Russian gas

Politics Before Profit

Dodgy deal: Alexey Miller signed a gas contract with the Chinese under the watchful eye of Vladimir Putin.
  • Why it matters

    Why it matters

    Gazprom, already suffering from high costs and falling energy prices, cannot afford to continue signing costly, politically motivated deals.

  • Facts


    • Gazprom, after flirting with Western companies in recent years, has reverted to Kremlin control.
    • In the wake of the Ukraine crisis, the Kremlin forced it to reroute the South Stream pipeline through Turkey.
    • Gazprom has just signed a gas-supply deal with China that is likely to generate losses.
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The film “No More Mr. Nice Guy” is one of the best German road movies. After a madcap journey, the story ends unexpectedly with the heroes at the banks of the quietly flowing River Don in Russia.

The script could be a model for Gazprom, the world’s largest gas company. “No More Mr. Nice Guy” appears to be the new maxim of Alexey Miller, the firm’s chief executive. It seems he’s adopted it partly as an act of defiance, and partly as a necessity.

Gazprom, despite Mr. Miller’s efforts, has reverted to a Kremlin-controlled company that is almost 100 percent a political entity.

Mr. Miller, who has been CEO since 2001, had tried to reposition the gas giant, delighting Western shareholders and industry partners. But those times are gone.

Things have been different since Russia annexed Crimea a little over a year ago. Mr. Miller, who has led Gazprom for as long as his benefactor Russian President Vladimir Putin has sat in the Kremlin, is once again maneuvering to represent political interests.

It should be noted that Russian leadership is not solely to blame. The European Union has never developed a constructive relationship with Gazprom, though the gas company hasn’t made it easy for Brussels with its constant calls for exemptions from the rules.

Mr. Miller is following political guidelines as he reorients Gazprom away from his main customers in Europe and towards China.

Gazprom is the most important company in Russia. It pays the highest taxes in the country and contributes substantially to Russia’s export earnings. Gazprom is forced to act in the interests of Mr. Putin’s domestic and foreign policies, often using pipelines as a weapon.

In Russia, pipes are laid at the behest of the Kremlin in regions it seeks to politically promote, even if they are not profitable. The same thing is happening outside the country. Mr. Putin wants to show the world Russia is not alone in its stand against Western sanctions, a stance that has led him to force a gas contract with China on Gazprom.

The pipeline to China, dubbed “The Power of Siberia,” is tying up an enormous amount of capital with no mention of advance payment from Beijing. Gas prices are so low Gazprom executives admit internally the deal with China will certainly lose money.

Only a couple of pipeline builders are benefiting and, unsurprisingly, they are close associates of Mr. Putin. The Kremlin boss sweetened the deal by promising them that their energy companies could get around the Gazprom monopoly on the export of liquid gas in the future.

Mr. Miller must smile and bear it. He also defends the surprising shutdown of the South Stream pipeline project, which was designed to transport gas through the Black Sea to Bulgaria and onto Southern Europe. It will now be rerouted via Turkey to avoid E.U. rules. He announced the change to the European Union in an unusually rude tone, which obviously isn’t how a salesman treats customers.

Gazprom-sales and revenue 2009-2014

In fairness, the European Union has made life in Europe difficult for Gazprom with antitrust probes, new conditions on the use of inner-European pipelines and its obstruction of the company’s efforts to take over European marketing and sales firms. Nevertheless, decisions in Brussels are not made solely on politics.

This is proven by the sale of RWE Dea. The German based energy giant RWE was allowed to sell its international oil and gas subsidiary to a Russian oligarch with the E.U.’s blessing.

Meanwhile, Mr. Miller is following political guidelines as he reorients Gazprom away from his main customers in Europe and towards China. Diversification of markets makes good business sense.

The shale gas boom in the U.S. and the development of liquid gas in Qatar have roiled Western markets, leading the Chinese to brutally exploit Russia’s weaknesses as Gazprom jousts with Europe. And all because Mr. Putin wants to demonstrate his supposed power to the West while removing insubordinate Ukraine as a transit country for Russian gas.

This hurts Gazprom because it increases the costs of Russian exports to Western Europe while making Qatar’s liquid gas, which has been fairly expensive, more competitive in the marketplace. Mr. Miller and Mr. Putin must now prove that they can make Gazprom profitable again and that Turkey is a more reliable partner than Ukraine.

Mr. Miller and Mr. Putin don’t want to be Nice Guys anymore. Whether they can really afford not to be is another matter.


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