Energy Giants Are Putin's Safety Net

"Russia's financial system was under siege on Monday, but the country is still pumping and exporting vast amounts of oil and natural gas to the rest of the world, delivering cash in the face of Western sanctions and a financial cushion for President Vladimir Putin. At the heart of it lie two London-listed energy giants.

Gas exporter Gazprom PJSC and oil giant Rosneft PJSC fund a large chunk of the Russian state and are among the country's largest employers. Neither has been targeted by major Western sanctions, a sign of their importance in the global energy markets. Rosneft says it is Russia's biggest taxpayer, contributing a fifth of budget revenue. Gazprom paid 2.3 trillion rubles, or $27.43 billion, to Russia's budget in 2020, the company said. That amounts to around 6% of budget revenue, based on International Monetary Fund data.

The two companies' shares plunged Monday amid a wider Russian market rout triggered by Western sanctions imposed on Moscow in recent days. The ruble tumbled and Russia's central bank raised interest rates sharply. London-listed shares of Gazprom fell 53% and Rosneft shed over 42%.

BP PLC on Sunday said it would exit its nearly 20% stake in Rosneft following pressure from the British government, which had cited the Russian company's links to the Kremlin and accused it of fueling the advance into Ukraine. On Monday, Shell PLC said it would exit its joint ventures with Gazprom, citing Russia's invasion.

In Europe, "we are at war and we need to consider those companies as an extension of the Russian state," said Thierry Bros, an energy expert and professor at Sciences Po Paris.

Gazprom and Rosneft didn't respond to requests to comment.

A disruption in Russia's energy sales would have widespread repercussions for the global economy, from hitting European businesses and consumers to hurting customers at the pump in the U.S. The European Union gets around 40% of its gas imports and more than one-quarter of its oil from Russia.

The Russian government and companies controlled by it own more than 50% of shares in Gazprom. Gazprom was created in 1989 when the Soviet Union's Ministry of the Gas Industry was converted to a corporation, retaining most of its assets.

It is run by Alexei Miller, a close ally of Mr. Putin. When he was personally hit by U.S. sanctions in 2018, Mr. Miller said, "Finally, I've been included. So we are doing everything right."

Last year, when gas prices soared in Europe because of low inventories and a surge in demand because of the economic recovery from the pandemic, European officials said Gazprom was deliberately not selling extra gas on the short-term spot market.

European lawmakers called for a probe into whether this amounted to market manipulation. Gazprom also operates Nord Stream 2, the now-frozen pipeline project to Germany that would have enabled Russia to circumvent Ukraine's transit system.

The company and the Kremlin have maintained that they have been meeting their contractual obligations. Gazprom on Monday said it continues regular supply to Europe via pipelines in Ukraine, Russian state media reported.

Europe's dependence on Russian oil and gas is mirrored by Russia's reliance on the continent as its biggest energy customer.

But Gazprom has sought to pivot away from Europe in recent years. As part of the Kremlin's bid for deeper relations with China, Gazprom began delivering natural gas to China through the $55 billion Power of Siberia pipeline in 2019.

Beyond gas, the company sponsors various sports teams in Russia and abroad. German soccer club Schalke 04 on Thursday said it would remove the company's logo from its jerseys following Russia's invasion of Ukraine.

Moscow has long tried to increase its geopolitical reach through Rosneft. The company has pushed into countries such as Iraq, China, Cuba, Vietnam and Venezuela. The Trump administration in 2020 blacklisted Rosneft subsidiaries for allegedly helping Venezuela sell its oil in violation of U.S. sanctions. U.S. officials accused Rosneft of using dangerous ship-to-ship transfers on the high seas in an effort to hide its actions, with their geolocation transponders turned off to evade detection.

Rosneft has denied breaking U.S. sanctions against Venezuela, despite calling them illegal, and said it was active in the country long before their imposition. Later, the company said it would halt all activities in Venezuela and sell all its assets related to activities in the country." [1]

 

Since Ukraine is ending up pro-Russian now, Russia does not need Nord Stream 2 anymore. Germans could use the pipeline to grow chickens there paying some small fee to the Gazprom.

 

1. The Ukraine Crisis: Energy Giants Are Putin's Safety Net
Kantchev, Georgi. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 01 Mar 2022: A.11.