Courtesy of The Financial Times, a look at how Gazprom is grappling with the collapse of its sales to Europe:

Vladimir Putin was effusive late last year after Gazprom reported record sales to China, telling chief executive and longtime ally Alexei Miller: “This is great, I congratulate you on the results of your work.”

But the Russian president’s praise, proudly trumpeted on state media, belies the crisis unfolding at a company that is struggling with the loss of its biggest market.

Europe has defied expectations by breaking its addiction to Russian gas, and the state-run gas monopoly — Putin’s trump card when he launched his full-scale invasion of Ukraine — has become one of the war’s biggest corporate casualties.

“Gazprom understands that it will never again have as big and fat a slice of the pie as Europe, and it simply has to accept that,” said Marcel Salikhov, head of the Institute for Energy and Finance, a Russian think-tank. “The only way forward now is to look for relatively smaller sources of revenue and gradually develop them, gathering crumbs.”

In an interview with state television channel Rossiya 1 on Sunday, Putin admitted Russia had previously profited more from exporting energy, but denied the loss of business was causing problems. “Maybe it was more fun [previously], but on the other hand, the less we depend on energy, the better, because the non-energy part of our economy is growing,” he said.

While Moscow decided early in the war to slash gas supplies to Europe, a move that initially boosted prices enough to offset the slump in exports, the effect was shortlived.

Pre-tax earnings hit a record Rbs4.5tn ($49.7bn) in the first six months of 2022 but slumped 40 per cent to Rbs2.7tn a year later, while net profits slid from almost Rbs1tn to Rbs255bn.

Researchers at the state-controlled Russian Academy of Sciences have even predicted the company’s full-year 2023 results will show it has ceased to be profitable, and that net losses could hit Rbs1tn by 2025.

The EU has proved more adept at sourcing alternative gas than many thought possible — Russia’s share of the bloc’s gas imports dropped from more than 40 per cent in 2021 to 8 per cent last year, according to EU data — while prices have collapsed from their peaks in the early days of the war. The EU is aiming to eliminate all imports of Russian fossil fuels by 2027.

On Sunday, Putin said Russia had coped well after Europe stopped buying its gas, “by exploring alternative routes and focusing on its own gasification efforts”. But in reality these are not a replacement for the EU export business.

With its main export business in tatters, Gazprom has sought to find new buyers but its deals in central Asia and minor supply boosts to China and Turkey will compensate for only 5 per cent to 10 per cent of the lost European market, according to Salikhov.

Achieving any substantial change in this scenario will require enormous investment in pipelines and other infrastructure to serve new markets, as well as the involvement of external partners that are in less of a hurry to commit.

When the invasion began, Gazprom appeared to be in a much better position than other Russian energy exporters given that the country’s gas, unlike its oil, was not under any western sanctions.

But its prospects changed in September 2022 when underwater blasts ruptured the Nord Stream gas pipelines that had carried 40 per cent of Russia’s gas exports to Europe, drastically reducing Moscow’s ability to use the fuel as leverage. Moscow and the west have accused each other of sabotage.

Gazprom did not reply to a request for comment.

The Russian market, which has always accounted for a much bigger share of the company’s output than Europe, has helped it stay afloat but with gas sold at a much lower price domestically, local sales cannot make up for the collapse of the EU market.

Gazprom has to sell gas domestically at regulated prices, while competitors such as Rosneft and privately run Novatek can offer discounts to attract bulk buyers.

“After the war started, Gazprom intensified its efforts to ensure fair competition on the Russian market with the lifting of domestic price restrictions,” said Irina Mironova, a lecturer at the European University at Saint Petersburg, who previously worked as an analyst at Gazprom.

Critics have long suggested that Putin has used the group to funnel profits to his acolytes — although the subject remains taboo in Russia.

State-owned Sberbank’s investment arm in 2018 sacked two senior analysts after they published a report saying Gazprom deliberately opted for unprofitable projects to secure lucrative contracts for companies owned by the president’s close friends Gennady Timchenko and Arkady Rotenberg. 

“Gazprom’s model, which consisted of generating excessive profits in Europe and then distributing them among contractors close to Putin?.?.?. no longer exists,” said Vladimir Milov, a former deputy energy minister who was the architect of Gazprom’s reforms in the early 2000s and who later became an associate of opposition figure Alexei Navalny, who died in an Arctic penal colony on Friday, according to Russian authorities.

The primary recipient of Gazprom’s profits is now the Russian state, which shortly after the invasion imposed an additional monthly levy of Rbs50bn on the company until 2025.

While gas exports to China have risen, the volumes remain relatively small — Russia sent about 22bn cubic metres of gas to the country via pipeline last year, a fraction of the average annual 230 bcm it exported to Europe in the decade before the Ukraine war.

The company could improve its prospects if it reaches an agreement on the construction of the 3,550km “Power of Siberia 2”, which would connect the gasfields that once supplied Europe to China, and a second pipeline to the Asian nation. However, Beijing and Moscow have yet to agree on the PS2 project, which will pass through Mongolia.

“Those two sides still need more time to do more detailed research on the economic studies,” Mongolia’s Prime Minister Luvsannamsrain Oyun-Erdene told the Financial Times in January.

Even under the most optimistic scenario the PS2 would take years to build and would not make up for lost European sales, independent analysts and state-sponsored researchers agree.

Construction of the pipeline will also be different from other Gazprom projects, as it will most likely be financed from the state budget — which has historically enjoyed generous contributions from the gas company — and not from Gazprom’s excess profits.

Meanwhile, while Russian liquefied natural gas exports are gradually increasing, they remain a fraction of the prewar pipeline deliveries. Novatek accounts for most of Russia’s LNG exports, with Gazprom lacking the specialised infrastructure to convert and transport the liquid form of the fuel, having bet on pipelines rather than liquefaction technologies at the dawn of the Putin era.

Gazprom’s oil business, Gazprom Neft, has become the company’s main lifeline, contributing 36 per cent of revenues and 92 per cent of net income in the first half of 2023. The division’s market value even surpassed that of its parent company last year.

“Oil is not a side business for Gazprom, it is not just the cherry on the cake — it is the entire layer of it,” said Sergey Vakulenko, a former head of strategy at Gazprom Neft who is now a non-resident scholar at the Carnegie Russia Eurasia Center. 

He also noted Gazprom’s generous dividends to shareholders including the state had often been very close to the sum of dividends it received from Gazprom Neft.

However, he described the group’s position as “not great, not terrible”, insisting “the company isn’t yet on the verge of collapse”. Ron Smith, oil and gas analyst at Moscow-based BCS Global Markets, also said Gazprom’s financial position was not yet “catastrophic”.

But the company faces the risk that its fortunes and prospects will never be the same again.

“Gazprom will never again be the huge cash cow for those in power,” said Milov, the former deputy energy minister. “Instead of making excessive profits, there is a risk that the company will become the recipient of state subsidies.”