Russia shocked the world in 2010, when Forbes announced that Russian national energy champion Gazprom (OGZPY) had topped the list of the world's most profitable companies -- raking in $24.3 billion the preceding year. Two years later, Gazprom was at it again, reclaiming the "most profitable" title in 2012 after a year's lapse -- and nearly doubling its profit.
And now, Gazprom is making news again. This time, for two reasons. First, despite accounting for 8% of the gross domestic product of all of Russia, Gazprom is no longer that country's most profitable company, much less the world's.
As reported by investment banker RBC, oil and gas company Surgutneftegaz was Russia's most profitable company last year. Regardless, Gazprom, along with SNG, Lukoil, Rosneft, and other energy companies, raked in 98% of all profits earned by Russia's largest companies last year.
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Small pond, big fish
Although it's the biggest country in the world by landmass, Russia's economy isn't the world's biggest by a long shot. According to the number crunchers at Statista.com, Russia's $1.2 trillion economy is only the 15th biggest globally, and ranks behind such powerhouses as Mexico, Italy, and Brazil (and of course, the U.S. as well).
Nonetheless, RBC's finding that energy companies such as Gazprom account for essentially all the profit that Russian companies produce is a bit of a shocker -- and a revelation. Oil and gas companies accounted for "only" 79% of national profits in 2013, according to RBC. Now that number is nearly 20 percentage points higher -- while overall profits are lower. Data from S&P Capital IQ puts Gazprom's large share of the country's profits in perspective: Profits at Gazprom over the past 12 months amounted to less than $7 billion -- down from more than $40 billion in 2012.
Granted, Gazprom is just one company. Granted too, RBC's survey covered companies representing "only" 77% of Russian GDP. But in winning 98% of that 77%'s profits, energy firms such as Gazprom must have corralled at least $3 out of every $4 of the declining profits that Russian companies earned last year.
What it means for Russia
Local paper The Moscow Times characterized this news as "making a mockery of [President Vladimir Putin's] attempts to wean Russia off its reliance on energy exports," and proof positive of "Russia's failure to diversify its economy away from" commodity exports of oil and gas.
With oil prices still hovering around $50 a barrel, and natural gas contracts selling for $2 and change, Russia's Central Bank predicts that Russia's economy is on course to shrink by 4% or more this year, then fall further in 2016.
Prime Minister Dmitry Medvedev still hopes to "reorient" the Russian economy "away from commodities toward other sources of growth" -- but we've heard such promises before. And there's no doubt that a quicker solution to Russia's slump would be if oil prices magically turned around and started moving higher again.
What it means for the world
The quickest way to boost profits for Russian businesses in general is to boost the profits of its energy sector in particular. That's because energy still essentially is "Russian business," despite the government's best efforts to change the equation.
Sadly, two of the best ways to boost oil prices quickly are to cut supplies and to raise investors' fears about imminent supply disruptions. Look around the world today, and it's hard not to see these factors behind many moves that Russia is making...
In the Arctic, Russia is planting flags and refurbishing military bases, building icebreakers and beefing up its military presence. All these steps seem aimed directly at controlling an area of the world estimated to hold 30% of undiscovered natural gas reserves, and 13% of undiscovered oil.
In sending warplanes, missiles, and perhaps even ground troops to Syria, Russia promises to keep the Syrian civil war alive, and reduce the risk that rebels will displace President Bashar al-Assad and bring an end to that conflict.
Indeed, even Russia's invasion of Ukraine can be seen through the prism of energy strategy, as a way of gaining control over pipelines crucial to Russia's business of exporting natural gas to Europe.
What it means for investors
Russia's urgent need to boost oil and gas prices to revive its ailing economy promises to keep conflict alive in many oil-rich areas around the globe. This motivation has just as important implications for energy investors.
Believe it or not, if you're betting on a rebound in oil prices: You're kind of on the same side as Russia. Both oil investors and Russia's government want higher oil prices. The only real difference is that unlike individual investors, Russia has the tools to try to make that happen.
