Russia's Gas Monopoly Comes Apart
Nord Stream 2 Goes American | Power of Siberia Stalls | Western Sanctions Bite
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“Barbershop Whispers….Russia (BWR)” begins with “My Takeaways” on the main topic, followed by a discussion on the main topic. The last two BWR sections are “Follow-ups” on previous publications and “Quick Bites” on emerging events.
In last week’s BWR, I discussed the Kremlin’s political and economic benefits of North Korean troops in Putin’s war on Ukraine.
In this week’s BWR, I discuss Russia’s eroding control over its natural gas export markets. Nord Stream 2 (Disclosure)1 is on the auction block, Power of Siberia -2 is stalled, and Rusisan LNG struggles with offtake agreements and distribution channels.
Takeaways
RUSSIAN GAS EXPORT MARKETS—Once firmly a monopoly under Kremlin control, Russia’s natural gas export markets increasingly fall under direct and/or indirect control by US, European, and Chinese actors.
REALPOLITIK—Monopolies and war always end; the question is timing and who benefits. The Kremlin is paying dearly in blood and treasure for Putin’s war, and Ukraine is fighting for its very existence. Will Nord Stream 2 ownership become a bargaining chip in future Ukraine/Russia/Western powers ceasefire negotiations? What Western sanctions, if any, could also be on the negotiating table?
Russia’s Gas Monopoly Comes Apart
Nord Stream 2 Goes American | Power of Siberia 2 Stalls | Western Sanctions Bite
Nord Stream 2 Auction
Nord Stream 2 AG (NS2), the 1,200KM natural gas pipeline that extends under the Baltic Sea from Russia to Germany, was completed in 2021 at a cost of $11B. It has an annual capacity of 55 billion cubic metres (BCM), equivalent to 700 LNG tankers, and was intended to deliver energy to 26M European households annually.
The pipeline never became operational, first because the German government delayed certification due to Putin’s second invasion of Ukraine. Then, in September 2022, the pipelines Nord Stream 1 (NS1) and NS2 were damaged by explosive sabotage, rendering NS1 completely disabled but surprisingly sparing one of two NS2 pipes.
Nord Stream 2 AG, owner and operator of NS2, is a wholly owned Swiss subsidiary of Gazprom RU. In January 2025, a Swiss bankruptcy court will auction it off. How many buyers will participate in the auction remains to be seen. Given Putin’s ongoing war on Ukraine and the government approvals—US, Swiss, and Russian—needed to acquire the pipeline, only the brave and those with a high-risk tolerance will participate. One declared participant is Stephen P. Lynch, an American entrepreneur with decades of successful deal-making experience in Eurasia.
His three most high-profile distressed asset acquisitions were the former Yukos oil power assets acquired through a Russian bankruptcy auction ($281M), Yukos Finance BV ($306M) in 2007, and later Sberbank AG (CHF398M), Sberbank’s (RU) Swiss subsidiary. In the Sberbank AG transaction, he organized the required Russian, US, and Swiss government approvals and investors to complete the deal successfully.
If Lynch successfully acquires NS2, it would mean an American private citizen controls a significant natural gas distribution infrastructure from Russia to Europe. Lynch has successfully acquired US Treasury licenses and Swiss approval in the past, which is an intensive background review and costly process, and there is no reason to believe he cannot succeed again. Knowing Mr. Lynch, I would assess that other NS2 bidders will find he has protected himself well from the competition and adequately mitigated the risk factors associated with a complex geopolitical business transaction such as NS2.
From early in the war, I knew Lynch’s thinking about the NS2 acquisition; the timing was good despite the geopolitical risk factors involved in the transaction — Putin’s war on Ukraine and Western sanctions on Gazprom. It is known that his team submitted an application for this transaction with the US Treasury’s Office of Foreign Asset Control (OFAC) in February 2024. Since then, they have discussed the acquisition with senior Biden and incoming Trump Administration officials. According to published reports, they believe they have bipartisan support for it because it serves US economic and strategic interests.
Suppose Lynch is issued an OFAC license for this transaction. Does it indicate that control over European energy distribution is a negotiating point in a future ceasefire discussion between Russia and Ukraine? It remains to be seen if the US will support the transaction by issuing an OFAC license and if the Kremlin is ready to discuss a ceasefire.
It should be noted that controlling the pipeline does not necessarily mean controlling the product and vice versa.
Russian LNG Export Markets
Russia faces three significant challenges as it repositions itself in the global LNG gas market: technology, logistics, and competition. These challenges are proving formidable.
Russia has seven LNG projects, five of which are currently operating and two under construction. Gazprom and Novatek-led consortiums own two and four LNG projects, respectively. When completed, the seven plants will have a total production capacity of 62 metric tonnes (mt).
Novatek’s Arctic LNG-2 is Russia's newest and largest, with a production capacity of 19 mtpa. Its shareholders include China National Offshore Oil Corporation (CNOOC), French energy giant TotalEnergies, and Japan’s Mitsui. The facility began production in 2023 and is scheduled to be fully operational by 2026.
However, US sanctions have caused Western shareholders to suspend participation in the project – financing, technical expertise, off-take contracts, etc. – resulting in project delays and Novatek declaring force majeure over product deliveries. The sanctions have also led to changes in equipment and technology, forcing Novatek to rely on Chinese suppliers for turbines and LNG shipbuilders.
Weak Chinese Export Market
Gazprom announced in early 2024 that it had overtaken Turkmenistan as China’s largest volume natural gas supplier. However, Turkmenistan’s export earnings to China remain greater than Russia’s. The Turkman Portal reports that during the first quarter of 2024, Turkmenistan generated $2.4B in earnings from Chinese natural gas exports compared to Gazprom’s $2B over the same period.
China continues to take advantage of Russia’s need for cash to fund the war when Russia struggles to replace its lost European markets with Asian markets. This is playing out in the infrastructure financing of Power of Siberia 2 (POS2). China is in no hurry to finance it or negotiate a long-term purchasing agreement, partly because it has substitute sources, such as Turkmen pipeline gas. The collective capacity of three pipelines connecting Turkmenistan and China totals 55 bcm, while POS1 is expected to reach a capacity of 38bcm by 2025. POS2 continues to experience delays after many years of negotiations over the financing and offtake agreements.
Conclusion
Russia’s control over its natural gas export markets continues to erode. Before Putin’s war on Ukraine, Russia had a near monopoly over the European natural gas market.
Putin’s war may have permanently displaced Russian gas from Europe, with the US and Norway filling the natural gas vacuum left by Gazprom’s voluntary exit. However, the substitution comes at a price higher than the cheap gas provided by Russia. Western primary and secondary sanctions continue to hamper Russia’s ability to create new markets by withholding technology and financing. For example, Russia’s reliance on China for technology and hardware, such as turbines and LNG tankers, and the financing of POS2 are directly related to Western sanctions.
Putin’s war will not last forever, and neither will Putin. Eventually, Russia, Ukraine, and Western powers will need to negotiate and make unpleasant compromises, and Nord Stream 2 might be one of them.
Additional Reading(s)
American Investor Expects to Buy Nord Steam – 2 (AK&M, 22 Nov 2024)
A Miami Financier Is Quietly Trying to Buy Nord Stream 2 Gas Pipeline (Wall Street Journal, 21 Nov 2024)
Russia Struggles with the Changing Gas Market (Barbershop Whispers…Russia, 10 Mar 2024)
Putin Pays Homage to Emperor Xi (Barbershop Whispers…Russia, 19 May 2024)
Russian LNG - China and Asian Markets? (Barbershop Whispers…Russia, 17 Mar 2024)
Gazprom Flare Out (Barbershop Whispers…Russia, 16 Jun 2024)
Follow-ups & Quick Bites
Follow-ups
Kremlin Says Russia Needs Migrant Workers
Dmitri Peskov, Kremlin spokesman, said Russia needs migrant workers to sustain its development and alleviate the shrinking population problem. In an interview with RIA Novosti, Peskov said,
“Migrants are a necessity. The fact is, we are facing a very strained demographic situation. We live in the largest country in the world, but there are very few of us […] Russia only welcomes migrant workers […] Migrants are not the problem — the problem is illegal migrants,”
He continued by saying the authorities plan to intensify efforts to combat illegal migration, which fosters conditions for “religious extremism” and “drug abuse.”
Following the March 2024 terrorist attack at Crocus City Hall in Moscow, allegedly carried out by Tajik citizens, the Russian government introduced stricter measures on migrants. Several bills to increase penalties for illegal migration have been submitted to, and passed by, the State Duma.
Additional Reading(s)
The Tajikistani Connection (Barbershop Whispers…Russia, 12 May 2024)
Kremlin spokesman says Russia needs migrant workers amid ‘strained demographic situation (Meduza, 22 Nov 2024)
New US Treasury Sanctions Hit Gazprombank
Gazprombank’s exemption from US sanctions, based on its essential role in facilitating cross-border natural gas payments, ended last week.
Gazprombank and its six international subsidiaries have been sanctioned. According to Washington, Gazprombank is a conduit for military equipment purchases and is used to pay soldiers and the families of those killed in Putin’s war on Ukraine.
US Treasury Secretary Janet Yellen stated,
"Today's sanctions targeting Russia's largest remaining non-designated bank, as well as dozens of other financial institutions and officials in Russia, will further diminish and degrade Russia's war machine, […] this sweeping action will make it harder for the Kremlin to evade U.S. sanctions and fund and equip its military."
Gazprombank has informed its retail customers abroad that they may experience payment disruptions with China’s UnionPay cards after the new U.S. sanctions.
Russian banks began issuing UnionPay cards after Visa and Mastercard suspended services in Russia following Putin’s second invasion of Ukraine.
Additional Reading(s)
Treasury Sanctions Gazprombank and Takes Additional Steps to Curtail Russia’s Use of the International Financial System (US Department of the Treasury, 21 Nov 2024)
Russian Rubles for Rupees and Yuan - Cross Border Settlements without USD (Barbershop Whispers…Russia, 2 Jun 2024)
Grounded - Half of Russian Civil Aviation Airbus 320/21
Russian airlines have grounded 34 of their 66 Airbus A320neo aircraft due to unresolved engine problems, aggravated by Western sanctions, the Kommersant business newspaper reported on Thursday, citing unnamed sources familiar with the matter.
The grounded jets are equipped with Pratt & Whitney engines and last year a “rare condition” in the metal used to manufacture certain engine parts requires “expedited removals and inspections.”
Western sanctions on Russia have hit the civil aviation sector hard, making new Western aircraft and spare parts expensive and difficult. Kommersant said that without proper maintenance, the A320/21 Neo aircraft will likely be decommissioned in 2026.
The A320/21 Neo models represent about 10% of foreign-made aircraft in Russia's fleet.
Additional Reading(s)
Half of Russia’s Airbus 32/21 Neo Fleet Grounded (Aeroflap, 22 Nov 2024)
Russian Airline's Power-Off Stall (Barbershop Whispers…Russia, 7 Jul 2024)
Russia's S7 To Decommission Airbus A320/A321neos Due To Sanctions (Simple Flying Youtube video on S7 Airlines)
Quick Bites
Kremlin Strikes Ukraine with the “Oreshink” Hypersonic Ballistic Missile
In response to Ukraine’s use of US ATAMS and UK Storm Shadow rockets against targets inside Russia, the Kremlin launched the Oreshnik, a new nuclear-capable hypersonic intermediate-range ballistic missile (IRBM) striking a weapons plant in Dnipro, Ukraine.
According to the Pentagon, the new design is based on the previous RS-26 Rubezh ballistic missile. The IRBM travels at Mach 5 and can maneuver mid-flight, making them harder to track and intercept. The missile can have three to six warheads, according to weapons experts.
Putin, in a public address last week, stated,
“…Russian armed forces conducted a combined strike on one of Ukraine’s defense-industrial complex facilities. This included testing one of Russia’s latest medium-range missile systems in combat conditions. In this case, a ballistic missile equipped with non-nuclear hypersonic technology, referred to as Oreshnik by our missile forces. Targets for engagement during further testing of our newest missile complexes will be determined based on threats to the security of the Russian Federation. When selecting targets for such systems as Oreshnik on Ukrainian territory, we will ensure that civilians, as well as citizens of friendly nations present in those areas, are advised to leave potential danger zones in advance. This will be done openly, publicly, and out of humanitarian considerations, without fear of opposition from the enemy.”
Puitn characterized the use of Western weapons to strike targets inside of Russia as an escalation of the war in Ukraine.
Additional Reading(s)
Russians Launch New Missile at Dnipro, U.S. Provides Ukraine with New Tactical Weapons (US Department of Defense, 21 Nov 2024)
Russia’s Experiential Ballistic Missile Rubezh RS-26 Strikes Ukraine (The War Zone, 22 Nov 2024)
Vol 2, No 56 - BWR 24.11.2024
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.
Disclosure - It should be noted I have known Stephen Lynch for 32 years. We first met as Peace Corps volunteers – Russia 1 in 1992. While our political views may sharply differ, I have known him to conduct business with integrity and sound principles. Mr. Lynch is a seasoned Russian hand not to be underestimated.