Moscow’s decades-old gas ties with Europe lie in ruins

Meticulously crafted over decades as a major revenue stream for the Kremlin, Moscow‘s gas trade with Europe is unlikely to recover from the ravages of military conflict.

After President Vladimir Putin’s “special military operation” in Ukraine began almost a year ago, a combination of Western sanctions and Russia’s decision to cut supplies to Europe drastically reduced the country’s energy exports.

The latest sanctions, including price caps, are likely to disrupt oil trade further but it is easier to find new markets for crude and refined products than for gas.

Russia’s gas trade with Europe has been based on thousands of miles of pipes beginning in Siberia and stretching to Germany and beyond. Until last year, they locked Western buyers into a long-term supply relationship.

“Of course, the loss of the European market is a very serious test for Russia in the gas aspect,” Yury Shafranik, Russian fuel and energy minister from 1993 to 1996, told Reuters.

A former senior manager at Gazprom (GAZP.MM) was more direct.

“The work of hundreds of people, who for decades built the exporting system, now has been flushed down the toilet,” the former manager told Reuters on condition of anonymity for fear of reprisals.

Current employees, however, say it is business as usual.

“Nothing has changed for us. We had a pay rise twice last year,” a Gazprom’s official, who is not authorised to speak to press, told Reuters in Novy Urengoy. The Arctic city is often referred to as Russia’s “gas capital” because it was built to serve the biggest gas fields.

The state gas export giant Gazprom, which has offices there, was formed in the dying days of the Soviet Union in 1989 under the Ministry of Gas Industry, headed by Viktor Chernomyrdin.

“Chernomyrdin never allowed anyone to put his nose into Gazprom. It was a state within a state, and remains so to an extent,” Shafranik said.

Since the military operation began on Feb. 24 last year, less information has been available.

Like many Russian companies, Gazprom stopped disclosing details of its financial results.

According to Reuters’ estimates, based on export fees and export volumes data, Gazprom’s revenues from overseas sales were around $3.4 billion in January down from $6.3 billion in the same period last year.

The figures, combined with forecasts of exports and average gas prices, imply Gazprom’s exporting revenues will almost halve this year, widening the $25 billion budget deficit Russia posted in January.

Already, the company’s natural gas exports last year almost halved to reach a post-Soviet low and the downward trend has continued this year.

European Commission President Ursula von der Leyen estimated Russia cut 80% of gas supplies to the EU in the eight months after the conflict began in Ukraine.

As a result, Russia supplied only around 7.5% of western Europe’s gas needs by the end of last year, compared with around 40% in 2021.

Before the conflict, Russia had been confident of selling more to Europe, not less.

Elena Burmistrova, the head of Gazprom’s exporting unit, told an industry event in Vienna in 2019 the company’s record-high exports outside Soviet Union of more than 200 billion cubic metres (bcm) achieved in 2018 were the “new reality”.