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from stratfor.com
Summary
The Dow Chemical Co., the leading U.S. petrochemical company, and Russian state natural gas monopoly Gazprom have announced a joint venture deal. Not only would a tie-up between the two companies be mutually beneficial, it could revamp large portions of the European economy – as well as rebalance relations between Washington and Moscow.
Analysis
The Dow Chemical Co., a U.S. petrochemical giant, and Russian state natural gas monopoly Gazprom announced May 26 a joint venture that has the potential to remake the European economic landscape and to reshape Moscow-Washington relations.
The potential implications of such a deal are staggering.
Dow is among the world’s largest chemical manufacturing firms – and among the most important precursor materials that chemical fabricators use is natural gas. Natural gas prices in the United States and Europe are near historical highs and rising, which has already squeezed many chemicals firms’ margins to the limit, if not squeezed them out of the business altogether.
Russia is different. There, natural gas prices are subsidized in order to keep the population placid. Consequently, natural gas prices in Russia are about one-fifth the rate of prices in core Europe. And since Russia’s bitter winters dramatically reduce waterborne oil shipments, resulting in price-gutting gluts of crude oil – another leading chemical precursor material – every time the temperature dips, it rapidly becomes apparent that Russia is potential perfection for petrochemical firms.
Providing perfection for foreign petrochemical firms, however, might not be exactly what the Kremlin is aiming for. Remember that Gazprom is not only majority state-owned, but its chairman, Dmitry Medvedev, is Russian President Vladimir Putin’s most likely successor – meaning Gazprom is often used as a vehicle for promoting the Russian state’s interests. But the deal with Dow stands to reinforce swathes of Russian foreign policy initiatives.
Gazprom has been attempting to use its economic bulk and political heft to force its way into downstream activities in Europe, but the Europeans have almost uniformly rebuffed the Russian firm on national security grounds. Clinching the Dow deal would allow Gazprom to jointly produce chemicals for export to Europe – thereby massively undercutting local producers such as Germany’s BASF and Bayer, Poland’s Ziaja Kosmetyki, and France’s Lyondell Chemical Co.
In addition to the satisfaction Gazprom and the Kremlin would undoubtedly feel at the suffering of European chemicals firms, Gazprom could also attempt to scoop up those firms as they go under, only to supply any such acquisitions with cheap natural gas to solidify Gazprom’s emergence as a petrochemicals juggernaut. And for Dow, the market share and profit possibilities are dizzying.
But as in all Russian policies these days, there is a deeper geopolitical logic. Dow is one of the largest U.S. firms, and therefore is well-wired into Washington. Effectively having the Russian state as a partner would make Dow the permanent advocate for Gazprom with the White House, asking Washington to go easy on Russia in the foreign policy sphere. While the United States and Europe are undoubtedly partners, economic competition is a built-in feature of the relationship. And suddenly, the United States has some very real economic reasons for wanting to see Gazprom succeed.
All in all, the deal bears the hallmark of Medvedev’s pragmatism, and is a shining example of Russia’s efforts to use its massive energy output as a tool of foreign policy. The Europeans have already seen the Russians wield this hammer; now they will see Moscow wield a sledgehammer.
But as always, the devil will be in the details. No company with Dow’s experience will go into an investment climate as sketchy as Russia’s – particularly with a partner as rapacious as Gazprom – quickly or blindly. We are not surprised that the two firms are not releasing any of the details of their agreement yet beyond the news that they have reached a deal. Every firm that has partnered with Gazprom, including the hardly risk-averse Halliburton Co., has wound up feeling like it spent a few hours in a dull grain thresher. For this joint venture, and the broader policy spin-offs, to be successful, the Russians in general – and Gazprom in particular – will need to restrain their predatory natures.
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