The Lord giveth and the Lord taketh away: Falling Gas Prices Deny Russia a Lever of Power

From The New York Times:

As energy markets shrink, the same tactics that the Kremlin used to build Gazprom, the giant energy company, into a fearsome economic and political power that could restore Russian influence in the world are now backfiring, slashing both its profits and its influence.

Throughout his eight years as president of Russia, Vladimir V. Putin pursued the strategic goal of dominating natural gas supplies to Europe and the pipelines that deliver them. His success was underscored in January, when for the second time in three years a pricing dispute with Ukraine disrupted the flow of natural gas, leaving hundreds of thousands in Eastern Europe shivering in the deep winter cold.

But in his zeal to monopolize gas supplies, Mr. Putin, who is now Russia’s prime minister, committed Gazprom to long-term contracts with Central Asian countries for gas at a cost far in excess of current world prices. Now that the world economic crisis has sharply curtailed demand for gas, Gazprom is saddled with a glut of expensive Central Asian supplies that it is forced to sell at a loss.

In a painful twist, the company also finds itself forced to close its own wells in Russia, which produce gas for a fraction of the cost of that from Central Asia, in order to balance its supplies with declining world demand. In effect, a strategy that made business and political sense in a time of high and seemingly ever rising prices is threatening to create years of losses and declining influence, if energy prices fail to rebound.

Last week, the European Union signed an agreement with Azerbaijan, Georgia, Turkey and Egypt that could revive the long delayed Nabucco pipeline, which is intended to break Russia’s monopoly on Caspian Basin energy supplies. That was quite a turnabout for Azerbaijan, which after the war in Georgia last summer had offered to sell Gazprom its entire future output of gas from an offshore development.