Russian Economics

An understanding of basic economics was always in short supply in the Soviet Union, and it is not exactly in abundance in modern Russia.

Natural gas is undervalued and its price less susceptible to producer influence than oil because long-term contracts dominate the industry, Gazprom deputy chief Alexander Medvedev said.

“Objectively, natural gas is undervalued,” Medvedev said. “The era of cheap energy is over.”

Natural gas futures on the New York Mercantile Exchange have dropped 21% this year and are down 69% since last year’s high of $13.694 per million British thermal units. Gas for March delivery fell 0.9% today to $4.447 per million Btu at 2 p.m. in New York.

The gas price is linked to the price of oil, which is also undervalued, Medvedev said. “Oil at $85 per barrel is more justified than $45 per barrel,” he said.

The spot value of oil and gas is whatever somebody is willing to pay for it right now.  The future value of oil and gas is whatever anybody is prepared to pay for oil and gas futures.  Clearly, those who are actually wanting to buy oil and gas do not agree with Mr Medvedev’s assessment as to what his products are worth.  I suppose if he tried to flog his car, he’d be complaining that buyers were undervaluing it by only offering $19,000 and “objectively” it was worth $23,000.  Somebody should tell Russia’s captains of industries that the days of their being able to assign arbitrary prices which everyone must pay ended almost 20 years ago.

From the same article, this also amused:

The global financial crisis may mean an opportunity for Gazprom to purchase more assets at low prices, including in North America, Medvedev said, declining to comment further. The company may borrow money for the purchases from Russia’s state-owned banks at low interest rates, he said.

So state-owned Gazprom, which is massively in debt and the recipient of government bailout money, is going to borrow yet more money from state-owned banks at artificially low interest rates to purchase foreign companies which are struggling financially?  Sounds like one hell of a business plan.

On a related note:

Gazprom Neft, the oil arm of Russia’s gas export monopoly Gazprom, may emerge as a new owner of mid-sized oil outfit Russneft, according to reports.

Moscow-based financial daily Vedomosti quoted a source close to Sberbank , Russia’s largest bank, as saying such a deal could take place because the current effective owner of Russneft, Russian businessman Oleg Deripaska, was struggling to service his debt.

Most of the debt belongs to Sberbank, which wants Gazprom Neft to take over Russneft and its debt.

Sberbank is state-owned.  Gazprom Neft is state-owned.  Little wonder that Gazprom Neft is Sberbank’s preferred buyer of the debt.  The consolidation of Russia’s banking and oil industry under a nationalised umbrella continues unabated.


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  1. Pingback: White Sun of the Desert » Business as Usual in Russia’s Oil and Gas Sector

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