In 2021, Gazprom reported record-breaking profits. However, between January and November 2022, there was a 45% decrease in gas exports to far-abroad countries. Presently, the company is not paying dividends, experiencing declining revenue, and facing uncertain market prospects. Mikhail Krutikhin sheds light on how prioritizing the external market and using gas as a political tool contributed to the downfall of the Russian gas giant.
The Russian monopolistic gas giant is experiencing a downturn. Gas production has fallen by 24% across the country, and if we look specifically at Gazprom, it has decreased by nearly a third compared to pre-war levels. Gas exports to distant European markets have plummeted from 170-180 billion cubic meters during peak years to just 12 billion cubic meters in the first six months of this year. Arbitration courts are dealing with numerous multi-billion-dollar lawsuits filed by consumers who were left without gas due to Gazprom's contract violations. Government revenue from gas exports has declined by 80%, and the company has stopped paying dividends.
Thousands of investors who had put their money into Gazprom stocks, holding onto them for years in anticipation of growth, are witnessing a significant decline in their value. The share price, which reached its peak at 360 rubles ($4.90) in September 2021, has now dropped to 166 rubles, equivalent to less than $1.80 at the current exchange rate. Both individual investors who believed in Gazprom as a “national treasure” and toasted “to us, to gas,” and the entire national economy have suffered substantial losses.
How did such a massive company, employing nearly half a million people, end up in such a state and who is responsible?
Gazprom built its empire on gas exports, without paying much attention to the domestic market. According to the official “energy strategies” of the Russian government, the gas export monopoly was expected to expand its dealings with international buyers while allowing other companies to cater to domestic consumers.
Gazprom built its empire on gas exports, without paying much attention to the domestic market
The priority of gas exports was actually established during the Soviet era when the USSR, possessing vast reserves of natural gas, entered the European market in the late 1960s and offered mutually beneficial cooperation to the West: uninterrupted gas supplies in exchange for technology, equipment, consumer goods, and much-needed resources that the Soviet state lacked. A strong system of interdependence emerged, which was not easily shaken even by political factors such as the invasion of Czechoslovakia in 1968 or Afghanistan in 1979. Europe became just as dependent on the USSR, and later on Russia, for gas as the gas supplier relied on European buyers. In early 2019, Russia accounted for 39.4% of gas imports to the European Union, and the revenue from these supplies constituted 13.5% of the federal budget's income.
The temptation to disrupt this balance and, as it is now called, “weaponize” this interdependence by introducing elements of political manipulation and pressure arose with the consolidation of power in Russia in the hands of Vladimir Putin and his Chekist associates. This group had no regard for the win-win principle, which involves developing mutually beneficial relationships based on mutual concessions. The ideology of the Kremlin began to prioritize the tactics of a street thug: “strike first” and “if you yield even a little, you're a loser.” Gas supplies gradually became a tool of blackmail.
It all started with the modification of contractual terms. The price in contracts began to be determined by politics, with discounts and additional financial assistance from Gazprom extended to its allies, while markups were imposed on those perceived by the Kremlin as opposing the Moscow regime. Threats were made to reduce or cut off supplies to the “unyielding.”
However, it would be inaccurate to say that Gazprom consistently acted with aggression throughout the Putin era. European counterparts began to suspect something was amiss and took proactive measures. They prohibited Gazprom from including clauses in contracts that restricted the resale of gas received from Russia. They demanded the closure of fraudulent supply schemes involving Gazprom's affiliated “subsidiaries” that were linked to corrupt officials in European countries. They also closely monitored the politicization of gas prices and introduced regulation through so-called “energy packages.” In response, Gazprom, though initially disgruntled, swiftly and appropriately complied with most of the EU's requirements, demonstrating a willingness to embrace market principles and depoliticize its operations. Alongside long-term contracts, Gazprom increasingly engaged in spot contracts with highly flexible terms. Over time, Europeans reached the conclusion (albeit somewhat hastily) that Gazprom could be engaged with in a civilized manner, and they could count on its reliability.
Europeans reached the conclusion that Gazprom could be engaged with in a civilized manner, and they could count on its reliability
However, in 2021, while preparing for a large-scale invasion of a neighboring country, Putin ordered Gazprom to use gas supplies to Europe as a political tool under the slogan of “we will freeze you and bring you to economic collapse if you insist on supporting Ukraine and do not lift sanctions against Russia.” As a first step, the Russian president demanded payment for gas in rubles, openly violating contractual terms. When some buyers refused to pretend to pay in rubles, Gazprom cut off their gas supply. Furthermore, Gazprom halted gas injection into its underground storage facilities in Europe, ceased selling gas on electronic trading platforms, and significantly reduced gas flows through export routes.
Putin ordered Gazprom to use gas supplies to Europe as a political tool
But the endeavor failed. Firstly, Europe demonstrated incredible resilience and flexibility, albeit at a high cost. It survived the winter and eventually established alternative gas supply routes. Secondly, Putin's calculations that the Chinese market could replace the European market turned out to be an illusion. China's demand for Russian gas is not comparable to that of the Europeans, and constructing the necessary infrastructure to meet China's requirements would take at least 12-15 years.
Recently, Gazprom's CEO, Alexey Miller, has issued new ultimatums. He threatens to completely cease gas transit through Ukraine to Europe unless Kyiv renounces its claims for compensation regarding the violation of contractual transit terms by the Russian side. Miller is unwilling to fulfill the company's obligations under the agreement with Ukraine and refuses to pay the corresponding penalties. This behavior reflects the same brash mentality as that of a street thug.
Gazprom, which was not hindered by any sanctions and had every chance to continue operating as a normal commercial company in the European energy market, has essentially committed suicide as an exporter. The order for the “national treasure” to commit this act of self-destruction came from the Kremlin.