Since the fall of the Soviet Union in 1991 and the beginning of democracy, Gazprom has pretty much been the sole source provider of natural gas and petro products to Russia and a major supplier to Western Europe. But since the global economy has been tanking for a while now, what used to be one of Russia's main economic engines has now become a dead weight dragging the russian economy down even further.

Andrew Kramer does a good job in his article pointing out how the Russians (Putin) had banked on a rising petroleum market to sustain the Russian economy and how this strategy is now failing. Russia had basically become a rentier state, depending on Gazprom and other similar industries to fuel its growth through the sale of its commodities to other countries. Where Russia went wrong with it's strategy is the contract it went into with several central asian states that provided the natural gas to Gazprom. According to the article, Gazprom negotiated a fixed price of $340 per 1k cubic meters of natural gas from the central asian states through 2028. The demand for natural gas has fallen so far that the Ukranians are expected to pay on average $230 per 1k cubic meters and Europe $280 per 1k cubic meter for the remainder of this year. That's anywhere between a $60 to $110 loss per 1k cubic meter. And with the global economy still in the doldrums for the next year or so, this does not bode well for Gazprom and Russia as long as gas prices remain depressed.

Now, I'm not an economics guy, but I would figure 3-4 years of sagging gas prices will really put Russia in a bind. They would have to see a significant boost in prices to make up for lost ground, but still not do it too fast that they cause a spike followed by another down turn in prices. They'll have to handle this one with kid gloves.

Maybe they can find a T. Boone Pickenovich?

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