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How Gazprom helps the Kremlin put the squeeze on Europe

ONE OF THE joys of reading the business pages is that they tend to deal with the cut and thrust of competition, rather than the cacophony of war. But when it comes to President Vladimir Putin’s assault on the sovereignty of Ukraine, there is a company—the world’s largest gas producer—that is right in the thick of it. Gazprom, majority-owned by the Russian state, has mastered the art of furthering the Kremlin’s interests as well as its own commercial ones. That extends to squeezing European gas supplies until the pips squeak. On February 22nd it received a dose of its own medicine when Germany said it would mothball the Nord Stream 2 (NS2) pipeline owned by Gazprom in retaliation for Russia’s warmongering in Ukraine. That is a blow. It will not stop the company from making mischief—and money—though.

To understand Gazprom, it helps to remember it is a child of the cold war, born from the Soviet Union’s Ministry of the Gas Industry in 1989. Its boss, Alexey Miller, has run it since 2001, the year after Mr Putin took power. The two men are cut from the same cloth. When America imposed sanctions on Mr Miller in 2018, he remarked: “Finally I’ve been included. It means we are doing everything right.” Investors in the West, who buy Gazprom stock for a spectacular dividend yield, lament that it splurges on projects that benefit the state, not shareholders; a plan to build the world’s second-tallest skyscraper in St Petersburg is a case in point. As for mixing politics with commerce, its business model relies on a monopoly on the high-margin export of piped natural gas in order to cross-subsidise cheap gas to Russians. In a land of frozen winters, that is a precious quid pro quo for Mr Putin.

The run-up to the latest Ukraine crisis offers a textbook lesson in how Gazprom serves the government’s interests while feathering its own nest. For years its efforts to circumvent Ukraine, an important transit route for its gas, have led it to construct alternative pipelines into northern and southern Europe that will strengthen its bargaining power when its contract with Ukraine ends in 2024. These efforts have also set European countries that stand to win and lose from the new configurations against each other. Gazprom’s decision to dribble only a bit of surplus gas to Europe as demand there has soared in recent months has a commercial logic—the resulting spike in spot prices has translated into record profits. However, it also sends a message: Europe should not take Gazprom for granted. “It suits their purposes to keep Europeans on their toes,” says Jack Sharples of the Oxford Institute for Energy Studies, a think-tank.

Since the cold war, western European countries have tended to shrug off this nasty side of Gazprom. Instead they have become overdependent on its gas. Germany, which gets about half of the fuel from Russia, is in a particularly invidious position. Some Gazprom hangers-on, like Gerhard Schröder, an ex-chancellor who chairs Nord Stream deserve special ignominy. Former Eastern bloc countries, such as Poland, have no such illusions. They know that as well as extending the hand of friendship, Gazprom can wield the knuckle duster. They are also the most exposed, observes Anna Mikulska, an expert on Russian energy at Rice University’s Baker Institute. The most extreme case is Ukraine, where Gazprom has provided cheap gas and other benefits, then suspended them on and off as punishment for the country’s westward drift. Recently Moldova has suffered similar treatment.

Though a belated recognition of this geopolitical thuggery, Germany’s decision to halt the approval process for NS2, a €9.5bn ($10.7bn) underwater pipeline running from Russia to Germany, came as a surprise. It is a setback for Gazprom. The pipeline was already halted for legal reasons; Gazprom needs it up and running by 2024 to exert maximum leverage over Ukraine when its contract comes up for renewal. Yet on the day of the announcement Gazprom’s share price rose. As Alex Comer of JPMorgan Chase, a bank, says, for the next few years it may make more money without NS2 than with it, because a lack of surplus gas in Europe will keep prices elevated.

The betting is that given how dependent on Gazprom Europe remains, the firm will not suffer that much even if full-on fighting breaks out in Ukraine. Russia’s potential eviction from the SWIFT interbank payments system—which some Western politicians are calling for—would probably not entirely sever Gazprom’s links with its European customers, who still need a way to pay for its energy. An idea suggested by Ms Mikulska, among others, to sideline Gazprom with a “Gaslift” of liquefied natural gas (LNG), a maritime version of the airlift that overcame Russia’s blockade of Berlin in 1948-49, looks like a long shot. The destruction of pipelines on Ukrainian territory would damage the company’s exports but a subsequent rise in prices might well mitigate the problem, especially in a tight market. And though Mr Putin could turn off the taps as part of his war effort, for the time being he may prefer European cash pouring into his coffers.

Put that in your pipeline
Whatever happens, Gazprom’s fealty to the Kremlin is unlikely to be shaken. Being a loyal servant has won it the support it needs from the regime as other presidential pets, such as Rosneft, an oil giant, try to wrestle away its monopoly on piped-gas exports.

The Kremlin-first strategy nevertheless carries risks. The more Gazprom’s customers realise it has Mr Putin’s interests at heart, not theirs, the warier they will be of doing business with it. European countries are already talking up investments in terminals to import LNG and in renewables. As their gas markets mature and shift to alternatives, rising demand will come from China, which already guzzles Gazprom gas and is less bothered by Mr Putin’s belligerence. But even the Communist Party in Beijing has good reason to care about Gazprom’s trustworthiness if it squeezes Europe too hard. The python may yet end up tying itself in knots.

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