April 23rd, 2014

Ukraine casts a long shadow over Gazprom

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Political crisis in Ukraine has taken its toll in Russia’s gas monopoly Gazprom that has has been suffering significant losses over the recent years. For over a decade Gazprom served as Vladimir Putin’s major geopolitical weapon. Today, it becomes evident that overusing the company for political interests is the key reason for a rapid deterioration of its market position.

Political crisis in Ukraine has taken its toll in Russia’s gas monopoly Gazprom that has has been suffering significant losses over the recent years. For over a decade Gazprom served as Vladimir Putin’s major geopolitical weapon. Today, it becomes evident that overusing the company for political interests is the key reason for a rapid deterioration of its market position.

Ukraine is strategically important for Gazprom’s transportation system: the company’s major pipelines (Yamal-Europe, Soyuz) that pump gas from Russia to Europe pass through Ukrainian territory. Ukraine’s political turmoil during and after the 2004 Orange revolution exposed vulnerability of both–Gazprom’s market positions and Vladimir Putin’s leverage over EU gas importers. To avoid such vulnerability in the future, Gazprom launched a number of extremely expensive construction projects (North Stream, South Stream) to create alternative routes of delivering Russian gas to Europe, bypassing Ukraine. Currently, more than 50 percent of exported Gazprom’s gas is pumped through Ukraine.

In the recent years, Gazprom suffered the biggest collapse in market capitalization among the world’s 5000 largest companies.

However, over the years these and other Gazprom’s projects, politically motivated and economically unjustified, fundamentally undermined the company’s performance. In 2007, the company’s market value was projected to quadruple and reach $1 trillion by 2014. In reality, Gazprom suffered the biggest collapse in market capitalization among the world’s 5000 largest companies. And current Ukrainian crisis seems to push Gazprom closer to the edge.

Earlier this April, Gazprom management admitted that the sanctions imposed on Russia by the U.S. and the European Union, following the annexation of Crimea, contributed to the company’s slump in share prices that have decreased by 12 percent this year only, according to Bloomberg. To put this in context, one needs to consider that Russian ministry of finance reported that Russia’s GDP growth slowed down to 1.3 percent in 2013, and given the deepening Ukrainian crisis, it is likely to drop below 1 percent this year.

A few years back, the US shale gas revolution sent a ripple effect to the global energy market, and Gazprom has been too slow to fully comprehend these shifts. Meanwhile, as Reuters analysts calculated, EU imports from Russia can decrease by a quarter (worth of $18 billion) by 2020. As the crisis deepens, Europe is actively looking for ways to increase its energy security, and the slash in imports of Russian gas to EU might happen even faster, leading to further undermining of Gazprom’s profitability. Unfortunately, since Russian gas monopoly accounts for 8 percent of the country’s GDP, Russian citizens will be the first to pay for the company’s failures.

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