Gazprom: Russia’s Gaz Empire

Gabriel Casella, JHU:

Origins

The Soviet Union’s economy in the late 1980s was undergoing a radical change from a state-owned command system of production to a privatized free-market system. In 1989, the Soviet Ministry of Gas Industry was restructured into the Gazprom State Gas Concern, a private enterprise.

However, on December 25 2005, Rosneftgaz (a subsidiary of the Russian Federation-owned company Rosneft) acquired 10.7 % of Gazprom’s stock, bringing Gazprom under government control once again with a total of 38% ownership of company shares.

Over the last two decades, Gazprom has experienced great expansion in both the output and the acquisition of competing enterprises and expansion into the fossil fuel sector. In 2001, Gazprom made progress in starting its first production from the Zapolyarnoye oil and gas field  with an original annual production capacity of roughly 35 billion cubic meters of gas. Future projections anticipate that the annual gas production from Zapolyarnove will extend to 130 billion cubic meters due to the advancement in extraction technology and investment in the development of the field by Gazprom. In 2005, Gazprom purchased about 75% of Sibneft’s shares from Millhouse Capital for 13.1 billion dollars, in what is currently considered the Russian Federation’s largest corporate takeover. Renamed Gazprom Neft in 2006, it is currently Russia’s 4th largest producer of oil.

Recent Development

In recent trends Gazprom has made an effort to acquire shares in the competing gas and oil industries of neighboring nations, expanding the company’s international and geopolitical influence. For example, in 2010 Gazprom took over Beltransgaz, becoming the private owner of the gas transmission network in Belarus. In 2014, Gazprom fully acquired ArmRosgazprom (renamed Gazprom Armenia), effectively bringing Armenia’s gas supply and transmission under Russian control.

Currently, Gazprom is the owner of the world’s largest natural gas reserves and is developing many projects that seek to expand gas production into the Yamal Peninsula, Arctic Shelf, and Eastern Siberia. Gazprom exports its gas to about 30 nations: Germany, Ukraine and Turkey and many eastern European and nations in the caucus region rely heavily on gas imports from Russia.

Gazprom and oil giant, Rosneft have often been used by the Russian government to push the country’s international agenda and influence domestic policy. In 2014, the Russian government required both Gazprom and Rosneft to constrain their foreign currency holdings in an attempt to keep the ruble from depreciating.

Gazprom in the International Scene

In Russia’s recent military intervention in Ukraine, the country has used Europe’s reliance on Gazprom’s gas exports in order to dissuade direct involvement in the ongoing conflict and has been accused of bullying Ukraine by raising gas prices. As a result, the European Commission’s antitrust watchdog has filed a formal charge against Gazprom accusing it of uncompetitive behavior and market manipulation.  The European Union and in particular, Ukraine has been increasingly seeking alternative sources of energy in order to curb Russian influence.

Gazprom on the other hand has also been seeking to curb its reliance upon the European market, looking east towards the resource hungry Chinese economy.  On May 2004, Gazprom, in a tactitcal move against the West, signed a 400 billion dollar deal to export gas to China for the next 30 years. It is important to note that the Russian Federation has simply switched its reliance upon the European market to reliance upon the Chinese Market.

Gazprom relies heavily on the gas transport network of Ukraine and Poland to reach the large German and Western European gas market. As a result, Gazprom has expanded efforts to build the Nord Stream and the now cancelled South Stream pipeline in order to circumvent the pipelines in Ukraine and Poland if needed. This will allow the Russian Federation to exert political pressure over neighboring nations by allowing Gazprom to restrict gas exports to Eastern Europe without directly affecting the supply of gas to Western Europe.

In 2014, after a state visit, Vladimir Putin announced the construction of the new Turkish Stream pipeline in order to replace the cancelled South Stream Pipeline. However, after recent geopolitical conflicts with Turkey after the downing of a Russian jet and Ankara’s defiant stance towards Moscow, Russian Energy Minister Aleksandr Novak has announced the cancellation of the joint project.

The Outlook

As direct military intervention in today’s society is becoming increasingly costly both in resources and lives, Russia is waging a new type of hybrid warfare, using its export and economical ties to exert it’s geopolitical will. Russia’s fossil fuel empire has given the country great economic and political power, but on the other hand it has become the Russian version of the Dutch illness. The Russian economy has for a long time relied heavily on companies like Gazprom and Rosneft to support its large economy, but has essentially created a lack of diversification in the export of industrialized goods and the ability of its domestic market to meet demands. About 70 percent of Russia’s exports are fossil fuels: this in the end means that the Russian economy, much like that of Venezuela, is tied directly to the fluctuating prices of the fossil fuel market.

Russia heavily relies on Western Europe and the United States to import a variety of goods ranging from pharmaceuticals and electronics to oil extraction technologies and aircraft parts. A lack of a domestic source for these products leaves Russia vulnerable to economic sanctions and too reliant on outside investment to promote growth and innovation in industry. The enactment of sanctions over the Ukrainian conflict and low oil prices have caused the Russian economy to shrink and fall into a recession. The situation is only expected to worsen and become dismal as the price of oil is expected to drop to $30 a barrel. In order to adapt to these measures, Moscow is going through a phase of import substitution, whereby the depreciation of the ruble makes imports more expensive and drives the competitiveness and development of domestic goods as a protectionist measure. However, the process of import substitution requires many years to accomplish as import restrictions need to be kept in place long enough to allow for domestic producers to make a profit on the market. The future of the Russian economy will depend on whether it can successfully achieve import substitution before low oil prices and trade sanctions cripple its economy.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s