The escalating sanctions between Russia and Europe since the beginning of the invasion/war in Ukraine reached a new level last week when Gazprom indefinitely stopped the flow of gas from one of the main gas pipelines to Europe. While Europe is taking swift action on one side, economic steps are being taken on the other to prevent unrest among the population, from industry to households.

But not enough is said about what the other side of the crisis is doing - how is Gazprom dealing with the turmoil that started with the Ukraine war? If the company is not selling gas to Europe, what is it doing with it? What is Gazprom's strategy based on? We'll be looking for answers to these questions this week.

GAZPROM'S WAY TO EUROPE: FROM PIPELINING TO GAS CUT-OFF

For Russia, Europe has been an important foreign policy and energy destination since 1971, when the USSR began supplying gas to Western Europe for the first time. After the collapse of the USSR in 1991, the Russian Federation has sought to remain in the European market. In this context, Russia first built the Yamal-Europe pipeline in 1997, which transports 33 bcm (billion cubic meters) of gas per year to Europe via Poland. Then, in 2011, the Nord Stream I pipeline went into operation, transporting gas directly from Russia to Germany and now making headlines due to disruptions. The Nord Stream I pipeline eliminated the problems Russia previously had with transit countries such as Belarus and Ukraine because, unlike the Yamal and Bratstva pipelines, there are no transit countries and the pipeline transported gas directly from Russia to Germany. In addition to these breakthroughs, a sister pipeline to Nord Stream I was built while sanctions were imposed on Russia due to its annexation of Crimea: Nord Stream II. Like the first pipeline, it would transport gas from Russia to Germany and deliver it directly to this country. Similarly, the Turkish Stream I and Turkish Stream II pipelines were implemented through Turkish territorial waters. While the first of the Turkish Stream pipelines delivered gas directly to Turkey, Turkish Stream II delivered and continues to deliver 15.75 bcm of gas to southern Europe.

The history of the pipelines summarized above used to be seen as a testament to the importance Russia attaches to the European market, and as evidence of its efforts to increase its presence and market share there in the future. However, in the wake of the sanctions that began with the invasion, the opening of the Nord Stream II pipeline was initially suspended. As a result, Europe began looking for alternative suppliers to Russia. At the same time, Gazprom began to reduce gas flows to both Yamal and Ukraine. Eventually, the Nord Stream I pipeline, where the flow had fallen to 40 percent, was shut down completely. What is Gazprom doing with this gas now?

GAZPROM'S TRIAL BY SANCTIONS: REDUCE PRODUCTION!

Gazprom produces 500-600 bcm of gas annually, a significant part of which is destined for the Russian domestic market, while the rest is exported to the European and Asian markets. In this context, statistics show that on average 180 bcm of gas is delivered to Europe and in this sense, Europe has been the most important foreign market for Gazprom. During another crisis related to Ukraine (2014), Russia and China agreed on the "Power of Siberia" pipeline, through which 38 bcm of gas would be transported to China annually, which was called a "mega deal" at the time.

In fact, we are again in a similar situation, but in this case Europe has reduced its gas purchases from Gazprom by 48 percent since the beginning of 2022. In the face of this situation, Gazprom seems to be pursuing two strategies. The first is to reduce production. An analysis of the data shows that the company has reduced its production by 13.2 percent year-on-year. In fact, excluding the former Soviet republics, the company's gas deliveries to Europe between January 1 and August 15 fell 36 percent year-on-year to 78.5 billion cubic meters.

With the cut in production, Gazprom seems to be acting cautiously. Although there are alternatives, considering the global natural gas market, the company does not want to produce too much gas and sell it at a cheap price and is also looking for better opportunities and favorable conditions by postponing production. In a sense, it is prudent in its strategy of what can be done without Europe. However, it is not holding back the possibility of making another breakthrough. Let us now look at the breakthrough.

CHINESE OFFENSIVE: GAS TRANSSHIPMENT TO CHINA UP 60 PERCENT

Gazprom's breakthrough is driven by two pressures. The first is the economic pressure. Oil and gas revenues play an important role in Russia's national budget and reserve accumulation. When times are uncertain, the company must guarantee at least some revenue. Second, if the company does not export gas to Europe but simply cuts production, both the company's and Russia's image would suffer a desperate jolt. To prevent this, China is once again stepping in.

Gazprom states that the company's gas exports to China increased by 60 percent in the first eight months of the year. The increase is due to flow through the Power of Siberia pipeline. Last year, 10.4 bcm of gas was transported through the pipeline, which opened in 2019. The pipeline's capacity is 38 bcm, and it can be observed that the flow through it has been gradually increased. In addition, in February 2022, Gazprom signed an agreement on the transfer of another 10 bcm of gas to China. Under this agreement, which is based on the construction of an additional pipeline, the volume of gas that Gazprom will supply to China will increase to 48 bcm. In addition to pipelines, China also purchases liquefied natural gas from Russia. In the first six months of the year, there was a nearly 30 percent year-on-year increase on this item. In addition, August saw a 22-month high of 611,000 tons of gas delivered by Russia to China, according to S&P Global.

Gazprom officials regard the Asian market as stronger and more attractive. They estimate that China's gas consumption will increase by 40 percent over the next 10 years, and they are rapidly moving towards this market. In other words, just like Europe, Gazprom is diversifying its markets for the sake of energy security. In fact, Gazprom had already started this diversification strategy before the crisis, but the latest data show that the main direction of this search will be China and that it will proceed faster.

In summary, Gazprom planned to maintain its power and even increase its share in the European market, taking into account the global balances. The Ukraine crisis led to the opposite result. Therefore, the company turned to alternatives, albeit reluctantly, considering the possibility that its previous investments would go down the drain. Gazprom's investment losses are partially offset by record-high gas prices on the world market. Still, the company is taking its time and proceeding with a two-pronged strategy. On the one hand, it is cautiously cutting production to prepare for the worst (loss through profit), and on the other, it is strengthening its ties with China and turning to new profit centers. It should also be noted that Gazprom's strategy is flexible. Instead of cutting production, the company could have produced the same amount and sold the gas at a cheaper price, but instead it maintains its profit margin and keeps the door open by telling Europe, "If we reach an agreement, I can increase production again." And by working with China, it sends the message, "Look, nothing is going to happen to me, I'm going to sell my gas anyway, and you will be the one who suffers."