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The End Of Gazprom's Reign?

New Gazprom pipes ready for installation in Russia's Krasnodar territory. That pipeline and others might see declining usage over the next decade.

New Gazprom pipes ready for installation in Russia's Krasnodar territory. That pipeline and others might see declining usage over the next decade.

Just over 18 months ago, Russia was predicting a bright future for Gazprom, stating that its capitalization would exceed $1 trillion by 2015 and its shares would be trading on the New York Stock Exchange.

Today, the story is very different. The company's net profits fell by nearly half in the first two quarters of 2009, and several factors seriously challenge Gazprom's continuing reign.

Russian President Dmitry Medvedev, in his annual address to the Federal Assembly in November, called for an end to the economy's heavily reliance on hydrocarbon sales. Given that the Russian economy has contracted by 10 percent, Medvedev is urging Russia to shift away from raw materials to smaller, sleeker, more technologically efficient sectors.

Paralleling the president's address was the release of the International Energy Agency's annual report. The agency concluded that global gas supplies are rising faster than demand, pushing down the price for the next decade. By 2015, there could even be underutilized gas pipelines and liquefied natural gas (LNG) terminals.

Most worrisome for Russia is the future of European demand. Russia's largest customer is experiencing declining demand, spurred by the recession and a mandatory shift to using 20 percent renewable energy by 2020.

And Gazprom has been harmed by the Kremlin's political miscalculation to cut off gas to Europe last winter. Just as Gazprom plans two new pipelines to Europe carrying over 110 billion cubic meters (bcm), Europe is seeking alternatives from the Caspian and the Middle East.

At the same time, Gazprom's ability to provide future gas is under question because of inefficient management, leaking pipes, industrial inefficiency, lack of technology and capital, and a monopolized domestic gas market. And Central Asian countries, which are critical to meeting Russia's European gas contracts, have redirected export volumes to China and Iran.

Meanwhile, Russia has plans to send gas to Asia. It has received loans from China in exchange for providing a pipeline. However, China will not pay European prices and the gas is set to come from unexplored fields in eastern Siberia.

It is unclear how Russia intends to meet its energy-expansion agenda. Gazprom has pledged billions for global energy projects and is even eyeing a share of the U.S. market. At the same time, the recently released 2030 Russian Energy Strategy stipulates $2.1 trillion in investments at home to be paid primarily by Russian companies.

The Russian authorities face a conundrum. Some in leadership positions have realized that Gazprom cannot provide the engine for the country's future economic growth. At the same time, the company provides the glue that keeps Russia together, including the majority of state revenues and the less transparent benefits for invested authorities.

Gazprom could thrive with the help of foreign funding and technology, but the Russian investment climate remains unstable and littered with a recent history of broken deals. Russia would also benefit from liberalizing the domestic gas market, but that option is politically unpopular.

It appears that history may be repeating itself. The 2010s could be to Russia what the 1970s were to the Soviet Union. The plundering of oil fields coupled with a global energy crisis kept the Soviet economy running into the early 1980s, well beyond expectations. Today's promises of Gazprom expansion sound familiar.

Stacy Closson is a fellow at the Woodrow Wilson Center in Washington, D.C. Her research assistant, Vladislav Prokopov, contributed to this commentary. The views expressed here are the author's own and do not necessarily reflect those of RFE/RL

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