ECONOMY
Gazprom’s Road From Cash Cow to ‘Budget Parasite’
June 11, 2024
Tatiana Rybakova
Journalist and writer
Journalist Tatiana Rybakova explains how the Russian gas monopoly recorded its first financial loss since 1999 and why, in the current conditions, that was all but inevitable.
After the government issued a directive on May 18 that Gazprom would not pay dividends, later approved by the company’s board of directors, Gazprom shares fell more than 20% and continue to fall.
The reason why dividends will not be paid out is clear: according to the 2023 IFRS earnings released on May 2, for the first time since 1999 Gazprom reported a loss for the year, at RUB 629.1 billion, versus a gain of RUB 1.23 trillion for 2022.
The reason why dividends will not be paid out is clear: according to the 2023 IFRS earnings released on May 2, for the first time since 1999 Gazprom reported a loss for the year, at RUB 629.1 billion, versus a gain of RUB 1.23 trillion for 2022.
Viktor Chernomyrdin (1938-2010), Russian PM in 1992-98. As the minister of the Soviet gas industry, he became the first chairman of Gazprom. Source: Wiki Commons
No matter how hard the state-controlled media and analysts tried to explain away the loss, citing the peculiarities of international accounting standards, the decision not to pay dividends made all their effort meaningless. Even though the state really needs money right now (according to a preliminary estimate by the Ministry of Finance, the federal budget in January-April 2024 ran a deficit of RUB 1.484 trillion, or 0.8% of GDP), it cannot take it from Gazprom, in which it has a stake of more than 50%.
How did a company that paid over RUB 2 trillion into the budget before the war, a “national treasure,” turn into a loss-making asset on the verge of requiring state support?
This development does not seem so unexpected if you consider the company’s modern history. This naturally happens to companies that are used not to maximize profits and public welfare, but to meet the needs – commercial and political – of elites.
Career killer
As a single concern that united all parts of gas production, sales and distribution, Gazprom was created back in 1989, following the example of Italy’s Eni. The head of the concern was Viktor Chernomyrdin, then minister of the Soviet gas industry.
In 1993, during voucher privatization, Gazprom was transformed into a joint-stock company, headed by Chernomyrdin’s first deputy, Rem Vyakhirev.
How did a company that paid over RUB 2 trillion into the budget before the war, a “national treasure,” turn into a loss-making asset on the verge of requiring state support?
This development does not seem so unexpected if you consider the company’s modern history. This naturally happens to companies that are used not to maximize profits and public welfare, but to meet the needs – commercial and political – of elites.
Career killer
As a single concern that united all parts of gas production, sales and distribution, Gazprom was created back in 1989, following the example of Italy’s Eni. The head of the concern was Viktor Chernomyrdin, then minister of the Soviet gas industry.
In 1993, during voucher privatization, Gazprom was transformed into a joint-stock company, headed by Chernomyrdin’s first deputy, Rem Vyakhirev.
“Since then, many attempts have been made to split up the resulting giant or reduce the appetites of its managers, but each time things ended badly for the people who went up against Gazprom.”
The first attempt to split the company up was in December 1992, three months before its official registration as a joint-stock company. In November, Leonid Bochin took over the antitrust regulator, created two years earlier, which found that the concern was a monopolist in the production and supply of natural gas (with a market share of 95%), sulfur (about 100%) and compressed gas (100%).
A presidential decree was drafted that would allow Gazprom to maintain a monopoly only on the export, transport and distribution of gas, with everything else left to competing entities. But Gazprom made a fuss about the “inadmissibility of the collapse of the single [gas] complex,” and the company was recognized as a natural monopoly. Moreover, since 1993 the state, as the main shareholder, began to support the company, which was an important exporter, as well.
A significant factor in this and subsequent battles between Gazprom and antitrust authorities was the argument that exports to Europe should not be disrupted. The antitrust regulator fought with Gazprom for several more years, sometimes allied with other ministries and MPs, but Vyakhirev, with the support of Chernomyrdin, successfully warded off the attacks.
The final victory over the persistent antitrust authorities came in 1997, when Bochin was dismissed (malicious rumors have it that a big banquet was held at Gazprom the same day). But the gas monopoly’s opponents had won some victories: in 1995, state support for Gazprom was canceled, while excise taxes on gas were raised from 15% to 25%.
In 1996, Gazprom was deprived of its own so-called “stabilization fund,” where the monopoly had been stashing some of its revenues. After this, the most infamous “gas war” started, where Gazprom began to accumulate debt to the state, and when that reached almost RUB 10 trillion, the tax police showed up at the company’s divisions.
There were two results: the company stopped accumulating debt, but it also obtained permission to sell 9% of its stock on foreign exchanges as ADRs, supposedly to cover losses.
Boris Nemtsov was the next to fall in the fight against Gazprom. In April 1997, when Vyakhirev again alleged that enemies wanted to split up Gazprom, Nemtsov and Alfred Koch made public a secret trust agreement according to which Vyakhirev had almost 40% of Gazprom shares in trust, the conditions being such that Vyakhirev had the right to acquire about 30% of the company.
A scandal broke out. President Boris Yeltsin, Nemtsov recalled, demanded that Vyakhirev return the shares to the state. “Vyakhirev told me that he would never forget that conversation,” Nemtsov recalled. And he did not: by the end of 1997, Nemtsov, who was Yeltsin’s favorite and seen as his successor, lost his patron’s favor.
True, it was not Vyakhirev that played the decisive role in that decision (the privatization of Svyazinvest did), but the Gazprom case also made a contribution, and a new trust agreement with Vyakhirev was signed only in March 1998. By that time, the conflict between the head of the gas monopoly and Yeltsin’s beloved deputy prime minister had reached the point of personal hostility.
After the 1998 default, the entire government of reformers was dismissed, and Nemtsov’s career ended. The end of Vyakhirev’s career came in 2001, when the new president, Vladimir Putin, replaced him with his St Petersburg acquaintance Alexei Miller.
‘Putin’s wallet’ and the ‘energy stick’
From that moment on, Gazprom went from the personal fiefdom of its managers to a cash cow for the budget and the ruling elite. “Gazprom has part of its shares directly under the control of the Russian state through Rosimushchestvo, but about 12% of these shares are controlled by a company called Rosneftegaz, which receives dividends on the stake, but where it spends [the dividends] is a secret. Its activities are not disclosed because it is the president’s personal wallet,” says Mikhail Krutikhin, a partner at the independent consulting agency RusEnergy.
Meanwhile, the budget was not doing bad either: Krutikhin estimates the contribution of Gazprom’s export earnings to the budget before the war at about 7%. This, of course, was driven by the rise in oil prices and the terms of long-term foreign contracts concluded by the gas giant.
In contracts Gazprom always tied the price for gas to oil. In addition, countries were contractually barred from reselling the gas supplied to them without Gazprom’s permission.
A presidential decree was drafted that would allow Gazprom to maintain a monopoly only on the export, transport and distribution of gas, with everything else left to competing entities. But Gazprom made a fuss about the “inadmissibility of the collapse of the single [gas] complex,” and the company was recognized as a natural monopoly. Moreover, since 1993 the state, as the main shareholder, began to support the company, which was an important exporter, as well.
A significant factor in this and subsequent battles between Gazprom and antitrust authorities was the argument that exports to Europe should not be disrupted. The antitrust regulator fought with Gazprom for several more years, sometimes allied with other ministries and MPs, but Vyakhirev, with the support of Chernomyrdin, successfully warded off the attacks.
The final victory over the persistent antitrust authorities came in 1997, when Bochin was dismissed (malicious rumors have it that a big banquet was held at Gazprom the same day). But the gas monopoly’s opponents had won some victories: in 1995, state support for Gazprom was canceled, while excise taxes on gas were raised from 15% to 25%.
In 1996, Gazprom was deprived of its own so-called “stabilization fund,” where the monopoly had been stashing some of its revenues. After this, the most infamous “gas war” started, where Gazprom began to accumulate debt to the state, and when that reached almost RUB 10 trillion, the tax police showed up at the company’s divisions.
There were two results: the company stopped accumulating debt, but it also obtained permission to sell 9% of its stock on foreign exchanges as ADRs, supposedly to cover losses.
Boris Nemtsov was the next to fall in the fight against Gazprom. In April 1997, when Vyakhirev again alleged that enemies wanted to split up Gazprom, Nemtsov and Alfred Koch made public a secret trust agreement according to which Vyakhirev had almost 40% of Gazprom shares in trust, the conditions being such that Vyakhirev had the right to acquire about 30% of the company.
A scandal broke out. President Boris Yeltsin, Nemtsov recalled, demanded that Vyakhirev return the shares to the state. “Vyakhirev told me that he would never forget that conversation,” Nemtsov recalled. And he did not: by the end of 1997, Nemtsov, who was Yeltsin’s favorite and seen as his successor, lost his patron’s favor.
True, it was not Vyakhirev that played the decisive role in that decision (the privatization of Svyazinvest did), but the Gazprom case also made a contribution, and a new trust agreement with Vyakhirev was signed only in March 1998. By that time, the conflict between the head of the gas monopoly and Yeltsin’s beloved deputy prime minister had reached the point of personal hostility.
After the 1998 default, the entire government of reformers was dismissed, and Nemtsov’s career ended. The end of Vyakhirev’s career came in 2001, when the new president, Vladimir Putin, replaced him with his St Petersburg acquaintance Alexei Miller.
‘Putin’s wallet’ and the ‘energy stick’
From that moment on, Gazprom went from the personal fiefdom of its managers to a cash cow for the budget and the ruling elite. “Gazprom has part of its shares directly under the control of the Russian state through Rosimushchestvo, but about 12% of these shares are controlled by a company called Rosneftegaz, which receives dividends on the stake, but where it spends [the dividends] is a secret. Its activities are not disclosed because it is the president’s personal wallet,” says Mikhail Krutikhin, a partner at the independent consulting agency RusEnergy.
Meanwhile, the budget was not doing bad either: Krutikhin estimates the contribution of Gazprom’s export earnings to the budget before the war at about 7%. This, of course, was driven by the rise in oil prices and the terms of long-term foreign contracts concluded by the gas giant.
In contracts Gazprom always tied the price for gas to oil. In addition, countries were contractually barred from reselling the gas supplied to them without Gazprom’s permission.
“Thus, by skillfully manipulating the terms of contracts, Gazprom managed to turn the gas business into a potent political weapon.”
Lakhta Center, which houses the headquarters of Gazprom. St Petersburg. Source: Wiki Commons
“The Kremlin’s ‘energy stick,’” as Gazprom began to be called by the mid-2000s, was used primarily against post-Soviet countries. Ukraine, through which pipelines to Europe pass, found itself on the receiving end multiple times. As a result, when gas was cut off to Ukraine in 2006 and 2009, Europe essentially found itself hostage to Russian policy. This was ostensibly why European countries greenlighted the construction of pipelines bypassing Ukraine: Nord Stream 1 and Nord Stream 2.
Defeat
There is a science fiction novel about a “ring of invincibility” that military leaders, overconfident, removed before the decisive battle – in the end, they were defeated. Something similar happened with Gazprom in 2022.
Having launched his latest aggression against Ukraine, Putin decided that he could force Europe to accept the invasion if its gas was turned off (and Miller, the head of Gazprom, unquestioningly carried out every order of the president). But after the first, difficult winter, Europe not only dealt with gas shortages but also acquired new suppliers. Norway has become the largest supplier of gas to the EU, while the US is now the world’s largest exporter of liquefied natural gas (LNG).
Gazprom still does not know where to put the 20% of its gas that had previously gone to Europe. And it is taking financial losses.
“Gazprom has gone from a contributor to the state budget to a parasite on it,” says Krutikhin. Despite the losses in the gas segment, the monopoly continues to spend money on large projects, Krutikhin explained. “This is, first and foremost, the construction of a gas trunkline from Siberia to Khabarovsk, where the pipeline is to be connected with the route from Sakha-Yakutia. The second major project is the construction of a gas chemical and gas liquefaction plant in Ust-Luga on the Baltic Sea.”
However, the port in Ust-Luga is shallow, which rules out the use of big LNG carriers, while the EU is now discussing sanctions not only on the supply of Russian LNG to the EU, but also on its transfer to other ships for countries outside the EU. In addition, the equipment for the project was imported, and finding a domestic replacement in the near future does not look likely.
Nevertheless, for the Ust-Luga project Gazprom has already received more than RUB 300 billion from the National Wealth Fund (NWF) this year. Krutikhin believes that Gazprom will basically fund future projects from the Russian budget, “as it does not have enough money to finance them from its investment program.”
Economist Sergei Petrov (he preferred to remain anonymous) notes that this is a serious issue for state finances: though the contribution of the gas business to federal budget revenues is not so big, the regional budgets of gas producing regions may suffer much more seriously, to the point that they, as net contributors to the federal budget, may turn into net recipients.
“For Gazprom itself, the situation is still moderately negative – we should understand that some of its losses come from idiotic spending. It would be enough to get rid of assets that the company does not need,” says Petrov.
Defeat
There is a science fiction novel about a “ring of invincibility” that military leaders, overconfident, removed before the decisive battle – in the end, they were defeated. Something similar happened with Gazprom in 2022.
Having launched his latest aggression against Ukraine, Putin decided that he could force Europe to accept the invasion if its gas was turned off (and Miller, the head of Gazprom, unquestioningly carried out every order of the president). But after the first, difficult winter, Europe not only dealt with gas shortages but also acquired new suppliers. Norway has become the largest supplier of gas to the EU, while the US is now the world’s largest exporter of liquefied natural gas (LNG).
Gazprom still does not know where to put the 20% of its gas that had previously gone to Europe. And it is taking financial losses.
“Gazprom has gone from a contributor to the state budget to a parasite on it,” says Krutikhin. Despite the losses in the gas segment, the monopoly continues to spend money on large projects, Krutikhin explained. “This is, first and foremost, the construction of a gas trunkline from Siberia to Khabarovsk, where the pipeline is to be connected with the route from Sakha-Yakutia. The second major project is the construction of a gas chemical and gas liquefaction plant in Ust-Luga on the Baltic Sea.”
However, the port in Ust-Luga is shallow, which rules out the use of big LNG carriers, while the EU is now discussing sanctions not only on the supply of Russian LNG to the EU, but also on its transfer to other ships for countries outside the EU. In addition, the equipment for the project was imported, and finding a domestic replacement in the near future does not look likely.
Nevertheless, for the Ust-Luga project Gazprom has already received more than RUB 300 billion from the National Wealth Fund (NWF) this year. Krutikhin believes that Gazprom will basically fund future projects from the Russian budget, “as it does not have enough money to finance them from its investment program.”
Economist Sergei Petrov (he preferred to remain anonymous) notes that this is a serious issue for state finances: though the contribution of the gas business to federal budget revenues is not so big, the regional budgets of gas producing regions may suffer much more seriously, to the point that they, as net contributors to the federal budget, may turn into net recipients.
“For Gazprom itself, the situation is still moderately negative – we should understand that some of its losses come from idiotic spending. It would be enough to get rid of assets that the company does not need,” says Petrov.
“Indeed, Gazprom today owns many noncore businesses, including a media company, but this is part of its ‘social commitment,’ i.e., its contribution to maintaining the current regime.”
Power of Siberia, a Gazprom-operated pipeline in Eastern Siberia that transports natural gas from Yakutia to Primorsky Krai and China. The photo shows the 2014 ceremony to mark the joining of Power of Siberia’s first section. Source: Wiki Commons
Petrov sees the Power of Siberia 2 project to build another gas pipeline to China, this time through Mongolia, as one of the main negative factors for Gazprom’s earnings: “this idea is unrealistic for two reasons. Firstly, China is categorically against transit through third countries. Secondly, China’s ‘gas balance’ is now set for many years to come and [the country] does not really need this gas, even at an insane discount.”
Petrov also argues that just in technical terms the project would not be very profitable: gas is pumped through pipes by turbines that themselves run on gas. And whereas, when pumping from Urengoy (Siberia) to Germany, this consumes about 25% of the pumped gas, the route to China is even longer, and if it bypasses Mongolia, it will become completely unprofitable.
Today, China receives gas through four pipelines from Turkmenistan and one from Myanmar, as well as at 13 LNG receiving stations (recall that LNG can be purchased from suppliers all over the world; China buys mainly from Qatar). “That’s why [Russia and China] barely managed to conclude Power of Siberia after 10 years of negotiations, while we have not been able to sell them on a second branch for a whole 18 years,” says Petrov (see economist Vladislav Inozemtsev in Russia.Post about Russia-China energy relations here).
Krutikhin points out that the Russian delegation during Putin’s recent visit to China did not include the head of Gazprom, although the top executives of Novatek and Rosneft went.
If Rosneftegaz is truly “Putin’s wallet,” then Putin himself should be hurting from the current situation. “War requires money, all the biggest companies are paying now. Gazprom is through an increased tax of RUB 50 billion monthly – and Putin is paying, too,” Krutikhin laughs.
At the same time, Petrov notes, Gazprom does not want to give up expensive projects. In his view, the reason is that its contractors receive huge kickbacks. “When Nord Stream 2 was built, a small section of it was built by the Germans. And it turned out that their cost of construction was six times lower than for Gazprom,” recalls Petrov.
Considering that the cost of German construction is at least no less than that in Russia, on these projects Gazprom contractors could siphon off, according to Petrov’s estimates, more than 80%. The fact that the construction of pipelines has turned into a “feeding trough” for contractors affiliated with Gazprom was mentioned in a scandalous report by Sberbank CIB analysts in 2018, after which its authors were fired. Apparently, nothing has changed since then, and Putin is unable or unwilling to tell his subordinates to cut it out.
Petrov also argues that just in technical terms the project would not be very profitable: gas is pumped through pipes by turbines that themselves run on gas. And whereas, when pumping from Urengoy (Siberia) to Germany, this consumes about 25% of the pumped gas, the route to China is even longer, and if it bypasses Mongolia, it will become completely unprofitable.
Today, China receives gas through four pipelines from Turkmenistan and one from Myanmar, as well as at 13 LNG receiving stations (recall that LNG can be purchased from suppliers all over the world; China buys mainly from Qatar). “That’s why [Russia and China] barely managed to conclude Power of Siberia after 10 years of negotiations, while we have not been able to sell them on a second branch for a whole 18 years,” says Petrov (see economist Vladislav Inozemtsev in Russia.Post about Russia-China energy relations here).
Krutikhin points out that the Russian delegation during Putin’s recent visit to China did not include the head of Gazprom, although the top executives of Novatek and Rosneft went.
If Rosneftegaz is truly “Putin’s wallet,” then Putin himself should be hurting from the current situation. “War requires money, all the biggest companies are paying now. Gazprom is through an increased tax of RUB 50 billion monthly – and Putin is paying, too,” Krutikhin laughs.
At the same time, Petrov notes, Gazprom does not want to give up expensive projects. In his view, the reason is that its contractors receive huge kickbacks. “When Nord Stream 2 was built, a small section of it was built by the Germans. And it turned out that their cost of construction was six times lower than for Gazprom,” recalls Petrov.
Considering that the cost of German construction is at least no less than that in Russia, on these projects Gazprom contractors could siphon off, according to Petrov’s estimates, more than 80%. The fact that the construction of pipelines has turned into a “feeding trough” for contractors affiliated with Gazprom was mentioned in a scandalous report by Sberbank CIB analysts in 2018, after which its authors were fired. Apparently, nothing has changed since then, and Putin is unable or unwilling to tell his subordinates to cut it out.
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