The politics of Moscow’s energy industry

Certainly in recent weeks there has been considerable upheaval, and most of it generated by Russian actions.

It faces ongoing western sanctions as a result of the Ukrainian crisis, the collapse in its plan to move business to China because of its unforeseen economic slowdown and to make matters worse, a return to low oil prices after Russia and a group of western powers successfully negotiated a nuclear deal with Iran off last month. Unfortunately for a country that relies on revenues from oil and gas by as much as 50%, $55pb of Brent is not good news.

Domestically there are warnings that something has to change and fast. The Higher School of Economics in Moscow estimates as much as 25% of Russia’s regions re in default, with local authorities struggling to pay for welfare costs, rising inflation and salaries.

The country’s state owned gas firm Gazprom has recorded a 19% fall in output in June this year compared to the same time last year, bringing levels to their lowest ever. A report from Sberbank is dire: Russia’s oil and gas reserve funds are likely to be obliterated next year as Gazprom’s revenues fall by almost a third to $106bn. This is the company which provides 10% of Russia’s GDP. Add to that the 4.9% contraction endured by the economy thanks to the EU and US.

When the west bit back over the conflict in Ukraine, they directly targeted the oil and gas companies using sectoral sanctions. The ante was upped after MH-17 which was suspected of having been brought down by Russian supplied rebels in Ukraine. Rosneft and Novatek were both sanctioned. Forbes illustrates the impact succinctly saying that, “Between July 16 and March 3 2015 Rosneft shares rose 9.5% and Novatek shares rose 27.56%. That’s in rubles. The ruble in that period lost 79.7% of its value against the dollar.”

President Putin naturally didn’t take it lying down. He moved Gazprom’s sights east and signed a series of multibillion dollar deals with China. The 30 year contract would have seen Russia develop a Siberian pipeline known as the East Route to supply 38bn cubic meters of natural gas a year to China by 2018.

But then, as Precise Consultants previously reported, China’s economy started to slow. Fears of a financial meltdown abounded when its stock market collapsed in June. It has dissipated for now but the pipeline plans have been put on the shelf indefinitely. It has significantly impacted on Russia’s ambitious bid to extricate itself from the European market.

Back then to the 300 plus moves for an energy grandmaster, and Russia’s involvement in the P5+1. When you look into it, it’s a win-win for Putin. By working to bring about a deal with Iran Russia took a big hit when oil prices dropped – but it did open the door to future investment in Iranian projects and technological advances. By going behind closed doors with the US and other EU powers, Putin risked domestic wrath at a time when tempers are short – but he managed to appease the US which could lead to the easing of sanctions. Following the deal the Kremlin released a statement informing the world that President Obama had thanked Putin for his help – emphasising that “the role of Russian-US dialogue (had) ensured security and stability in the world…(Putin and Obama) expressed a mutual intention to continue joint work in …certain other current international matters.”

With $185bn of projects likely to be offered by Iran, according to the country’s deputy oil minister Hossein Zamaninia, the US was in line for considerable gain. Putin isn’t renowned for his humanitarian work, and with the wolves close to his door, you can bet he will be keen to ensure he gets his share of the deal.