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Putin's Energy Weapon Cuts Two Ways

When Russia shut off gas flows to Ukraine earlier this summer, it played one of its best cards and put tremendous pressure on Kiev. But as we’re finding out now, it also put tremendous strain on Russian gas company Gazprom, which reported a 41 percent loss in first quarter net profits, largely as a result of the goings-on in Ukraine. The FT reports:

Gazprom said the hit was largely due to a Rbs71bn rise in operating expenses as a result of a provision for “doubtful trade accounts” receivable from NAK Naftogaz Ukraine, the country’s state-run gas supplier. […]

The pricing dispute with Ukraine began when Russia cut the gas price paid by Ukraine by a third for January-March following Kiev’s decision to withdraw from a trade deal with the EU…Gazprom subsequently raised prices for Ukraine by 80 per cent from April after the pro-Moscow president Viktor Yanukovich fled the country amid street protests in Kiev.

Things don’t look like they’ll be getting better anytime soon, which should worry all involved—Ukraine, Russia, and indeed the rest of Europe, which relies on Gazprom for roughly a third of its gas, some 30 percent of which transits Ukraine. The impact on Europe and Ukraine has been well-documented, but today’s news reveals the shut-off to be, at best, a kind of pyrrhic victory for Putin.

Consider too that Moscow’s budget relies heavily on the sales of hydrocarbons. In fact, Russia needs a price of oil somewhere near $110 a barrel to balance that budget, and with the current price of Brent crude currently hovering around $98 a barrel—a two year low—Putin must be feeling the pinch.

If there’s any winner out of all of this, it may be China, which recently signed a somewhat favorable gas deal with Russia after a decade of wrangling over price. The rallying cry in Europe right now is to diversify away from Russian energy supplies; Moscow may be forced to look east for customers, and Beijing will hope to take advantage of any desperation it sees in Putin.

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  • Duperray

    Please escape from short term details ($barrel drop 10%…). The key factor that ought to be extracted from all this mess is the apparent extreme speed at which Russia has able to develop cooperation with China within weeks. This speed cannot come from emergency but from a long duration preparation time (for several large projects) which were “on hold” for ever just because someone did’nt want to flip towards China, rather prefering to favor cooperation with West. This dream is now over:
    From present tireless restriction policy, Russia flip the page and irreversibly opens to China and some others. CSO is on steam now up to become a NATO mirror. Pakistan, Iran are asking to join too…. Why?
    Good job: US succeeded to merge all these into a half Humanity military block against them. This block has no reason to help West fight and contain ISIS (and possible hate successors): They may even provide them with money and weapons because Russia-China are immune to islamic terror.
    I don’t know what will happen but definitively, the world has changed and I am not sure it’s towards a safer one for West..

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