Gazprom, the natural gas company controlled by the Russian state, is in crisis. It is likely to fall victim to the shale gas revolution that is under way across the US. The shale gas revolution will probably have telling consequences for Russian state capitalism and President Vladimir Putin’s power.
This crisis erupted suddenly. With its surge in shale gas production the US has become self-sufficient in natural gas. It has overtaken Russia as the biggest natural gas producer. Crucially, US natural gas is cheap. Domestic US natural gas prices are only a quarter of Gazprom’s oil-linked eastern European prices. Such large price differentials cannot possibly last for long.
Curiously, in 2011 Gazprom was formally the most profitable company in the world with purported net profits of $46bn, but these profits were hardly real. Investment analysts opined that no less than $40bn disappeared through inefficiency or corruption. Gazprom’s cash flow was barely positive.
In their 2010 booklet Putin and Gazprom , Boris Nemtsov and Vladimir Milov, the opposition politicians, detailed how assets were being stripped from Gazprom through large kickbacks on pipeline construction and cheap sales of financial and media subsidiaries to Putin cronies. Since shareholders have realised that only their dividend yield is material, Gazprom’s market value has plummeted by two-thirds from $365bn in May 2008 to $120bn today.
Gazprom’s demise looks likely. With its demise, Russia’s revenues would dwindle. Mr Putin‘s model of state capitalism would suffer a devastating blow from Gazprom’s fall. If not even Gazprom is viable, which Russian state company is? Such an insight could give market economic reforms new impetus. After all, Russia just privatised $5.2bn of shares in Sberbank, the state savings bank.
In his first comments on the European Commission case against Gazprom in Vladivostok on September 9, Mr Putin revealed the level of his incomprehension of market economics. He said the “EU subsidises the economies of eastern European countries. Now it seems that someone in the EU has decided to shift part of the burden, some of the subsidies, to us”.
Contrary to the evidence, he said Gazprom’s prices were market-oriented, adding that “we have had certain pricing principles for decades and they are written in long-term contracts. No one ever questioned these principles”.
Well, the European Commission does question them. The longer Mr Putin denies reality, the deeper Gazprom’s crisis will grow.
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Of course Vladimir Putin will fight until the bitter end in order to stay in power. But there is no way he can save his failed money machine, Gazprom. And there will be no Putin without Gazprom. The day when Putin shares the fate of all other corrupted dictators could be beginning of Russia´s progress towards real democracy, for the benefit its long suffering people.
As we have said before, this will be another huge benefit of the American led shale gas revolution.