The stabilizer of the Russian economy is in the red. How did such a thing happen? And what will happen next?

The inevitable has finally happened. Gazprom, Russia’s largest company and one of the world’s largest companies, the everlasting cash cow of the Russian economy, has shown a huge loss. Once a Russian jewel, Gazprom is now on the way to bankruptcy – fast.

GAZPROM, THE CASH COW

In the past, people used to say about Gazprom: ‘When Russia runs out of natural gas, Gazprom will be able to heat the entire country for another year or two just by burning its paper money.’ Yes, Gazprom was that profitable. And now it is in the red.

Gazprom was actually not a company, but rather, a ministry of the world’s largest country, the USSR. Gazprom was formed as a company only in 1989 as a result of the conversion of the Soviet Ministry of Natural Gas into a corporation, becoming the first state-run private enterprise in the Soviet Union.

Communist USSR had no legislation for corporations to exist. Its law didn’t recognize the term ‘corporation,’ but they did it anyway. Soon after the fall of the USSR, they privatized the Ministry of Natural Gas, transforming it into Gazprom.

Gazprom was – plain and simple – a monopoly. It is the only publicly held entity in Russia that has a right to extract and sell natural gas, both domestically and overseas. Well, there’s one other company that can also extract and sell but it’s a small private company that belongs to just friends, so we can disregard them.

As of 2019, Gazprom had sales that were over US $120 billion. Until 2023 Gazprom was ranked by revenue as the largest publicly held natural gas company in the world, and the largest company in Russia.

ON THE STOCK EXCHANGE

The majority of the company is owned by the Russian government via the Federal Agency for State Property Management, one of the agencies of the Russian government, and via its oil company, Rosneftegaz, while the remaining shares are traded publicly. Gazprom is listed on the Moscow stock exchange.

Back in the late ‘60s, Germany was the first Western nation to establish cooperation with the USSR by exchanging large diameter natural gas-transporting pipes. The USSR, the country that was sending people into space and possessing nuclear weapons threatening the entire world, did not have technology to manufacture gas transporting pipes.

The deal was quickly called ‘the deal of the century’ – at least in the USSR. Officially, it was called ‘gas for pipes.’ As a result, moderately priced natural gas from Russia was supplied to West Germany, giving its industry an extraordinary competitive advantage.

Following Germany’s lead, other European countries also became consumers of Russian gas. Everyone wanted cheap gas.

Fifty years later, three quarters of Gazprom’s exports were supplied to the European Union. Europe became the best, the largest, the most reliable, the richest customer of Gazprom. (Read: ‘Russia.’) The Russian company held a forty percent share of the European market. Things were going pretty darn well for Gazprom – and Gazprom was absolutely crucial to Russia back then.

Yes, back then. Not anymore – for two main reasons. Reason number one: it had money, And in Russia, the strongmen use money to empower themselves. So, money is crucial to attain and keep power.

WHERE THE PIPELINES ARE

Reason number two: It used gas as a Russia’s geopolitical weapon, exerting power over Europe. The European countries were sort of ‘addicted’ to Russian gas – cheap, reliable. Until the start of the war with Ukraine, Gazprom supplied approximately 150 billion cubic meters of gas to Europe.

There were several routes, including Nordstream One, the underwater pipeline on the floor of the Baltic Sea to Germany, with a capacity of 55 billion cubic meters through two pipelines.

Yamal Europe, which passed through Belarus to Poland, supplied 33 billion cubic meters annually. Ukraine’s gas transportation system accounted for 40 billion cubic meters. When the USSR fell apart, that pipeline was split between Russia and Ukraine, with a long-term contract supplying Russian gas through Ukrainian territory. It still is supplied during the war.

And last, the Turkish stream, supplied South-eastern Europe with Russian gas – about 20 billion cubic meters. Moreover, there was another pipeline built called Nord Stream Two, complementing Nordstream One and doubling its transporting capacity. Russia was on the verge of commencing it when the war happened.

RUSSIA’S BIGGEST EXPORT

It’s hard to underestimate what Gazprom was to Russia, especially in the ‘90s. It was the stabilizer of the economy. Back in the ‘90s, oil was dirt cheap, and Russia was not making much money exporting oil. Natural gas was the biggest export of Russia.

In the 2000s, oil price skyrocketed, showering Russia with money. But natural gas was still a huge breadwinner. Combined, gas and oil revenues amounted to almost half of the country’s federal budget revenue. That’s how important Gazprom was.

For the year of 2022, Gazprom’s export revenues amounted to 7.3 trillion rubles. For the year 2023, Gazprom’s export revenues dropped to 2.9 trillion rubles. Revenues declined by almost three times in one year, 2022-23. For the year 2022, Gazprom’s net profit amounted to 1.2 trillion rubles and for the next year, 2023, Gazprom’s net loss amounted to 629 billion rubles (i.e. 0.6 trillion).

In September of 2019, Gazprom had a market capitalization of US $80.56 billion. In January of 2024, Gazprom’s market capitalization dropped to US $44. 96 billion.

This is the first time that Gazprom has become unprofitable in the 21st century. Well there was a brief period during the acute phase of COVID fear. All trade in the world stopped – oil and gas, everything. So, Gazprom showed a loss then, but the reasons were objective. The only other time it showed a loss was 1998, when Russian government defaulted its debts. That was also a special situation. So, we can say that in the normal times Gazprom has shown unprofitability for the first time ever.

You might have heard these numbers everywhere lately because they have been hitting the news. What you probably haven’t heard is Gazprom’s debt situation. No one is talking about it for some reason, but it’s hugely important.

To understand the debt structure. I read the previous year’s summary for investors. Against the background of declining revenue and traditionally high capital expenditures, Gazprom increased its total debt by 31% to 6.7 trillion rubles. The dynamics of the company’s net debt is pretty similar – an increase of 34% to 5.2 trillion rubles. Last year, Gazprom was borrowing money like crazy. It borrowed more 30 plus percent more than it had borrowed the previous year.

IT STOPPED SELLING GAS

So, what happened to Gazprom? Plain and simple: It simply stopped selling gas. Let’s compare exporting gas to exporting oil. Just in simple terms, natural gas is the cheapest transportable substance because it runs through pipelines. All you need is a very long pipeline and every so often you install special compression stations that increase pressure, to move the gas.

Gas requires special pipelines. That’s the only way to transport it, but oil is liquid, and it can be transported by barrels, delivered by huge oil tankers by sea to anywhere in the world. Oil tankers are nothing but huge floating barrels. So, in 2022, the beginning of the war with Ukraine was a unique situation. Russia didn’t know what to do. The plan was to take over Kiev. When that didn’t happen, the Russian army was retreating. It had left Kiev and Kharkiv provinces, and was leaving Kherson.

So, the Russian government started using natural gas supplies to Europe as a geopolitical weapon. It started threatening to cut off its gas supply if Europe did not lift the sanctions against Russia. But Europe did not bend, so Russia started taking action. They stopped supplying its gas to Germany via Nordstream One, citing technical problems with turbines. In August, they simply turned the gas off.

Then a very unexpected. thing happened. In early September, the Kremlin halted the exports through both Nordstream One pipelines, intending this as political leverage. There were four Nordstream lines, each with two lines, and on September 26 , three of those four lines were blown up by sabotage. No one knows who was behind it, but as a result there’s nothing left for the Kremlin to use for intimidation.

PAY IN RUBLES?

Gazprom cannot resume supplies, as the infrastructure was blown up and its restoration is a very lengthy and expensive process, even in peaceful times. In war time, it’s nearly impossible. Simultaneously, the Russian authorities dealt a blow to Gazprom’s European business by demanding a switch to ruble payments with clients from the countries that they called ‘unfriendly.’

Almost none of the so-called ‘unfriendly’ nations agreed to transfer the contracts into rubles. And while the contracts with most European consumers formally remain in effect, deliveries under such contracts have ceased.

Russians are continuing to supply gas through Ukraine to some countries in the European Union, but the supply has been absolutely incomparable with Nordstream One working at full force.

What was left for Russia to do? Of course, to look east. So, China has become the only importer of Russian gas, if we remove the Ukrainian supply system from the equation.

But a funny thing happened shortly later. The Russian government made secret the money numbers of the revenue. Volume numbers – the amount of gas supplied to China – are publicly accessible, but the amounts of money are confidential. We don’t know how much money Russia is getting for the gas.

This reflects the same logic as when the Russian government does not reveal how many Russians have been killed in Ukraine. They keep silent about it because the numbers are not favorable. It’s the same with the payments for Russian gas from China.

But now we are seeing Gazprom numbers – but only at the other end. They’re not showing us China’s payments, but they’re showing us Gazprom’s financial performance – and it’s a huge loss. So, we understand how much China is paying, and it looks like Russia is actually paying China for every cubic meter that it supplies to China.

We can speculate why this is happening. Perhaps some weapons are involved? Perhaps some exchange is going on? We don’t know. But clearly, something is fishy here.

Moreover, Gazprom has probably lost its Western European market forever, although Vladimir Putin occasionally proposes to resume deliveries through the only surviving branch of Nordstream.

It’s physically possible but even after the war Gazprom will find it very challenging to regain its lost position in the European market. The European Union has woken up and approved a new energy transition strategy. Even before the war. The EU had been aiming for radical reduction in gas consumption in favor of renewable energy sources. By 2030, imports of gas are expected to be only 236 million cubic meters.

Furthermore, the events of 2020 – 22 demonstrated how risky it is to depend on a single supplier. Europe did not freeze in the winter, but it paid a huge price for diversifying its sources of supply. The price of gas spiked. According to the International Energy Agency, the rejection of Russian gas cost 270 billion euros in 2022. But by the winter of 2023 -24 prices were much lower.

PINNING HOPES ON CHINA

Europe is lost and Gazprom’s main hopes are on China, which according to some forecasts is expected to account for nearly half of the world’s gas consumption in the next five years. The head of Gazprom recently promised that pipeline supplies to China will soon reach the previous levels for exports. to Western Europe. But that is highly unlikely, and I think he knows that.

The primary route for exports to China is through a pipeline calle “The Power of Siberia,” that was built between 2014 – 2021. In 2022, Russia supplied 15,5 billion cubic meters through it. And by next year, supplies are supposed to reach the planned 38 billion cubic meters.

Thirty-eight billion is what they’re hoping to sell to China. But compare that to the 150 billion that Russia supplied to Europe. And the 38 goal is still questionable. Right now, it’s a little over 15. So, compare the current 15 to 150. You can see that nothing can replace Europe for Gazprom.

China has taken note of Europe’s bitter experience and doesn’t want to depend solely on a Russian gas. It understands that Russia could start using gas supply as a geopolitical weapon against China.

China is waiting until 2026 when significant new volumes of liquefied natural gas from the US and Qatar are expected to enter the market.
I do understand how Gazprom works because of my own dealings with them. Let me tell you a personal story that will illustrate how the company works.

MY ENCOUNTER WITH GAZPROM

The year is 2006. I am a young Chief Business Development Officer at a Russian company that builds power plants. A new power plant construction is announced and our company is considered a serious player. I’m placed in charge of preparing a competitive bid.

I spend three months preparing the bid. We are the strongest company among the competitors. I hardly slept, there was so much work.
It took us two or three days to print everything out. I hired a couple of guys and a moving van, which they filled. I think there were like 26,000 pages in our documentation.

When I reached the place to submit the bid, there were five or six companies there, all with large documentations printed out. Imagine planning how to build a power plant. There’s so much equipment! The construction process usually takes about four years, with hundreds of subcontractors.

Then one company called Transgaz shows up. It’s a new company that just popped out of nowhere. The two smiling guys bring their bid. It’s about 25 pages on beautiful paper, divided into two parts – the commercial part (the pricing, etc) and the technical part.

We start laughing and the customer starts laughing as well. I had come to know the customer very well by then so I told him that I was interested in knowing what is in that bid. I understand that it’s confidential, but let’s check it out. He said, “I really am interested myself. So let’s see.” In the section on technical details, it just had one line: “To be provided later.”

Okay, so we all left. I took several days off, flew to Egypt and slept a lot. The customer informally told me, “You’re looking like the winner. It’s not official, but you’re number one.” The contract was for about $300 million and it was my first project! I was really excited.

So the next morning, we show up for the announcement and I see that something is wrong. Everyone is looking shocked. Then they announce the winner: Transgaz! The company that produced the laughingstock bid!

The bid committee also were speechless. They didn’t talk to anyone. They just announced and left immediately.

Later, the story became clear. A telephone call from the leadership of the Russian Federation had awakened the owner of the project. The message: “Listen, we cannot order you, but we strongly suggest that tomorrow you announce the winner is Transgaz.”

The owner replied that it’s impossible. Those guys had just formed the company two weeks before. The only have three people in the entire company and they don’t have any reference. “

THEY NEED THE PRACTICE

I won’t tell you who the voice on the phone was, though I know who it was. He said, “You’re right. They have no experience. But they’re going to be constructing pipelines to China for Gazprom and they need to practice. If you do that, we’ll make sure that you’ll be considered for other future contracts, but if you decide to deny them, there will be troubles for you.”

So, the guy complied and announced that Transgaz had won, but he killed the project. He ended up constructing the power plant three or four years later with a different company.

My office in Moscow was near Gazprom and the shareholders in the Russian energy businesses is a very small group. I went there and they were shocked as well. I said, “Let’s approach these guys. They don’t have a team. Let’s try to become their subcontractor.”

They learned who the general director was and phoned him, and I went to see the guy. I told him that we want to become a subcontractor for the project. He just said, “Probably won’t happen.” So that was it.

These people were building new pipelines. Their goal was not to construct pipelines in the shortest time within the budget for the least amount of money. No, no, no.

Gazprom’s top leadership enrich themselves, not by extracting and selling gas. They enrich themselves by laying pipelines. That was their business.

If they were to lay 2000 miles of pipes, they could give the order to a cousin’s company or their child’s company. If it cost, for example, one million dollars to lay one kilometer of pipelines, but then they sell that pipeline for $7 million and keep the difference. Who pays for that? Gazprom.

Gazprom was not about performance. Gazprom is a closed club – or at least it was.

Gazprom employed vice presidents, finance managers, directors and so forth. Over a dozen of them have fallen out of windows or committed suicide.

Gazprom was in the red in 2023 and it will get only worse. Why? It sells less. It sells to the Chinese for the cost of extracting and transporting it – perhaps even for less than cost. And it doesn’t sell to anyone else except domestic customers.

Sooner or later, the unthinkable will happen. Gazprom will declare bankruptcy.

You will hear others say that the sanctions don’t work, that the Russian economy has withstood all the sanctions thrown at it.

Just show them the Gazprom numbers that I gave you. •

Konstantin Samoilov was an executive in a Russian energy corporation until he moved to Tashkent to avoid being sent to kill Ukrainians. This is an excerpt from his daily YouTube show, “Inside Russia.” You are invited to discuss this article here:
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