Gazprom Flare Out
$6.8B Loss and More | Old Market Vs. New Market | Critical Ukraine Transit Route
Dear BWR Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways” on the main topic, followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” are “Follow-ups” regarding previous publications and “Quick Bites” briefly addressing emerging events.
In last week’s BWR, I discussed Western companies’ challenges exiting the Russian market three years into the war and their considerations for staying in the Russian market. Western and Russian companies are being seized.
In this week’s BWR, I discuss Gazprom's financial struggles. It reported a record $6.8B loss, the first in nearly 25 years. Why, and what are the options for recovery?
Takeaways:
OLD VS NEW MARKETS: The Asian market, particularly China, is not a like-for-like substitution for the reliable and well-established European market, which dates back to Soviet times. The Asian buyers have energy options, making it a buyer’s market and impacting what Gazprom can command for its gas in Asia. Furthermore, who is going to pay for the billions of dollars of pipeline infrastructure to deliver the gas to the Asian market?
COST OF WAR: Gazprom’s poor financial situation was self-inflicted and driven by Kremlin politics—the decision to go to war with Ukraine—and not by markets. Gazprom is not the only Russian company absorbing the financial cost of Putin’s war.
Gazprom posted a 2023 loss of ($6.8B), the first loss since 1999. For nearly two decades and as recently as 2022, Gazprom was one of the largest contributors to the Russian Federal budget. In 2022, excluding dividends, it contributed $40B to the Federal budget and the National Wealth Fund (NWF) combined. Given its current financial position, the Kremlin, Gazprom’s majority shareholder, has ordered Gazprom not to pay 2023 dividends.
Today, Gazprom is running at a loss, and the situation does not appear to be getting any better. According to its first quarter 2024 report, it lost $4.8B, a significant increase over the same period in 2023, which was $1B. It is quickly burning through a $27B cash reserve and reducing CAPEX to cover operating expenses. The latter may have a long-term impact on production, particularly regarding the development of new gas fields, pipelines, and equipment upgrades. Gazprom also has some $70B in international debt, of which some 20% will come due in the next two years and must be refinanced. Given that Gazprom has been shut out of the international markets, the question is, in what markets and currency(ies) will these bonds be refinanced? Refinancing in the Russian and Chinese markets would be expensive, and it will test the liquid capacity of those markets.
