Streetwise Professor

May 24, 2018

Gazprom and Its Connected Contractors: The Credit Mobilier Scheme, With Russian Variations

Filed under: Commodities,Economics,Energy,History,Russia — The Professor @ 6:05 pm

A couple of SWP friends were kind enough to send me a copy of the swan song of one Alex Fak, an erstwhile senior analyst at Sberbank.  Alex lost his job because he committed a mortal sin: telling the truth, in this instance about the monstrosity that I have savaged for years–Gazprom.

Alex said that the oft-heard question “why does Gazprom do such stupid things?” is off base because it presumes that the company is run in the interest of shareholders: if it were, its unmatched record of value destruction would indeed be stupid.  However, Mr. Fax opined that the company’s actions over the decades are definitely not stupid if you evaluate them from the perspective of its contractors, who make massive amounts of money building obscenely negative NPV projects.

Why does this persist, in the Putin era, which allegedly cracked down on oligarchic thievery? Well, one reason is that the biggest contractors happen to be owned by–wait for it–the two biggest friends of Vova: Gennady Timchenko (a hockey buddy) and Arkady Rotenberg (a judo buddy).*  Putin did not eliminate oligarchs, so much as replace them with his cronies.  Calling out such connected men by name is no doubt why Mr. Fax is an ex-Sberbank analyst.  And saying this kind of thing puts him at risk of being an ex-person.

The Gazprom MO described by Mr. Fak  represents a continuation of, and a mega-sizing of, the bizness model of the 1990s, when the “red directors” of state-owned firms tunneled out huge amounts of funds by having their firms buy supplies and services at seriously inflated prices from firms owned by their relatives.

Indeed, in the pre-Cambrian days of this blog–2006(!)–I hypothesized that Gazprom and its contractors were in effect a Russian version of Credit Mobilier, the construction firm that the Union Pacific hired to build the railroad.

The WaPo article also mentions that Gazprom’s pipeline construction costs are two to three times industry norms. To me this suggests a Credit Mobilier-Union Pacific type situation, where inflated prices for materials and equipment flow into the pockets of companies owned by Gazprom managers. Just thinkin’.

Thomas C. Durant was the president of the Union Pacific–and the major shareholder in Credit Mobilier.  The UP paid Credit Mobilier around $94 million, and Credit Mobilier incurred only about $50 million in costs to build the UP.   The Gazprom arrangement is somewhat different given that neither Timchenko nor Rotenberg are executives at the Russian gas giant, but the basic idea is very similar. (I also noted early on that Transneft, the oil pipeline monopoly, operates on the same model.)  Gazprom and its contractors operate on the Credit Mobilier model, with Russian variations.

Once upon a time Gazprom CEO Alexei Miller boasted that he would make Gazprom the world’s first trillion dollar company.  Today it’s market cap is south of $55 billion.  Hey! anybody can be off by two orders of magnitude, right?

This is not surprising, because maximizing value to shareholders is not, nor has it ever been, the objective of Gazprom.  The objective is, and always has been, to divert resources to the politically connected via wasteful capital expenditures (that happen to be the revenues of the likes of Timchenko and Rotenberg).  Alex Fak understood this, and paid the price for shouting that the emperor had no clothes.

Both Gazprom and Rosneft are world leaders in destroying value, rather than creating it.  But this is a feature, not a bug, given the natural state political economy of Russia, which prioritizes rent creation and redistribution to the elite. And this is precisely why Russia’s pretensions to great power status rest on economic quicksand.  That should be blindingly obvious, and I am sure that Putin understands this at some level.  But revealed preference suggests that he values enriching his friends more than implementing the economic changes that would make his nation economically and militarily competitive.

*The sums tunneled from Gazprom to Timchenko make me laugh when I think about the oft-repeated allegation that oil trader Gunvor (half-owned by Timchenko) was a source of massive personal wealth for Putin (via Timchenko).  There was much more money to be made much closer to home, and completely outside the scrutiny of bankers and regulators.

August 10, 2015

Gazprom Has Unprotected Sales, And Pays the Price

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:40 pm

I have long mocked Gazprom’s obstreperous, and economically unhinged, defense of an oil price peg of its gas sales. So today is another schadenfreude day, as the FT reports that Gazprom’s vaunted gas deal with China is finding that The East is Red (as in ink) because the price was linked to oil and “offers no protection against low [oil] prices.” (And despite the evident risks of going without protection, Russia is contemplating a ban on foreign condoms! Maybe Gazprom needs to be more “strict and discriminating” in its contracting practices.)

Apparently the company took strategic advice from Obama, who when asked by Fareed Zakaria what would happen if the Iran deal failed, said that “I have a general policy in big issues like this not to anticipate failure“:

Asked whether the contract built in protections to ensure that Gazprom would not make a loss in the event of a prolonged period of low oil prices, Pavel Oderov, a director at the company, said: “We have registered high risk appetite for this contract and we do not envisage such an event.”

By “high risk appetite,” I think he meant: “we were freaking desperate and we put it all on black (as in oil) to gamble for resurrection.”

And of course, Putin can’t let Gazprom eat a loss:

Separately, the Russian government is preparing to support the flagship project. According to a document published by the Kremlin on Monday, president Vladimir Putin ordered the Russian government to draw up by the start of September a “comprehensive action plan to ensure government support for the construction of gas transport infrastructure, including the Power of Siberia pipeline”.

Like the Russian government has money to throw around, especially since Gazprom (and Rosneft) are supposed to be the cash cows that feed the rest of its corrupt cronies, and the budget.

Insisting on the oil peg was always nuts. Note that one reason why many buyers of LNG want to move away from the oil-link is to diversify their price risk: that’s exactly why Russia, already a huge oil long, should have jumped at the chance to move away from a 100 percent reliance on oil price linkages. Yes, oil and gas prices are correlated, but imperfectly so, and moving away from oil-based pricing for gas would have reduced the country’s exposure to oil prices. But apparently Gazprom management and Putin believed that oil would always outperform gas, and insisted on the link. Be careful what you ask for, Vlad!

This is just the latest in a litany of Gazprom failures. Along with today’s bad news about the China contract-the cornerstone of Putin’s vaunted pivot to Asia-the company disclosed that production was down and sales to Europe were down in the first quarter. The company’s ruble profits rose only because the ruble cratered: talk about the cloud engulfing the silver lining. Further, the Turkish Stream project appears dead in the water, foundering upon-you guessed it-the inability to negotiate a price. That, and the cracked economic rationale for the project.

The world is finally awakening to the fact that the alleged energy behemoth is in fact an economically incoherent mess. In the US, it would have been taken over, and ruthlessly rationalized. Or put into rehab. Or broken up. But Putin continues to let it blunder on, like a vodka-sotted giant.

Not so long ago, Putin was considered some sort of virtuoso. He apparently thought so too. But now everything that used to work for him is self-destructing. And he seems quite bewildered at his turn of fortune.

In truth, Putin was not a virtuoso: he confused luck–high oil prices–for some sort of strategic genius. He was a huge spec long on oil, and looked brilliant when the price was high. When it is low, not so much. And idiotically, one of his champions insisted on increasing that exposure instead of diversifying away from it.

Well played. Well played.

July 12, 2015

Gazprom Struggles. And There Was Much Rejoicing.

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 7:18 pm

Surprise, surprise, surprise. The vaunted Russia-Turkey gas pipeline deal is not really a deal. The reason-brace yourself against the shock-is that the two sides can’t come to an agreement over price:

Russia’s plan to build a new $15 billion pipeline to Turkey is at risk of delay because of a fight over gas prices, according to people with knowledge of the matter.

State-run OAO Gazprom and its Turkish counterpart Botas had a six-month period to agree on prices for gas supplies between the two countries, which expired on Monday. The Ankara-based company now has the right to take the matter to international arbitration, three of the people said, asking not to be named because the information is private.

The dispute over prices means there’s no immediate prospect of signing a binding pact for the new pipeline, the second between Russia and Turkey. An agreement could now be delayed until at least October, two more people said, also asking not to be identified.

I was about as surprised about this as I was to see the sun rising in the east this morning.

Remember: Gazprom consummates maybe one percent of the “deals” that it announces. And the deals founder on price. Almost every time.

By the way, this totally demolishes the alleged pipeline deal between Russia and Greece, because the Grecian pipeline was intended to carry gas that Russia had shipped to Turkey on to Europe.

Not that the $2-odd billion pipeline deal would have been more than spit in the ocean of Greece’s debt problem: the Greek government would only realize a fraction of the $2+ billion, many years from now. And as things look now, never.

In other Gazprom news, apparently the company is stiffing Turkmenistan:

Turkmenistan, irked by falling natural gas exports to Russia, hit out at Moscow’s gas export monopoly Gazprom on Wednesday, saying the energy giant had not paid for gas purchased from the Central Asian country so far this year.

“Since the beginning of 2015, OAO Gazprom has not paid for its debts to state concern Turkmengas for the shipped volumes of Turkmen natural gas,” Turkmenistan’s Oil and Gas Ministry said in a statement on its official website (www.oilgas.gov.tm).

Could be worse. Gazprom could have blown up the pipeline.

This suggests that Gazprom is having some major cash flow problems.

And who says there is no good news?

 

 

May 11, 2015

Gazprom Agonistes

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:26 pm

It has been a hellish few months for Gazprom. It’s profits were down 86 percent on lower prices and volumes and the weak ruble. Although the ruble has rebounded, the bad price news will persist for several months at least, given the lagged relationship between the price oil and the price of gas in the company’s oil-linked contracts. The company has been a die-hard defender of the link: another example of be careful what you ask for.

Moreover, the EU finally moved against the firm, filing antitrust charges. Although many of the European Commission’s antitrust actions, especially against US tech firms, are a travesty, the Gazprom brief is actually well-grounded. At the core of the case is Gazprom’s pervasive price discrimination, which is made possible by its vertical integration into transportation and contractual terms preventing resale of gas. Absent these measures, a buyer in a low-price country could resell to a higher price country, thereby undercutting Gazprom’s price discrimination strategy.

It is interesting to note that the main rationale for Gazprom’s vertical integration is one which was identified long ago, based on basic price theory, rather than more elaborate transactions cost economics or property rights economics theories of integration. Back in the 1930s  economists identified price discrimination as a rationale for Alcoa’s vertical integration. There was some formal work on this in the 70s.

Gazprom is attempting to argue that as an arm of the Russian state, it is not subject to European competition rules. Good luck with that. There is therefore a decent chance that by negotiation or adverse decision that Gazprom will essentially become a common carrier/have to unbundle gas sales and transportation, and forego destination clauses that limit resale. This will reduce its ability to engage in price discrimination, either for economic or political reasons.

The company is also having problems closer to home, where it is engaged in a battle with an old enemy (Sechin/Rosneft) and some new ones (Timchenko/Novatek), and it is not faring well.

Gazprom and Putin have always held out China as the answer to all its problems. There were new gas “deals” between Russia and China signed during Xi’s visit to the 70th Victory Day celebration. (Somehow I missed the role China, let alone the Chinese Communists, played in defeating the Nazis.) But the word “deal” always has to be in quotes, because they never seem to be finalized. Remember the “deal” closed with such fanfare last May? I expressed skepticism about its firmness, with good reason. There is a dispute over the interest rate on the $25 billion loan that was part of the plan. Minor detail, surely.

Further, Gazprom doesn’t like the eastern route agreed to last year. It involves massive new greenfield investments in gas fields as well as transportation. It has therefore been pushing for a western route (the Altai route) that would take gas from where Gazprom already has it (in western Siberia) to where China doesn’t want it (its western provinces, rather than the more vibrant and populous east). The “deal” agreed to in Moscow relates to this western route, but as is almost always the case, price is still to be determined.

If you don’t have a price, you don’t have a deal. And the Chinese realize they have the whip hand. Further, they are less than enamored with Russia as a negotiating partner. Who could have ever predicted this? I’m shocked! Shocked!:

Chinese and Russian executives and advisers said that in addition to the challenge of negotiating prices acceptable to both sides, energy deals between the countries have also been hampered by mutual distrust and Chinese concerns about antagonising the US.

“The Russians are unreliable. They are always flipping things around for their own interest,” said one Chinese oil executive.

Who knew?

Putin is evidently losing patience with the company, and its boss Alexei Miller, is far less powerful than Sechin and Timchenko. When it was a strategic asset in Europe, and offered real possibilities in Asia, it could defend itself. Now that leverage is diminishing, its future is much cloudier.

The impending new supplies of LNG coming online in the US and Australia dim its future prospects further.

In sum, Gazprom is beset by many agonies. Couldn’t happen to a better company.

November 27, 2014

Transparency Incoherent. Gazprom & Rosneft Paragons of Anti-Corruption? Ha!

Filed under: Economics,Energy,Politics,Russia — The Professor @ 11:54 am

The Soviet Constitution was full of guarantees of individual rights and democratic political processes. But of course it was honored far more in the violent breach than the promise.

This comes to mind when reading Transparency International’s most recent rankings, which put Rosneft above ExxonMobil and Gazprom on a par with Chevron. The main reason for the Russian companies’ high ranking is their formal, written anti-corruption rules.

This is so farcical that I am tempted to demand transparency from TI: How much money did you get from the Russians?

If you want to understand Gazprom’s transparency and the complete disconnect between its formal anti-corruption policy and its corrupt deeds, this Reuters report is a must read. It details how Gazprom entered into completely opaque deals with Ukrainian oligarch Dmitry Firtash. In these deals, Gazprom sold to Firtash entities at very low prices, and Firtash then sold at huge markups to Ukrainian companies:

According to Russian customs documents detailing the trades, Gazprom sold more than 20 billion cubic meters of gas well below market prices to Firtash over the past four years – about four times more than the Russian government has publicly acknowledged. The price Firtash paid was so low, Reuters calculates, that companies he controlled made more than $3 billion on the arrangement.

There is a huge omission in the Reuters report: it doesn’t trace where the money went. Gazprom did not do this because it was inordinately fond of Dmitry Firtash. The $3 billion was certainly split between Firtash, and people connected to Gazprom. (One wonders if the initials of the person getting the biggest cut are VVP.)

This isn’t a slam on Reuters: I am sure that they tried to follow the money, but it proved impossible in the utterly dark world of Cypriot, Russian, and Ukrainian companies. Which demonstrates just how farcical the TI report is.

It’s not like no one knew that there were murky dealings between Gazprom and Firtash, even though Reuters has provided valuable detail. Enough was known to conclude that Gazprom’s formal anti-corruption policy was the corporate equivalent of the Soviet Constitution. Fine sounding words on paper bearing no relationship to reality whatsoever.

Update. Jake Barnes points out in the comments some other things that show how risible this list is. It ranks ENI number one: Italy is notorious for corruption at all levels, and for further confirmation see Nick’s comment about investigating corruption in Italy. Also, TI ranks Petrobras above Exxon, Shell, and Chevron. You know Petrobras. It’s the company that is eyes deep in a corruption scandal that threatens to blow up the entire Brazilian political class.

Siemens is also high on the list. Siemens paid the highest Foreign Corrupt Practices Act fine in history, and has been enmeshed in what has been called A World Wide Web of Corruption Just Google “Siemens corruption” and you’ll have hours of reading fun! It is involved in corruption in Brazil. And of course it is deeply enmeshed in Russia. Take that into account whenever you hear German execs, and especially Siemen’s execs, whinging about sanctions against Russia.

Which makes this truly hilarious. Siemens runs the International Anti-Corruption Academy:

Project Summary

The International Anti-Corruption Academy (IACA) is an international centre of excellence for a new and holistic approach to fighting corruption.

This, plus the TI report, makes it clear that hypocrisy and corruption go hand-in-hand.

The bottom line is quite clear: the Transparency International rankings are an utter travesty that bear no relationship to reality.

 

September 26, 2014

Gazprom: Price Discriminating, Monopolist Thugs. What’s Not to Love?

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 8:48 am

Russia is mounting a full-spectrum offensive to grind Ukraine into the dust. Military, paramilitary, diplomatic, political, and economic.

The centerpiece of the economic campaign is, of course, gas. Today Russia’s energy minister threatened a gas cutoff to any country that resold gas to Ukraine, in violation of Gazprom’s sales contracts. Hungary immediately knuckled under.

Energy Minister Alexander Novak asserted that the re-export to Ukraine of gas Europe buys from Russia was illegal and could see some of its nations go without fuel shipments from state energy giant Gazprom for the first time since 2009.

“We hope that our European partners will stick to the agreements. That is the only way to ensure there are no interruptions in gas deliveries to European consumers,” Novak told Friday’s edition of Germany’s Handelsblatt business daily.

Novak’s comments were published only hours after Ukraine’s state energy firm Naftogaz reported an interruption of gas supplies it receives through Hungary.

Naftogaz noted that the apparent cut “came only a few days after a visit to Hungary by representatives from (Russian state gas firm) Gazprom”.

Hungarian Prime Minister Viktor Orban conceded that his country could not risk losing access to Russian gas — responsible for about 60 percent of the country’s supplies — over Ukraine.

“Hungary can not get into a situation in which, due to the Russian-Ukrainian conflict, it cannot access its required supply of energy,” Orban said on state radio.

For its part, the EU disputes Russia’s interpretation of contracts:

The European Union rapped Hungary over the supply interruption.

“There is nothing preventing EU companies to dispose freely of gas they have purchased from Gazprom, and this includes selling this gas to customers both within the EU as well as to third countries such as Ukraine,” Commission spokeswoman Helene Banner said in Brussels.

Any such contractual terms would be, literally, agreements in restraint of trade. They restrain trade between first buyers of Russian gas and others.

Sometimes  restraints enhance efficiency. That is definitely not the case here. The restrictions have one purpose, and one purpose only. To facilitate price discrimination (and hence the exercise of market power) by Gazprom and Russia. This map provides a fascinating visual demonstration of how Gazprom discriminates by price. Adjacent countries can pay dramatically different prices. More distant countries pay lower prices than ones nearer to Russia.

Much of the discrimination is purely economic. Countries with access to few alternative suppliers or few alternative energy sources pay higher prices. But much of the discrimination is political. Note that Belarus and Armenia, reliable Russian clients, pay very low prices, but Ukraine and Lithuania, which bracket Belarus, pay very high ones.

Destination clauses are necessary to maintain these big price differentials. Hence eliminating them would reduce Gazprom’s market power and profitability (though the welfare effects of 3d degree price discrimination are ambiguous) and also reduce Russia’s political leverage. With the ability to resell, those buying at a favored price could resell to those whom Gazprom wants to charge a high price. Gazprom would have to charge pretty much the same price to everyone (though since diversions are not costless it would retain some ability to discriminate, but not nearly as much, especially in the longer run as new infrastructure could be created).

Which makes it all the more bizarre that Europe, and Germany in particular, hyperventilate over far more dubious and abstract theories of market abuse by Google and Microsoft, but meekly let Gazprom run roughshod with textbook monopolist tactics. The lack of a unified energy policy, and unified energy purchasing (Europe could act as a monopsonist) allows Gazprom to play its usual divide and conquer games, of which price discrimination is one obvious result. Expediting the antitrust action against Gazprom would be another way of combating Gazprom’s malign influence.

In the current dispute the stakes are both economic and political/geopolitical. Despite the high stakes, Europe will doubtless limit its response to theoretical objections like those delivered by Helene Banner.

One (bitterly) amusing sidelight to this is despite its market power (the result of Russian law which gives it a monopoly over gas exports and of European acquiescence) Gazprom is still a horrible performer by all conventional metrics. It’s price-earnings ratio is about 3. Contrast that to Shell, Chevron, and Exxon, which have ratios of 10, 11, and 12, respectively. Performance metrics, such as value added per employee or earnings as related to reserves, are horrible.

This is a testament in large part to appalling corporate governance and the insecurity of profits and property in Russia. Speaking of which, there were several developments in the Yevtushenkov/Sistema/Bashneft story today. Yevtushenkov’s house arrest was confirmed and extended, and the Russian government seized Sistema’s Bashneft shares.

I’m never going to run out of material. Never.

September 9, 2014

The Euros Get Tough on Google, But Run and Hide From Gazprom

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 8:09 pm

The European Commission’s competition commissioner has scuppered a proposed settlement with Google. The Commission has already taken many pounds of flesh from Microsoft and Intel over the past year, so now it is looking to add some Google cuts to the meat locker.

What about the EU’s case against Gazprom, you ask? <Crickets.>

I’m not a big Google or Microsoft fan, but the accusations leveled against them (and Intel) are highly speculative. Gazprom’s exercise of market power, and its protection of that market power, is almost textbook. The egregious price discrimination, and its use of contractual terms (no re-sale) to support that discrimination, is a blatant example. So on the merits, the Gazprom case should proceed and the Google case should be settled, and on anything but onerous terms.

But the craven Euros quake before Gazprom. Indeed, they seem to be even less willing to confront the company now that Putin is on the war path.

They have a better case against Gazprom, and that case could be a political lever in what is an existential battle over European security: Putin and the Russians have ranted and raved about the case when the Euros did press it some, which indicates that it hits the company, and hence Russia, where it hurts.  But rather than hitting this pressure point, the Euros bury the case and go kick Google instead.

Don’t think that Putin doesn’t notice. And know that it is exactly this kind of cowardice that emboldens him.

June 6, 2014

Putinomics: The Gazprom-China Deal

Filed under: China,Commodities,Economics,Energy,Politics,Russia — The Professor @ 6:16 am

Before the financial crisis, Gazprom CEO Alexi Miller boasted that his firm would be the first $1t market cap firm. Six years on, he’s only off by an order of magnitude: the company’s market cap is around $100 billion. Moreover, it sells for a comical 3x earnings (a little less, actually). The company’s capex is notoriously inefficient, and it is frequently cash flow negative. Other than that, it’s a financial marvel.

But that big China deal must surely have provided a boost for the company, right?

Apparently not. The other day Putin mooted the possibility that the company would have to be recapitalized by the state, i.e., receive an additional injection of capital from one of the state investment funds.

If the China deal were indeed favorable to Gazprom, it would have no problem financing the necessary investment in pipelines and greenfield production through the banks and/or the capital markets, rather than through the state. Putin’s suggestion of state funding strongly suggests that the economics and the risks of the deal are not favorable, and the necessary investments could not be funded externally: direct state funding would also suggest that Russian state banks are either unwilling or unable to fund it (or both), which speaks ill for the economics of the deal, and perhaps the financial strength of the banks. A further implication of this is that politics rather than economics was the main driver of the deal (if it exists, in fact), and that as a project intended to achieve state objectives, the state must fund it.

Reinforcing this perceived need for state rather than external funding  is the fact that obtaining outside funding would require Gazprom to divulge many more details of the deal than it has so far. This would be highly embarrassing to Putin and the government and Gazprom if these details show that Russia got the short end of the stick. So keeping the details out of public view by avoiding outside funding also suggests that there is something to hide, namely, that the Chinese exploited Putin’s needs.

If the government indeed recapitalizes Gazprom, it will be just the latest of a long line of economic policy failures. Another example of where politics or corruption/rent seeking has prevented Russia from putting its natural resource firms on a commercially sensible footing, and another example of where state funds that were generated by resource rents in the first place were ploughed back into inefficient state-controlled resource producers, rather than to help diversify the Russian economy.

This, my friends, is Putinomics. This is why Russia will remain on the hamster wheel from hell.

May 27, 2014

Gazprom Down, Rosneft Up: Cutting the Oil Link, Sucking Up to Sechin

Filed under: Energy,Politics,Russia — The Professor @ 4:23 am

The news and commentary pages have been filled for days with big stories claiming that the (alleged) China-Russia gas deal represents a seismic change not just in energy markets, but in international relations.

I remain skeptical because I still remain unconvinced there is a real deal with price and financing terms nailed down. What’s more, some of the more sober commentary casts doubt about how favorable the economics of the deal are for Russia, even if the reported contours of the deal are correct. Gazprom must develop green fields in east Siberia, and build the pipes to China. This will be quite expensive, and the reported pricing terms may border on the break even. This should not be surprising because the Chinese are hard bargainers, and Putin needed a deal more than they. (Probably the biggest beneficiaries will be the tunnelers at Gazprom, and companies to whom money is tunneled, like the pipe making Rotenberg brothers.)  So I don’t see this deal-if it exists-being the triumph for Russia and Gazprom as the commentariat is trumpeting.

Here is a piece of hard information that is very bad news for Gazprom: Eni has negotiated an end to oil-linked pricing, and the adoption of European hub pricing. This undermines Gazprom’s pricing model, and for this customer alone costs the Russian company about $650 million off the bat. There is a virtuous cycle here that will make the oil-link progressively less defensible. More hub based pricing tends to enhance the liquidity at the hubs, which makes the hub prices more reliable, and thereby reduces the cost of indexing contract prices to hub prices.

On the Rosneft side of the house things are much cheerier. Western company after western company trooped to St. Petersburg to pay court to the sanctioned Igor Sechin. They signed dozens of deals, and ladled on sick making praise for Sechin, Rosneft, and Russia. Bob Dudley from BP was the worst (go figure, given how Sechin has him by the short ones), but he had a lot of competition. Decent people would get a room to engage in such sucking up, but Dudley et al did it in full public view.

BP (and other companies) were obviously undeterred by the US sanctions on Sechin. They said they can deal with Rosneft, and meet with Sechin personally: they just can’t do deals with Sechin personally. Or something. Meaning the sanctions are a joke.

So I would score things Rosneft up, Gazprom down. Would that they were both down, and hard.

May 20, 2014

Don’t Be a Sucker: Sell, Don’t Buy, Russian/Gazprom Hype

Filed under: China,Economics,Energy,Russia — The Professor @ 7:16 pm

I told you to ignore the hype (all of which originated from the Russian side) about an impending Russia-China gas deal. Despite being 98 percent done! Down to one digit! Putin left China with no deal to sell gas to China.

Again: don’t believe it until you see it.

There was the same old-same old blah, blah, blah to rationalize the failure:

According to Xinhua, the Chinese state news agency, after meeting Mr. Xi in Shanghai, Mr. Putin said, “I’m glad to be informed that the two sides have made significant progress in the price negotiation of the east route of the natural gas project.”

A joint statement said that Russian natural gas supplies would start flowing “as soon as possible,” a phrase used after many previous negotiations between Gazprom and the China National Petroleum Corporation, and an indication that the two sides could not close the gap on price in time for the two leaders to announce the deal at their meeting.

The linked NYT article quotes several people who are surprised at the outcome. I really need their contact information. I have some bridges to sell. These people are apparently afflicted with this time it’s different syndrome. But it never is.Yes, there are some differences now, but it’s really not that different.

The most telling thing (which I alluded to in yesterday’s post) is that all of the hype emanated from the Russian side. The Chinese were noticeably silent. Since it takes two to make a contract, this asymmetry was a major tip-off.

One wonders what the Russians hoped to gain by exaggerating the imminence and certainty of a deal.

Did they think that they would embarrass the Chinese into giving in? Why would they think that? That the Chinese would lose face if their guests left empty handed? As if the Chinese care. This is a commercial transaction, and the Chinese realize the Russians need the deal more than they do.  If anything, by trading them like obsequious hosts cringingly sensitive to world opinion, such a strategy would be more likely to tick off the Chinese and make them less likely to deal. If anything, the Chinese want to cultivate a reputation for being hard bargainers and actually expect to benefit from walking away.

Didn’t the Russians think that another failure would make them less likely to believed next time? Apparently not. But as the whole Ukraine episode demonstrates, they say outlandish things that are sure to be disproved with no apparent shame.

Actually, the most plausible explanation is that the Russians were pumping and dumping Gazprom stock. The price moved up as the market became convinced that a deal was impending, and then fell about 3 percent when the sure thing turned out to be not so sure . If Gazprom management and regime figures sold into the rally, they could have covered quite profitably on the selloff.

I say that only half in jest. Because otherwise I am at a loss to explain why the Russians would repeatedly over-hype the prospect for a China deal.

But I am also at a loss to understand how the stock would have rallied on the Russian pumping of the likelihood of a deal. This requires a lot of suckers to believe it.  After 10 years of this farce, you’d think people would wise up and heavily discount Russian assurances.  I guess there are a lot of suckers who want to believe. Charlie Brown lives.

Next time around don’t be a sucker. Sell rumors that Russians are peddling, and maybe-maybe-buy facts of an actual deal.

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