Debts & Loans

Russia cannot afford to keep its gas taps for Europe turned off for too long as it needs to protect its budget revenues and its gas monopoly Gazprom needs to service its $60 billion debt.

Gas exports account for about a tenth of Russia's GDP, but these have been halted for nearly a week in a dispute with neighbouring Ukraine, the transit route for 80 percent of the gas Russia sells to Europe.

Analysts say Gazprom, a pillar of the Russian economy, is losing more than $100 million a day because of the transit cut-off. The loss of revenue comes at a bad time both for Russia, facing plummeting oil prices and the prospect of a recession, and for Gazprom, saddled with debt and likely to find gas prices falling by half by mid-2009 as they track crude.

"Gazprom faces demand destruction, falling prices, and huge challenges to finance its ambitious investments and manage its debt burden," said Douglas
Busvine, an analyst at policy research firm Medley Global Advisors. "Both it and the Russian state can ill afford the revenue hit that a prolonged loss of export revenues would cause."

Russian gas supplies to Europe via Ukraine have been halted due to a pricing row between Moscow and Kiev..

The disruption has left some countries in Europe shivering in winter temperatures, but it has also hurt a fragile Russian economy.

Driven down by the weak oil price, Russia's currency has lost nearly 3 percent in the first two trading days of 2008, building on a fall of 17 percent in 2008. In the meantime, the $40 price for a barrel of oil is well short of the minimum $60 Russia needs to balance its budget in 2009, threatening the lavish spending that has helped cement the Kremlin's grip on power.

With revenues of 1.74 trillion roubles ($56.99 billion) in the first half of 2009, Gazprom was responsible for 9 percent of Russia's GDP and its export shipments to Europe contributed around 15 percent to Russia's overall export revenues. But Gazprom is also Russia's most indebted company with 20 outstanding Eurobond issues and an obligation to buy a stake in its oil producer Gazprom Neft from Italy's ENI for $4.5 billion before April.

Prime Minister Vladimir Putin said on Sunday Gazprom had lost $800 million because of the dispute and Renaissance Capital brokerage said the figure was rising by $127-$141 million every day. "The winter season witnesses peak demand of the year, and gas prices are at a record high of $450-$500 per 1,000 cubic metres now as gas prices are following oil prices with a six to nine month lag," said Viktor Mishnyakov from Uralsib brokerage.

"Gazprom's huge 2009 investment programme of $29.4 billion requires strong cash flow and further gas supply delays are clearly detrimental," he added.
Gazprom, the world's largest gas producer which supplies a quarter of Europe's gas needs, approved in December a 32 percent rise in capital expenditures, seeking to build new pipelines and launch new Arctic fields as output is stagnating in Siberia.

European sales are the most profitable business for Gazprom, which exports about one-third of its total gas production and generates 60-70 percent of total sales on shipments abroad as domestic prices remain capped by the state. Now though, export prices are poised to shrink fast.

Mikhail Korchemkin from Pennsylvania-based East European Gas Analysis think tank believes prices will fall as low as $180 per tcm in the third quarter and Matthew Vogel from Barclays Capital sees average Gazprom 2009 prices at $250. Ukraine, on its side, is facing its worst ever financial crisis as the local currency, the hryvnia, lost half its value to the dollar and dozens of enterprises have closed down.



That raises the stakes for both Gazprom and Kiev, which have yet to agree on the price for gas for 2009 for Ukraine itself, which Gazprom says needs to move closer to European prices after years of post-Soviet subsidies. "The worst-case scenario for Russia and Gazprom is that the dispute drags on for too long and, regardless of the commercial merits of the dispute, the investment reputational damage becomes more extensive and longer-lasting," said Chris Weafer, chief strategist at UralSib brokerage.

Weafer added that by his standards the "too long" deadline had already passed after the two sides failed to agree on European supply resumption at the weekend. The two sides signed a deal on Monday for a second time to help secure the resumption of the gas supplies.