article "Russia's wounded giant" published on March 23 bears the
tagline "the world's biggest gas-producer is ailing. It should be broken
up" and is a fine work of anti-Russian propaganda. The authors of this
despicable hatched job used all the methods from the "black propaganda"
playbook, including quoting unnamed sources, accusations without factual
backing and very sloppy fact checking. The bias of the authors is so evident,
that it leaves only two possible explanations: Either they are utterly
incompetent or their bias is willful.
In this text, an attempt to do an analysis of the arguments presented by The
Economist will be made. It will be up to the reader to decide, whose point of
view is closer to the truth. All political aspects, like the accusations of
serving as "a wallet for the Russia's rulers" and accusations of
becoming "fat and lazy" will not be touched. Unlike The Economist,
better named "The Politician", I still believe that economics is a
science based on facts and not on political views.
The Economist's argument: Gazprom's "ageing gasfields are in decline"
The counterargument: This is a typical instance of "lie by omission".
It is natural for an ageing gasfiled to provide lower yield but a 118%
replacement ratio for 2012 shows that the overall "health" of the
company's assets is fine.
The Economist's argument: South Stream is a project "of questionable
economic value". One of the experts interviewed by the authors describes
South Stream as a "commercial idiocy". Another criticism is that Nord
Stream is running below capacity so it is nothing more than a "diplomatic
coup for Mr. Putin".
The counterargument: South Stream is a project that will ensure that the
political leaders of Ukraine can't hold Gazprom and its European customers
hostage to their political ambitions and demands of price cuts. Liquidating the
risk of non-delivery on the signed contracts is more than enough to justify the
investment. Moreover, Gazprom is not alone in this project. South Stream is
supported by ENI and Électricité de France, so it is hard to believe that three
of the largest European energy companies are voluntarily engaged in a
"commercial idiocy". If South Stream is not viable from a commercial
point of view, then why are Brussels and Washington so angry at its progress?
Regarding Nord Stream, the answer to the criticism is simple. The gas
consumption in Europe will grow, so it would be stupid to build a pipeline with
no spare capacity.
The Economist's argument: "On March 4 its shares hit a four-year low.
Investors reckon Gazprom is worth only a third as much as it was in 2008. By
one broker's calculation its market capitalization of $110 billion is barely
half the value of its assets."
The counterargument: In today's world it often happens that the price of the
shares doesn't reflect the true potential or the true value of the company. The
financial markets are not always right in their evaluation of companies and
entire sectors of economy, that's why we have bubbles like the housing bubble
in the US.
If the calculation of the unnamed broker is correct (it couldn't be replicated
in-house), then the shares of Gazprom are an exceptionally attractive
investment. One of the "Buffet rules" is that you should never buy a
stock with price greater than 10% above book value. In Gazprom's case, if the unnamed
broker didn't botch the math, there is a 50% discount to the book value, making
Gazprom shares a value investor's dream.
The Economist's argument: "Gas on the spot market is often much cheaper
than Russian gas delivered under long-term contracts."
The counterargument: It is also true that gas on the spot market is often much
more expensive than the Russian gas, so it's a matter of risk management for
the customers. If history is any indication, end-consumers operating in
commodity markets prefer long-term contracts to offset the risks of wild price
gyrations in the spot market. William Hague, the foreign minister of Great
Britain, mentioned that there is interest in supplies from Gazprom via Nord
Stream. That proves that even the country with the most liquid spot market for
gas is still interested in having a long-term supply relationship with Gazprom.
The Economist's argument: "Last August Gazprom and its partners, France's
Total and Norway's Statoil, decided to freeze a colossal offshore project in
the Barents Sea, which was intended to produce gas destined for export to
The counterargument: It makes no sense trying to export to America before the
burst of the shale gas bubble. After the shale gas bonanza is over, then the
prices will be more reasonable and unfreezing the project will make sense.
The Economist's argument: "The final threat to Gazprom's old way of doing
business is legal. An antitrust probe launched by the European Commission
alleges that Gazprom is using its dominant position in central and Eastern
Europe to restrict competition and hike prices. If it loses the case, it could
face a fine of up to $14 billion and lose the mighty lever of being able to
charge some European countries more than others. An adverse ruling might also
threaten its strategy of trying to dominate the European gas market by owning
both the supplies and the means of distributing them."
The counterargument: This is a classic case of trying to use legal pressure in
order to force Gazprom to reduce prices and it's a tool often used by European
negotiators who are taking the problem from the realm of economics to the realm
of geopolitical games. It should be noted that Russia has some potent tools to
ensure that trying to hurt Gazprom will hurt Europe more than it hurts Russia.
The political influence of Gazprom's European partners should not be
underestimated. Also, the Cold War experience gives Russian politicians an edge
in negotiations where the principle of mutually assured destruction is
To put it bluntly, the Russian budget can survive a year without gas income,
but can the fragile European economy survive a year without the supply of 25%
of its gas consumption? A spike in energy prices will surely kill any hope of
economic recovery and would exacerbate the European economic recession. It is
also worth taking into account the fact that Russia holds a big part of its
reserves in European bonds. For instance, how would the bond markets react to a
decision to sell 45 billion euro worth of French bonds? All the talks about
anti-trust litigation are nothing more than diplomatic posturing. The leaders
of the European Union like to play with fire, but they are not going to burn
their own house in order to hurt the profit of Gazprom.
The critics point out that Gazprom is facing competition at home and present
this as a bad thing for Gazprom. At the same, they predict that Kremlin will
stifle the competition in the home market to help Gazprom. The problem is that
it was the Kremlin who created the competitive market in Russia in the first
place. It is obvious that the authors of the hit-piece want to criticize both
Gazprom and the Kremlin and do so even at the expense of basic rules of logic.
In their world it is bad when the Kremlin creates competition in the home
market and it is just as bad when the Kremlin supposedly stifles the
competition. This is not economic analysis. This is pure russophobia disguised
as economic journalism.
The Economist's argument: "Besides buying more LNG, some EU countries are
keen to start fracking on their own territory. Exploratory drilling proceeds
apace in Eastern Europe, though fracking is still banned in France, Bulgaria
and the Czech Republic."
The counterargument: Starting fracking is not the same as "starting to
produce gas from commercially viable boreholes". The illusion of a shale
gas revolution in Europe has already been dispelled by the repeated failures of
western companies that tried to frack in Poland and other European countries.
It's not Gazprom's assessment, it's Bloomberg's assessment from February 2012:
"Exxon Shale Failure in Poland May Lengthen Gazprom's Shadow". A
recent report from Bloomberg New Energy Finance argues that hopes for a shale
gas revolution in the UK are "wishful thinking". Fracking is likely
to make the European ecology worse, but it won't help the European quest for
The hit piece from The Economist mentions that Gazprom has invested 40 billion
dollars in 2011, with "nothing to show for it", conveniently omitting
that in 2011 the proven reserves of Gazprom increased by 686 billion cubic
meters or the equivalent of 138% of the whole year's production. If 686 billion
cubic meters is "nothing" by the standards of The Economists' authors
then what kind of factual basis can be expected from their other assessments?
The only valid argument made by the British propagandists is that Gazprom is a
bit late to the LNG race, but that sole valid argument is definitely not enough
to offset the omissions and outright lies found in their article.
The "conclusions" presented by the British mud-slingers show the real
agenda behind the hit piece. Their advice to "heal" the
"ailing" Gazprom is by gutting it. In their view, Gazprom should be
split in several companies and its pipelines should be managed by another
company. The European Commission wants the same thing and would like to see the
vertical structure of Gazprom dismantled. Brussels would like to split Gazprom
in two or three companies not to make it stronger but to make it weaker,
because any vertically integrated company which owns everything from production
to supply routes is strong and can charge higher prices. The propagandists from
The Economist want to split Gazprom for the same reason. Since Gazprom is not
ailing and is too profitable, they would like to see the company dismantled.
This is pure poison presented as medicine. It is obvious that no one will
listen to such advice, but some russophobes may enjoy dreaming about the demise
of the world's biggest gas producer. Their dreams won't come true.
Voice of Russia