Putin shuns Gazprom’s lucrative European market, calls war with Ukraine ‘geopolitical piracy’

When senior managers at Kremlin-controlled natural gas producer Gazprom arrived in New York in February 2020 to offer a business update to US investors, the company had the best three-year extension in its export history.

Gazprom had supplied an average of about 200 billion cubic meters (BCM) of natural gas through the pipeline to Europe, including Turkey – a third more than the average for the previous decade – and generated more than $120 billion in revenue on that. Duration.

The management team told US investors that it expects Gazprom’s exports to Europe to be around that record level for the next decade, financial unexpected expansion For the company – a key pillar of the Russian economy – in the future.

Two years later, the forecast is completely different. Russian President Vladimir Putin’s decision to launch a massive attack on Ukraine – and his moves to cut gas exports to the EU over its support for Kyiv after the February 24 invasion, cost Gazprom a lucrative future on the continent Yes, experts say.

The company – which is considered a Kremlin “slush fund” because of its business ties with friends and close associates of Putin – loses hundreds of billions of dollars in European revenue over the long term. Experts said that bleak outlook would have ripple effects on Gazprom’s efforts to compensate along a pivot to Asia by undermining the negotiating position with China.

However, in the short term, Gazprom can expect to enjoy a bonus.

Even as its volume declines in Europe, the company will generate record export revenue this year – and strong earnings over the next two to three years – as Brussels calls the Kremlin “blackmail” amid its lack of Fuel prices have increased. ,

But by the middle of the decade, as new supplies of natural gas flooded the market and the European Union further cut Russian gas imports, Gazprom would face a sharp drop in revenues and profits at a time when the rest of the economy was in the Western world. would be struggling under sanctions, analysts say.

Gazprom’s growing exports to Asia will not make up for the lost earnings. The impact on Russia would be meaningful as Gazprom is one of the largest companies in the country by revenue, employees and capital expenditure, and a major contributor to the federal budget.

‘Off the Foil’

“Gazprom is not only missing out on a commercial opportunity – and taxes for the state – but is actively destroying its own market,” Nadia Kazakova, an analyst at UK-based Renaissance Energy Advisors, told RFE/RL.

“Gas prices in Europe will eventually come out of a boil, but Gazprom will never be able to regain its market share,” she said.

In Russia’s long-term plan for Gazprom, it was never supposed to be Europe or Asia – it should have been both, serving as an export company to the east and a growth driver for the country. Gazprom has the world’s largest reserves of natural gas, enough to supply large amounts of fuel to both continents for decades.

Before the February invasion of Ukraine, Gazprom was Europe’s largest gas supplier, accounting for about one-third of the continent’s needs.

Apparently Putin did not expect this to change. He was clearly confident of a quick and decisive victory in Ukraine – one that would subjugate Kyiv to the Kremlin – and analysts say he clearly believed that the United States and the European Union The West would accept that outcome, with limited sanctions imposed by the U.S. This was followed by Moscow’s seizure of Crimea from Ukraine in 2014.

Pipeline at a gas processing facility operated by Gazprom at the Bovanenkovo ​​gas field on Russia's Arctic Yamal Peninsula.  (file photo)

Pipeline at a gas processing facility operated by Gazprom at the Bovanenkovo ​​gas field on Russia’s Arctic Yamal Peninsula. (file photo)

Instead, the EU has vowed to sharply cut imports of Russian energy, including gas, to deprive Moscow of revenue for its military campaign – albeit slowly, to relieve the pain of EU countries and their citizens. with the aim of reducing.

Putin has tried to turn the tables on the EU by sharply reducing the flow of gas to the bloc, which helped drive prices to record highs and fears that Russia could halt exports altogether this winter. Is.

Natural gas is used extensively in winter to heat homes and buildings, in industrial processes, and to generate electricity.

“Now, Russia [is] The shots are calling,” said Karolina Siemianiuk, a gas analyst at Norwegian-based research firm Rystad Energy, in a July 26 note.

‘Russian game plan’

Kazakova said she did not expect Putin to completely stop gas exports to Europe.

“Russia’s game plan is to flow exports to Europe at a level that allows the government to collect substantial revenue and taxes but potentially keep Germany’s gas market low,” she said.

Germany was the largest importer of Russian gas to Europe.

Based on current prices and volumes, Kazakova expects Gazprom to generate $79 billion in European export revenue this year and $67 billion next year, far more than the record $51 billion it achieved in 2021.

Bonn-based independent energy analyst Sergei Vakulenko, said in the post That some Russian officials may bet that a peace deal on Ukraine would include long-term Russian gas supplies with the West and a waiver of legal claims stemming from the cutoff.

Such a bet would be a “huge miscalculation” on the part of the Kremlin, Ed Chow, an energy analyst at the Washington-based Center for Strategic and International Studies (CSIS), told RFE/RL.

He said that even though the war in Ukraine ended immediately, the decades-old symbiotic gas relationship between Europe and Russia has been irreparably damaged.

“After building a reputation as a reliable gas supplier for more than 50 years, Russia has pushed this out the window in five months,” Chou said.

Moscow never cut its gas supply to Western Europe for political gains during the Cold War. Instead, it acts as a bridge between the two camps, analysts said.

bread and butter

European sales have been Gazprom’s bread and butter for decades, accounting for about 70 percent of the company’s gas revenue and 40 percent of total revenue.

Gazprom, which sells more gas domestically than it sells to Europe, also generates revenue from oil and electricity generation.

European sales enabled Gazprom to recover from the turmoil of the 1990s, when Russia was transitioning to a market economy and many households and companies could not or could not pay for gas.

Russian President Vladimir Putin (left) during a videoconference meeting with Gazprom chief Alexei Miller at his office in Novo-Ogaryovo.  (file photo)

Russian President Vladimir Putin (left) during a videoconference meeting with Gazprom chief Alexei Miller at his office in Novo-Ogaryovo. (file photo)

Realizing the potential power of Gazprom’s influence at home and abroad, Putin took steps to consolidate his control over the company after he first took office in 2000.

In May 2001, a year after its inauguration, Putin removed the company’s long-serving head, Rem Vyakhirev, and installed Alexey Miller, a loyalist from his hometown of St. Miller runs the company to this day.

Putin quickly ended bids defeated by powerful business interests to break up Gazprom and end his monopoly on pipeline exports. They also began to use it as a foreign policy tool – mainly, first, in scrap with other former Soviet republics.

‘Last Hurray’

Looking to the future, Europe’s gradual shift toward alternative sources of energy to combat climate change meant that Russia’s revenues in the continent from the sale of fossil fuels would eventually decline.

But the Kremlin could still expect “two more decades of abundant ‘final storm’ oil and gas revenues,” said Georgetown University professor Thane Gustafson, who has written several books on Russia’s energy industry, Said in a recent post.

“The invasion will likely shorten that period of relief,” he said.

The International Energy Agency (IEA) estimates that Gazprom’s pipeline exports to Europe will fall by about 80 bcm by 2025 – a peak of about 40 percent reached in 2018.

The European Union, which accounts for the lion’s share of Europe’s gas demand, has said it will Aims to end Russian gas imports By 2027, however, some analysts say that could be difficult to achieve.

James Henderson, chair of the gas research program at the Oxford Institute for Energy Studies, said Europe does not need to completely stop Russian gas to end the Kremlin’s influence on the region.

He added that reducing Russia’s share of the European gas market to less than 10 percent or less than 50 bcm a year would end Moscow’s dominance if those exports were spread across multiple countries.

‘second best’

As Gazprom loses its dominant position in Europe, it is seeking to widen its footprint in Asia, particularly in China’s booming gas market – a shift that is fueled by intensifying geopolitical shifts from Moscow towards Beijing. The bend coincides due to the increasing isolation from the west. Anger and despair at his unprovoked war on Ukraine.

Henderson said Russia could begin exporting additional amounts of natural gas to China through a new pipeline by 2027 – when the EU aims to end imports – if the two sides can reach an agreement, Henderson said. he said.

Chinese President Xi Jinping is seen on a screen during a video link at a ceremony to launch Gazprom's Power of Siberia gas pipeline from Russia to China in Sochi, Russia, in December 2019.

Chinese President Xi Jinping is seen on a screen during a video link at a ceremony to launch Gazprom’s Power of Siberia gas pipeline from Russia to China in Sochi, Russia, in December 2019.

Moscow and Beijing have been in talks for years over the Power of Siberia 2, which will deliver 50 bcm of natural gas to China from fields in the Yamal peninsula in northwest Siberia, which supplies fuel to Europe.

Russia is currently exporting gas from regions of Eastern Siberia to China through Power of Siberia 1. That pipeline is expected to reach a maximum capacity of 38 BCM in 2024.

Chou said Russia’s loss in the European market makes a deal with China more urgent and thus weakens the Kremlin’s negotiating position.

This is a case of deja vu.

The Kremlin was desperate to sign a deal with Beijing to power Siberia 1 after the West imposed sanctions on Russia for the first time in 2014 following the annexation and annexation of Crimea.

Chou said China was able to strike a deal at a very attractive price.

UK-based analyst Kazakova estimated that in July China paid about a quarter of what Europeans paid for Gazprom’s pipeline gas.

Russia is just late in the Asian energy market and will never regain its dominant position in Europe, said Nikos Tsafos, chief energy adviser to Greek Prime Minister Kyriakos Mitsotakis and former CSIS analyst. Said in the note of May,

“In terms of volume, Asia may one day match Europe as the market for Russian gas, but as a source of income and geopolitical height, Asia will be the second best option.”

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