bne IntelliNews -
Net profits at Russian state energy group Gazprom plummeted 86% in 2014 as the world's largest producer of natural gas reeled under a 50% ruble devaluation, the breakdown in relations with key transit land Ukraine and its main consumers in the European Union, as well as a 50% drop in oil prices. Net income for 2014 was just RUB159bn ($3.1bn), compared with RUB1.1 trillion in 2013, Gazprom announced on April 29.
The collapse stemmed directly from the ruble's plunge, which causing crippling foreign exchange losses as Gazprom was forced to revalue its foreign currency debt. As a result, its foreign exchange losses were RUB926bn more in 2014 than in 2013.
Gazprom also made writedowns on receivables from Ukraine's state energy company Naftogaz, along with a slew of oil and electricity assets. Operating profits fell 17% to RUB 1.3bn as a result.
Gazprom, the world's most profitable company from 2009-2011, contributes around 20% of Russian government revenues, making its financial situation a matter of strategic importance for the country's leadership under President Vladimir Putin.
The company came under further pressure on April 22 when the European Union accused it of violating competition laws by using its market dominance to overcharge several client countries in Central and Eastern Europe. With vocal backing from members of the Russian leadership, Gazprom rejected the charges as "unjustified".
Ups and downs of a giant
However, analysts see the dire 2014 results as being a bump in the road for Gazprom, compared with the massive downside and upside risks resulting from geopolitical events. These are linked to Russia's rapidly changing relations with both the West and its potential new main customer China to the east.
"[The] outcome of the European Commission’s investigation into the company, the Ukraine issue and a potential second contract with China are more important developments for the company’s investment case," VTB Capital analysts wrote in a note.
Some analysts even put a positive gloss on the financial results. “If you clean up the numbers from one-offs, impairments charges in the fourth quarter and the foreign exchange loss, there is a positive net income,” Ildar Davletshin, analyst at Renaissance Capital., told the Wall Street Journal. "Underlying profitability looks strong," he added.
David Hunter, analyst at Schneider Electric consultancy, told the BBC that, "Gazprom is facing a perfect storm of faltering European gas demand, economic sanctions on Russia, the falling ruble and global oversupply in liquefied natural gas". Hunter also argued that the recent 30% spike in oil prices since January has stabilised the ruble and the future price of gas.
"This is a subtext to a larger geopolitical story, with Europe keen to create an 'energy union' and reduce its dependence on Russian gas, particularly on its eastern borders," Hunter commented. "In the longer term, Russia is looking east to Chinese markets as an outlet for its vast reserves and an alternative pipeline market to Europe in future," he added.
Gazprom itself has played it cool with regard to the impact on its operations of Western sanctions against Russia over Ukraine.
"The group continues to assess and monitor the impact of the ongoing sanctions but currently does not believe they have a significant impact on the financial position and results of operations," it said in its results.
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