66 Business The Economist February 26th 2022
Putin’spython
T
he businesspages of newspapers tend to deal with the cut and
thrust of competition, rather than the cacophony of war. But
when it comes to Vladimir Putin’s assault on the sovereignty of
Ukraine, there is a company—the world’s largest gas producer—
that is right in the thick of it. Gazprom, majorityowned by the
Russian state, has mastered the art of furthering the Kremlin’s in
terests as well as its own commercial ones. That extends to
squeezing European gas supplies until the pips squeak. On Febru
ary 22nd it received a dose of its own medicine when Germany
said it would mothball the Nord Stream 2 (ns2) pipeline owned by
Gazprom in retaliation for Russia’s warmongering in Ukraine.
Two days later Russia attacked Ukraine. Even those two events
may not stop the firm from making mischief—and money.
To understand Gazprom, it helps to remember it is a child of
the cold war, born from the Soviet Union’s Ministry of the Gas In
dustry in 1989. Its boss, Alexey Miller, has run it since 2001, the
year after Mr Putin took power. The two men are cut from the same
cloth. When America imposed sanctions on Mr Miller in 2018, he
remarked: “Finally I’ve been included. It means we are doing
everything right.” Investors in the West, who buy Gazprom stock
for a spectacular dividend yield, lament that it splurges on pro
jects that benefit the state, not shareholders; a plan to build the
world’s secondtallest skyscraper in St Petersburg is a case in
point. As for mixing politics with commerce, its business model
relies on a monopoly on the highmargin export of piped natural
gas in order to crosssubsidise cheap gas to Russians. In a land of
frozen winters, that is a precious quid pro quofor Mr Putin.
The runup to war in Ukraine offered a textbook lesson in how
Gazprom served the government’s interests while feathering its
own nest. For years its efforts to circumvent Ukraine, an impor
tant transit route for its gas, led it to construct alternative pipe
lines into northern and southern Europe that were intended to
strengthen its bargaining power when its contract with Ukraine
ended in 2024. These efforts also set European countries that
stood to win and lose from the new configurations against each
other. Gazprom’s decision to dribble only a bit of surplus gas to Eu
rope as demand there soared in recent months had a commercial
logic—the resulting spike in spot prices translated into recordprofits. However, it also sent a message: Europe should not take
Gazprom for granted. “It suits their purposes to keep Europeans
on their toes,” says Jack Sharples of the Oxford Institute for Energy
Studies, a thinktank.
Since the cold war, western European countries have tended to
shrug off this nasty side of Gazprom. Instead they have become
overdependent on its gas. Germany, which gets about half of the
fuel from Russia, is in a particularly invidious position. Some Gaz
prom hangerson, like Gerhard Schröder, an exchancellor who
chairs Nord Stream, deserve special ignominy. Former Eastern
bloc countries, such as Poland, have no such illusions. They know
that as well as extending the hand of friendship, Gazprom can
wield the knuckle duster. They are also the most exposed, ob
serves Anna Mikulska, an expert on Russian energy at Rice Univer
sity’s Baker Institute. The most extreme case is Ukraine, where
Gazprom provided cheap gas and other benefits, then turned them
on and off as punishment for the country’s westward drift. Recent
ly Moldova has suffered similar treatment.
Russia’s war against Ukraine paints Gazprom’s geopolitical
thuggery in stark relief. It sent prices of Brent crude soaring above
$100 a barrel, their highest level since 2014. It caused a surge in
prices of natural gas, of which Russia is the world’s secondbiggest
producer. The socalled Brotherhood Network running through
Ukraine used to be the main transit route for Gazprom’s gas into
Europe, though supplies have dwindled recently. Nonetheless,
fears that vital pipelines will be destroyed are likely to keep gas
prices elevated. So will concerns that Mr Putin could turn off the
taps as part of his war effort, though he may prefer European cash
pouring into his coffers. While Gazprom continues to supply Eu
rope, high prices are good for it.
Germany’s decision to halt the approval process for ns2, a
€9.5bn ($10.7bn) underwater pipeline running from Russia to Ger
many, does not change much. It had already been suspended for
legal reasons in Germany. The bigger question is whether sanc
tions will be imposed on Gazprom. Before the attack, the betting
was that given how dependent on Gazprom Europe remained, the
firm would not suffer much. Russia’s potential eviction from the
swiftinterbank payments system—which some Western politi
cians are calling for—would probably not entirely sever Gaz
prom’s links with its European customers, who still need a way to
pay for its energy. An idea suggested by Ms Mikulska, among oth
ers, to sideline Gazprom with a “Gaslift” of liquefied natural gas
(lng), a maritime version of the airlift that overcame Russia’s
blockade of Berlin in 194849, looks like a long shot. Put that in your pipeline
At a time of war, Gazprom’s fealty to the Kremlin is unlikely to be
shaken. Being a loyal servant has won it the support it needs from
the regime as other presidential pets, such as Rosneft, an oil giant,
try to wrestle away its monopoly on pipedgas exports.
The conflict will do grave damage to Gazprom’s reputation
nonetheless. It is a wakeup call to European countries that they
should invest in more terminals to import lng, and further build
up their renewables capacity to reduce dependence on Russia. It
will be studiously watched in China, where Gazprom has pivoted
in recent years in order to diversify its gas customers away from
Europe. China is likely to be less bothered by Mr Putin’s belliger
ence. But even the Communist Party in Beijing has good reasonto
care about Gazprom’s trustworthiness as it watches thesqueeze
on Europe. The python may yet end up tying itself in knots.nSchumpeter
How Gazprom helps the Kremlin put the squeeze on Europe