Flare up

Russia, not Ukraine, is Gazprom's real problem

The 20 per cent slide in Gazprom's share price since the political crisis in Ukraine escalated in mid-February looks like an overreaction. The Russian gas group has become less dependent on the transit role of the former Soviet Republic since tensions with Kiev last disrupted gas flows to Europe in 2009. And Gazprom's lowly stock market valuation already reflects its status as a risky proxy for Russia. The chillier investment climate in Moscow is a bigger threat to the company's shareholders.?

Europe imported about 30 per cent of its gas from Russia last year. Gazprom relies on pipelines that run through Ukraine to ship a significant percentage of that fuel to its largest export market. A serious disruption would spark a major escalation - an unlikely event since it would hurt everyone's interests. And Gazprom could probably manage a temporary interruption of gas flows.

Ukraine just doesn't loom as large over Russian supply lines as it used to. It only accounts for about eight per cent of Gazprom's revenue, according to Moody's. The country's real value to the Russian group is as a transit hub. In 2009, before a pricing dispute between Kiev and Moscow led Russia to slow the flow of gas, some 80 per cent of Gazprom's exports to the continent passed through Ukraine. Today, thanks to pipelines such as Nord Stream, carrying gas through the Baltic Sea to Germany, that figure is closer to 60 per cent. Ukraine could even possibly be cut out of the supply loop, if and when Gazprom's $46 billion South Stream pipeline starts pumping gas in a few years' time.

With its leverage over Gazprom's supply flows reduced, and with Russian troops already in the country, Ukraine would have to think twice about siphoning off gas intended for Europe if Russia cut off supplies this time. Russia itself is facing fierce competition in Europe from gas producers like Norway and Qatar, and might hesitate to do anything that mars its reputation as a reliable supplier.

On a measly two times forward cashflows, Gazprom's trading multiple reflects its status as a Kremlin tool. Foreigners' views on Russia's attractiveness as an investment destination are more important for the future of Gazprom's share price than the twists and turns of the current crisis.