Analysis says Gazprom could lose money on gas deal with China

(Reuters; July 28) - At face value, Russia’s $400 billion deal to supply gas to China, via state-controlled Gazprom, sounds like a coup for Moscow. But according to recent analysis, the deal is strongly tilted in China’s favor. Gazprom will be lucky to break even and may even lose substantial amounts of money.While the deal may not make economic sense for Gazprom, it does fit with Russia’s broader geopolitical “tilt to Asia” strategy, and represents “a desperate geopolitical gambit trumping all economic rationale,” according to analysis by the Chatham House, a U.K.-based policy institute.

In fact, the deal with China is just one example of how Gazprom operates more as an instrument of Russian President Vladimir Putin’s political ambitions and Russian state power than as a rational profit-maximizing corporation. While Gazprom trades on both Russian and American stock exchanges, it is majority-owned by the government and takes its marching orders directly from the Kremlin. Gazprom is first and foremost a tool of Russian foreign policy, which Putin is not shy about using for Russia’s interests.

And while the Russian government frequently promises Gazprom that it will be allowed to raise the price of domestic gas to a level sufficient to at least cover costs, Gazprom continues to lose large amounts of money on domestic sales. Its export sales, particularly pipeline gas deliveries to Europe, are its profit center. While a below-cost pricing strategy may be irrational by normal corporate standards, the Kremlin remains unwilling to risk the political and social instability that higher domestic gas could cause.