The Russian economy (catch all)

[Firn]

Gazprom raises gas prices for Ukraine by almost 50%.

The government of ousted president Viktor Yanukovych had negotiated a discounted price last year as he grappled with protests after he dropped an association agreement with the European Union.

It “follows from Ukraine’s non-performance of obligations to repay the debt for gas supplies in 2013 and the lack of 100 percent payment for the current supplies,” Gazprom Chief Executive Officer Alexey Miller said. “The gas discount can no longer be used.”

This comes as no surprise. In any case the Ukrainian government might be well advised to declare with Western help the Russian loans 'odious' and just not pay a dime. Some informations about the legal aspects, although it depends of course much on the Western political will and the take by the financial markets. The latter would likely go wild if this was done in a 'normal' situation, but I doubt that such a special case will have significant consequences.

The issue about Gazproms credit is of course more difficult from a legal point of view, as I understand it. Not paying them would make a great deal of sense but this has to be looked at in greater detail.

[wm]

Gazprom raises gas prices for Ukraine by almost 50%.



This comes as no surprise. In any case the Ukrainian government might be well advised to declare with Western help the Russian loans 'odious' and just not pay a dime. Some informations about the legal aspects, although it depends of course much on the Western political will and the take by the financial markets. The latter would likely go wild if this was done in a 'normal' situation, but I doubt that such a special case will have significant consequences.

The issue about Gazproms credit is of course more difficult from a legal point of view, as I understand it. Not paying them would make a great deal of sense but this has to be looked at in greater detail.

Over and above the debt issue, one wonders about future loss of revenue to Gazprom. Econ 101 and price theory-- as price goes up demand goes down unless the demand is inelastic. Particularly with warmer weather coming to the region, how inelastic is Ukrainian natural gas demand?

[Firn]

Over and above the debt issue, one wonders about future loss of revenue to Gazprom. Econ 101 and price theory-- as price goes up demand goes down unless the demand is inelastic. Particularly with warmer weather coming to the region, how inelastic is Ukrainian natural gas demand?

That's a good question. We already a nice graph of the Ukrainian energy consumption:



Now I found a stunning graph showing the increasing spread between the gas import price and the price payed by private costumers. Needless to say that the subventions became an increasingly heavy burden for the Ukrainian budget...



A good short-term comparision with West European and US prices:



Not much Russian favour for it's little brother under 'friendly' leadership...

Market prices for private costumers should more then double if you take into account the subvention cuts and the new Gazprom prices. Under such conditions demand will fall a lot. In the long run it is of course considerably more elastic then in the short term. The sommer months should help of course to tackle some issues. So far the industry seems responsible for most of the fall in demand since the fall of the SU, especially after 2005. A drastic case in point is the 2009 crash, prior to that the steel industry in the East did actually pretty well.

Gas contracts are an interesting topic of which I don't know much. In the past it seemed that Gazprom tried to protect it's long term revenue, cutting for example prices for E.ON IIRC from a higher contract one because it had it's margins squeezed there badly. This doesn't seem to be the case when the primancy of politics calls from Russia with love...

[Firn]

Outlaw, there is no doubt that Russia needs high commodity prices to finance it's budget. From it's production costs, especially in the future and it's budget position Russia is in a dangerous spot in the oil market.



The big technical challenges force high investments with human capital, financial capital and technology for good reasons coming almost only from Western companies. So any disruption there will lower the future Russian output. Personally I think that an engineered negative (higher prices) supply shock is less likely because the many oil-rich countries have much higher budget expenditure due to (much) higher populations and higher standard of living. See a bit of the Saudi one.

Of course oil is just a part of the commodity picture. In the important natural gas market only lots of CAPEX will allow it to switch in the long run to other costumers.

[Firn]

The 'energy weapon' is rather unwieldy as far as I can see. We discussed the postive changes which can be achieved on the own playing field. Driving down demand by increased energy efficieny, broader energy mix with more renewables and possibly some nuclear, LNG portals, more integrated piplines and grids, more strategic storage and 'battery' capacity. So the Western world can do a great deal with sound investments at home.

If you hear tough talk from guys like Maduro you should laugh at him or weep for the common folk. Oil at ~$ 75 per barrel for some years will be terrible hit in an already aweful economy...

The Russian budget is calculated using $ 95 as a baseline prediction IIRC. The Norwegians do so with $ 65.

[OUTLAW 09]

Firn---have been watching both TASS and Interfax---especially Interfax as they do a massive lot of oil/gas PRs----not a single mention of the 5M sell of sour crude.

You have to admit it is a not to subtle shot across the oil front ----shows me that maybe someone in the WH has been thinking creatively which some in the media have bashed them for not doing.

Firn---checked the average price for landed crude in the US for 2013 was roughly 97 USD and refiners paid an average of 98 USD---sour crude is a major portion of US refinery abilities.

So if this is what US importers were on average paying ---it is really close to the Russian 95 USD needed for budgeting purposes.

[Firn]

Just to finish it off for the day, some graphics about various budget breakeven prices.










The newest one...



Generally it is pretty bad position to be a high-cost producer of a commodity, especially one which needs large margins to finance the budget. The gas deliveries into the EU have been a very important anchor for Russias revenue.

[OUTLAW 09]

Firn---More information concerning the recent SPR sell of 5M barrels of sour crude---the same quality as sold by the Russians from the Urals.

SPR oil put up for sale on the day Ukraine’s new chief is in town

By John Kingston | March 12, 2014 04:27 PM Comments (3)

One trader speaking to a Platts reporter had this to say about the decision by the Department of Energy today to sell 5 million barrels of oil from the Strategic Petroleum Reserve.

“The Gulf Coast market has plenty of barrels,” he said. “They should have done it a few weeks ago when the Gulf Coast was tight due to all the weather delays.”

A few weeks ago, however, Arseniy P. Yatsenyuk wasn’t in Washington. He’s the interim President of Ukraine, and he’s in DC today.

It almost defies logic to think there isn’t a link. (And White House press secretary Jay Carney said there isn’t one, when asked about it at the daily White House press briefing.)

But there is no reason to sell oil now. The reason given by the Department of Energy — a test sale to evaluate its ability to distribute oil in the event of an emergency — sounds very formal and entirely believable. But such a test hasn’t been done since 1990. Why now?

The “energy weapon” that has been discussed so vehemently since the Ukraine crisis began — using US LNG and crude oil exports to weaken world prices and steal Russia’s energy customers — always had a few flaws in it. First of all, even for the terminals where LNG exports have been approved, they aren’t ready to go. Second, US crude exports are still banned, despite lots of talk of changing that.

But selling oil out of the SPR, and specifying that it’s sour crude that’s for sale — the same type as Urals, Russia’s crude grade — can be done now. Next month, in fact, 5 million barrels of oil over 30 days, for an average of just over 165,000 b/d.