to make the remaining payment by August 10. Belarus is, of course, in a tight spot. The regime is both economically and politically isolated, and, as a result, it is pretty much at Russia’s mercy. There is little outrage expended on behalf of the Lukashenka regime when Russia flexes her muscles at its expense. Russia doesn’t need to placate Belarus, because there isn’t really anywhere else to turn.

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