Consequences of war in Ukraine shake up Russian gas giant
Russia's Gazprom is suffering billions in losses and has to lay off more than a third of its employees. The loss of the European market is proving to be a sensitive loss for the once-mighty state-owned gas company. The plan for a massive round of lay-offs leaked through Russian Telegram channels early this week and was later confirmed by Gazprom. Management is about to lay off more than 1,600 of the 4,100 employees at its headquarters, which towers almost half a kilometre above Tsar Peter the Great's low-rise building in St Petersburg. It would be the biggest round of lay-offs in Gazprom's existence. The bad news about the company is piling up. In 2022, Gazprom's hugely expensive Nord Stream pipeline to Western Europe was blown up. In 2023, the company made its first loss in over 20 years: a whopping €6.7 billion. This year began with the end of decades of gas exports to Europe via pipelines through Ukraine.
The company with hundreds of thousands of employees across Russia is in trouble, mainly because a large part of the European market has been lost. Before the invasion, in the era when European government leaders teamed up with Kremlin leaders to commission gas pipelines that bypassed Ukraine, and when Gazprom was the main sponsor of the Champions League - 45 per cent of EU gas imports came from Russia. By 2023, that had dropped to 15 per cent. The flow of gas through pipelines in particular has declined, which is disastrous for the company that has a monopoly over Russian gas exports by pipeline. Gazprom itself initially shut the Nord Stream pipelines in 2022, but said it would reopen them if European countries withdrew sanctions. This allowed the company to keep political pressure on Europe, one of Gazprom's main tasks. But explosions in the pipes a few weeks later were the unexpected death knell for Gazprom's multi-billion-dollar pipelines to Germany.
For now, Gazprom still has limited gas exports left to the EU. Turkstream, a Russian pipeline to reach Europe via Turkey, allows Gazprom to supply Hungary with gas. But even that pipeline is vulnerable. According to Russia, Ukraine carried out a failed drone attack on a compressor station at Turkstream early this week. Russia also depends on transit country Bulgaria, and that country recently announced it was reconsidering transit due to US sanctions against Gazprom. For Russia's flagship economy, the last remaining route to Europe is by sea: liquefied natural gas (lng) is still welcome at European ports. Russian tankers even exported a record amount of Russian lng to the EU last year. But Gazprom does not have a monopoly over lng exports in Russia and faces a shortage of tankers and terminals for lng. Moreover, Brussels wants to get rid of all Russian fossil fuels by 2027 10 EU member states are lobbying for a ban on Russian lng imports.
The outlook for Gazprom is downright poor, according to a report a research firm conducted last year on behalf of Gazprom's management. Western sanctions against the Russian energy sector are simply leading to ‘a contraction of export volumes’, the report said. Recovery, Gazprom need not expect ‘any earlier than 2035’. The company is trying to shift gas sales to other customers. This is not going smoothly with a product that requires thousands of kilometres of pipelines. Sales to China have increased in recent years with the construction of the Power of Siberia in 2019, the first pipeline from Russia to China. A yet-to-be-constructed, second pipeline should increase those exports from 2030. But even then, the volume cannot match that of the old gas flows to Europe. Moreover, China has alternative suppliers, so it negotiates a low price. Instead of dictating, Gazprom is now forced to hold up its hand.