The Costs of Deploying the Energy Weapon

One wonders whether it could really be worth it for the Kremlin to keep up this gas war, no matter how upset they are with the endlessly frustrating Ukrainians.  For as much economic and political damage as they are imposing on their NATO-loving brethren to the West, Gazprom is increasingly shouldering an intolerable financial burden, from which it might not be able to recover without years of work.  First we had the announcement earlier this week that Gazprom had lost more than $1.1 billion in revenues, then Gazprombank got downgraded to junk status (which is huge), and now, according to the Associated Press, the company has tumbled from the 3rd largest in the world to the 35th (and naturally there’s a Yukos play in the equation).  If only money were still “a snap,” as the president used to be fond of saying.


Losing foreign income is catastrophic for Gazprom: It exports a third of its production and reaps much higher profits abroad than at home, where prices are capped.

Saddled with net debt of roughly $45 billion, the protracted dispute with Ukraine is one Gazprom can ill afford. And considering the company’s central importance to Russia’s prosperity, its mounting woes may hold the key out of the deadlock with Ukraine — which is also losing millions a day in the pipeline freeze.

Analystsestimate that the gas giant, which is Russia’s biggest debtor, willhave to repay $7 billion this year — easy enough when gas is flowingand prices remain at record highs. But since oil prices have plummeted,gas prices will follow suit — with a lag of six to nine months.

Gazprom’schanging fortunes coincide with Russia’s bleakest economic period in adecade. The country is facing recession, industry has been ravaged byfalling demand for metals, and investors suspect the government willturn to state-controlled giants such as Gazprom to prop up the ailingeconomy.

“The company is spending like crazy to do the state’sbidding, to keep growth up,” said James Fenkner, director atMoscow-based Red Star Asset Management. “They are completely unpreparedfor low oil prices.” (…)

Fenkner claims Gazprom is spendingeight times more than the last time oil languished at $40 a barrel.”They are still spending money,” said Fenkner. “They are doing all thisstupid, stupid stuff.”