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The Costs of Playing Chicken with Kiev

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An amusing turn of phrase from the Financial Times’s take on Gazprom horrible first quarter results (-62%!!).  While many stock analysts have been laying on the abuse on Gazprom, and of course we’re skeptical of its opacity and political instrumentalization, I tend to believe the minority out there (meaning Alfa Bank) who points out that Gazprom’s quarterlies are going to see some wide variation, and that the beast is far from dead.  After all, what other energy company CEO has been blessed by the patriarch to keep the big returns rolling in?

Investors can only wonder how different Gazprom’s prospects might look were it not so fond of playing chicken with Kiev. In fairness, who was ultimately responsible for the latest shutdown of supplies to Europe across Ukraine amid January’s pricing spat is unclear. Even so, its impact was laid bare in Gazprom’s first-quarter results. Export volumes to Europe – source of most of its profits – fell 30 per cent.

There were other factors, too. European demand was dented by recession. Gazprom’s contract prices, linked to oil except with a time lag, still reflected last summer’s record crude prices. So customers switched to the cheaper spot gas market or used gas from storage, waiting for Gazprom prices to fall later this year. Throw in a $4.5bn foreign exchange loss thanks to the rouble’s devaluation, and net income plunged 62 per cent to $3.3bn.  (…)

Further ahead, Ukraine is angling to cut gas imports from Russia by a third next year – leading, potentially, to more games of chicken with Kiev and further holes in Gazprom’s exports. The European Union, fed up with such interruptions, wants to diversify supplies. All this makes Gazprom’s shares, up 75 per cent from their February trough, look rather over-gassed.