Russia Spares Europe, Sucker Punches Ukraine

Russia, or more specifically Gazprom (NASDAQOTH: OGZPY  ) , just turned off the natural gas pipes going to Ukraine -- sort of, anyway, since there's still enough gas flowing to keep the company's European customers happy. Is Europe willing to accept Russia's provocations so long as it keeps getting its gas? What about other global players: How much will they compromise?

Now what?
The brewing battle between Ukraine and Russia hasn't gotten any better since Russia took over Crimea. In fact, that move appears to have exacerbated the discord. And, as has been the case in the past, Russia is wielding its biggest weapon in this fight: energy. In the case of Ukraine, that means natural gas.

Russia supplied 60% of Ukraine's natural gas last year. So Gazprom shutting off the gas is a big deal, at least for Ukraine. That's because Gazprom is sending enough gas to satisfy its European customers. That's a good call, since Russia supplies Europe with about 30% of its natural gas and roughly half of that flows through Ukraine.  

(Source: U.S. State Department, via Wikimedia Commons)

It's no wonder that Gazprom is trying to keep Europe happy -- the region accounts for roughly half of the company's gas sales. Since Russia essentially controls Gazprom, the company is left dancing like a puppet. Gazprom wants to make money, Russia wants to make a statement. This event shows the inherent risk of owning shares in a state-controlled entity.

So far, however, Russia is holding all the cards. Even if Europe wanted to divorce itself from Gazprom's fuel, it couldn't easily replace 30% of its gas supplies. That should give Gazprom plenty of time, and wiggle room, to build its new pipelines to China. However, if Russia steps too far over the line (which it obviously hasn't yet), Europe might be willing to suffer for the greater good. And that would likely put a bigger pinch on Russia than U.S. sanctions.

Nobody wants to go without
Russia, however, is finding that no one really wants to get closed out of their deals with the country. That goes for Europe's gas supplies from Gazprom to, well, Visa (NYSE: V  ) and MasterCard (NYSE: MA  )  -- venerable U.S. brands. The Russian market accounts for less than 3% of MasterCard's top line, and Visa has around 100 million cards in the country -- out of the roughly 2.1 billion it has out globally.

(Source: Reza luke, via Wikimedia Commons)

Clearly, Russia isn't all that important to either company's business on an absolute basis. But the potential growth Russia offers to Visa and MasterCard as its citizens start using plastic more is enticing. That's why U.S. sanctions against Russia caused such a stir, particularly since Russia countered with a demand that Visa and MasterCard put up a security deposit equal to 25% of their daily business in the country.

Russia, Visa, and MasterCard appear to be "discussing" the matter more fully since a compromise is in all of their interests. However, Visa and MasterCard have already blinked and are likely to buckle under to Russian demands so long as they are reasonable, which should buy Russia time to put its own transaction systems in place, something it has already mandated. And Visa and MasterCard appear willing to help the effort. Neither wants to be locked out of a big market with growth potential. Gazprom and Europe are, essentially, locked in a similar relationship.

Bigger than a bread box
The Russia/Ukraine mess is definitely bigger than a breadbox. It's already roiling energy markets, most notably Gazprom's natural gas dance. But other sectors aren't far behind, with Visa and MasterCard showing that doing business with Russia is, perhaps, worth compromising for.

The stakes are high on both sides, and while companies like Gazprom are in the thick of it, others are getting drawn in whether they like it or not. And Ukraine could hang in the balance between money and geopolitical power. Keep watching Russia, and make sure you know how much exposure you have to the conflict. If "all hell breaks loose," you'll be glad you took the time to find out.

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2014, at 11:34 AM, rodgerolsen wrote:

    This is a strangely biased article. How is demanding payment for your product "sucker punching" someone? You don't characterize GM as "sucker punching" its customers when it wants to get paid before delivering a car.

    The reporter also assumes that there is some reason why Europe would want to suffer higher prices and a slower economy to punish Russia because the US caused coup in Ukraine misfired.

    European countries do a lot of business with Russia and it is unlikely they will shoot themselves in the foot to appease the American superpower.

  • Report this Comment On June 30, 2014, at 1:10 PM, RF1 wrote:

    I don't see Russia as having very much leverage in this. They obviously jacked up the price to Ukraine after their boy Yanukovich was chased out of town and are clearly playing power politics with energy in order to pressure Ukraine to stay in the former Soviet sphere, rather than towards the West (which has obviously failed). The Russian budget is made up of about 50 percent energy exports, much of which goes to Europe. Europe, on the other hand, can over the next few years diversify the 30% they import from Russia to a combination of Norway, Africa, US and Qatari LNG, as well as domestic shale. Even with the deal Russia recently signed with China, the pipeline still needs to be built and it wouldn't be until 2018 at the earliest that the deal would reap any dividends for Moscow.

    Given the poor state of the Russian economy today as well as looking sectoral sanctions, Russia can't afford to disrupt its export revenues, so Putin really doesn't have much choice than to play ball with Poroshenko over Ukraine, lest risk crippling sanctions that will set his economy back years.

  • Report this Comment On June 30, 2014, at 2:46 PM, Romanticapped wrote:

    Russia is counting on the modern Corporate and company culture of greed. Sadly it is true, they would rather make a profit by and large than do what is good and just and right. Rather than help suffering people, they will make gestures and continue doing business with Russia for a buck.

    This is a very sad world we live in today, very few businesses have good ethics anymore, they don't take care of low level workers or their communities unless there is a Public relations/marketing benefit in it for them. Very...Very...Sad.

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