Let’s start with a look back. 2022 started very promisingly for Russian state-owned companies Gazprom and Rosneft, the largest contributors to Russia’s state budget, especially in Germany, Europe’s largest market.
The new federal government had announced the construction of numerous new gas-fired power plants to help meet the country’s electricity needs in view of the decision to phase out nuclear power and the early phase-out of coal. The Gazprom group was thus faced with an enormous expansion of its deliveries to Germany, which is already its largest sales market worldwide and which year after year took a quarter (!) of all Russian pipeline gas exports. In addition, the recently completed Nord Stream 2 Baltic Sea pipeline still had a chance of certification in Germany, because the new Chancellor Olaf Scholz (SPD) also called the pipeline, which was highly controversial in the EU, “a private-sector project”.
Rosneft, in turn, was about to increase its stake in the PCK refinery in Schwedt from 54 to almost 92 percent. For decades, this company has been exclusively processing Russian crude oil that came via the Druzhba pipeline. The refinery supplies the capital Berlin, large parts of eastern Germany and also the rapidly expanding new capital airport BER with petroleum products. All that was still pending was the final approval of the federal government, but no objections were to be expected.
The year 2022 is now ending with Gazprom completely stopping its deliveries to Germany, the federal government nationalizing its German subsidiary Gazprom Germania along with its large natural gas storage facilities, and the Nord Stream 2 project finally being buried. Two German liquefied gas terminals have already started operations, and next winter there will be at least six so that we are no longer dependent on Russian pipelines. Chancellor Olaf Scholz has repeatedly emphasized that Russia is no longer a reliable energy supplier.
The Rosneft group, in turn, has lost control of the refinery in Schwedt, which has been placed under state trusteeship, and expropriation is likely to be the foreseeable next step. In addition, PCK wants to end the processing of Russian oil on December 31, 2022 as part of the EU oil embargo and rely on other suppliers in the future. Great hopes are associated with Kazakhstan.
Thus, after only one year, Gazprom and Rosneft in Germany are in a shambles. To be more precise: after only ten months. This loss of the lucrative German market, which two key Russian companies had to suffer at the same time, illustrates very vividly the enormous damage that Vladimir Putin inflicted on the Russian economy with his attack on Ukraine on February 24, 2022. It’s not just about the failure of individual projects. This war destroyed the business model of today’s Russia.
This business model consisted in the fact that the most important Russian export goods – crude oil, petroleum products, natural gas, hard coal, metals – were sold mainly to Europe, specifically to the European Union. Machines and equipment for the modernization of the Russian economy and consumer goods for the Russian population were purchased there for the foreign exchange earned.
The focus on the EU as the largest export market and the most important supplier of high-quality imported goods was not only based on geographic proximity. In addition to the convenient logistics, the historical and cultural ties also played a decisive role: at least since the beginning of the 18th century, since Tsar Peter I, Russia saw itself as an integral part of Europe and saw the European countries as its preferred trading partners.
In modern Russia, almost all of the export-oriented Russian gas pipelines, the main oil pipelines, railway lines, highways, much of the western air connections were oriented towards Europe. Trade with Europe was the primary focus of modernization of the oil, coal and container terminals in the ports on the Baltic Sea, the Black Sea and in Murmansk.
Also, an essential part of the business model was that the countries of Europe became the largest foreign investors in the Russian economy. They brought capital, technology, know-how into the oil and gas industry, into power generation, into automobile manufacturing, into the food industry, into retail, just to name a few industries. Many investments also came from American companies, but the USA was not nearly as important as a sales market for Russia as Europe.
But now all that is history. With his war in the middle of Europe, Putin put an abrupt end to this well-functioning business model that he personally helped build. Numerous European companies have left Russia altogether, while others have at least halted their investments. They did it because of the EU and US sanctions, for image reasons, because business conditions in Russia have deteriorated significantly – or simply because this war disgusts them.
But the most serious loss for the Russian economy is that during 2022 it lost the largest market for its main exports. The most painful blow was dealt by the EU embargo on oil deliveries from Russia by sea. This measure has not yet had its full effect, as it only came into force on December 5th, as European companies needed time to switch to other suppliers and transport routes.
However, the ruble stumbled relatively quickly because fears of sharply falling foreign exchange earnings spread in Moscow. On February 5, 2023, the embargo on Russian petroleum products was added – a no less severe blow. In addition, since August 10, the EU has cut off the Russian coal industry from the European market, which recently bought around half of its exports.
The state-owned company Gazprom, on the other hand, did not suffer the most extensive loss of the European gas market because of EU sanctions, but rather because of the Kremlin. First, in the spring, he turned off the gas supply to those countries and companies that refused to give in to the sudden Russian demand for “payment in rubles.” Then, in the summer, deliveries through the Nord Stream 1 line to Germany and its neighboring countries were severely curtailed, citing alleged problems with Siemens turbines.
At the end of August, Moscow stopped the flow of gas altogether in the hope of blackmailing Germany and the EU with fears of a cold winter without enough energy and horrendous prices, and wringing less support for Ukraine from them. Two German companies are already planning to sue Gazprom for billions in damages for breach of contract for the vast amounts of gas that has not been delivered since the summer, and as long as Russia does not pay, this will be another hurdle (besides the political one) for the return of Russian pipeline gas to Germany, even in small quantities remain.
Gazprom will not be able to cite the mysterious destruction of the Nord Stream (and partially Nord Stream 2): the explosions occurred on September 26, almost four weeks after the complete halt to supplies and months after the start of their arbitrary cutbacks.
The almost complete disappearance of the German and European sales market will plunge the Russian gas industry, which has been accustomed to success, into a particularly deep crisis. Because Russia can divert the export of oil and coal to Asia in certain quantities, although it would be much more economical, for example, to continue to send the tankers from the Russian Baltic Sea ports to Rotterdam and not to distant India. But the gas pipelines, which have been laid exclusively westward from western Siberia for 50 years, cannot simply be rerouted eastward.
Although the Kremlin announces that it would lay new gas pipelines to the east, Russia needs a great deal of what it currently does not have and will probably no longer have in sufficient quantities: time, money and skilled workers. Because the loss of the European sales market will now become more and more noticeable from month to month, the country’s own financial reserves, on the other hand, will continue to burn up in the war, it remains cut off from the international capital market, and the country already has hundreds of thousands who died at the front, became crippled or fled abroad able-bodied men lost.
So the Kremlin will not be able to set up a halfway functioning alternative to Russia’s Europe-oriented business model, which has now been destroyed. In 2023 more and more Russians will feel this more and more often.
*The article “How Putin’s war destroyed Russia’s business model” is published by Deutsche Welle. Contact the person responsible here.
