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As Gazprom Grows, So Does Russia's Sway

Vladimir Putin is slowly but surely building a state-controlled energy behemoth that is continuing to expand.

October 16, 2005|Kim Murphy | Times Staff Writer

MOSCOW — A year ago, Ukraine appeared to be pulling relentlessly away from Russia's grasp and into the arms of Europe, and Russian President Vladimir V. Putin seemed helpless to stop it.

After the democratic Orange Revolution, Ukraine was rushing to join the World Trade Organization ahead of Russia and talking of reversing the privatization of companies bought by Russian investors. Together, those moves represented an economic nightmare for Russia in a nation it once considered a virtual client state.

The picture looked a lot different Sept. 30, when new Ukrainian Prime Minister Yuri Yekhanurov arrived at the Kremlin. "We have given a clear signal," Yekhanurov declared. "Reprivatization problems will no longer worry our partners."

What brought Ukraine around?

It turned out that Putin had a secret weapon known as Gazprom. The Russian energy giant supplies Ukraine with a third of its gas at a fraction of the price the company charges European customers. When Ukraine's new pro-Western leaders talked of breaking out of Russia's sphere of influence last spring, Gazprom executives announced that if Ukraine wanted to move toward Europe, it should begin paying European prices for its gas.

Most analysts predict such a move could cost as much as $3 billion and result in the virtual collapse of the Ukrainian economy.

Now, after Yekhanurov's visit, the two sides plan to hold new and presumably more conciliatory talks on the gas pricing issue.

This is what can happen when the government owns the gas company.

With shipments of 545 billion cubic meters a year, the Gazprom behemoth dominates Europe and is already the largest-producing energy company in the world. Now, with the recently announced plans to buy Russian-based OAO Sibneft for $13.1 billion, open up half its stock to foreign investors and expand into energy projects across the globe, Gazprom says it could out-earn even international giants such as Exxon Mobil Corp. within the next five years.

"Just a few years ago, Gazprom's activity was basically limited to the production of gas in western Siberia, distributing it virtually at cost, or sometimes below cost, throughout Russia and making a profit by selling it" to Europe, said Sergei Kupriyanov, deputy head of Gazprom's information policy department. "Over the past few years, we've demonstrated colossal growth."

Now, Gazprom supplies about a third of all Western Europe's natural gas, including 39% of Germany's gas and nearly all of Slovakia's and Bulgaria's.

With plans to acquire a 25% share in massive oil and gas deposits on Sakhalin Island off Russia's east coast, plus its own huge new Arctic tracts in the Barents Sea, Gazprom also is poised to become a major gas supplier to the U.S., Japan and China.

The acquisition of Sibneft, previously owned by billionaire tycoon Roman Abramovich, marks the company's foray into crude oil. The deal, scheduled to be signed in the next few weeks, will give Gazprom 650,000 barrels of crude oil production a day and make it Russia's fifth-biggest oil company. Analysts say other oil acquisitions could be in the works soon.

Slowly but surely, Putin is building a state-controlled, internationally powerful energy giant. In less than two years, the Russian president has effectively renationalized much of an oil and gas sector that had been dominated by private oligarchs, even as he has opened unprecedented opportunities for private foreign investment.

It started in October 2003, with the arrest of Mikhail Khodorkovsky, chief executive of oil giant OAO Yukos, on charges of fraud and tax evasion. Yukos also was handed a bill for $28 billion in back taxes. The move came as Khodorkovsky was trying to put together a merger with Sibneft and the subsequent sale of a large stake in the resulting energy giant to a Western oil major.

Instead, Sibneft wound up in Gazprom's hands. Yukos' main production facility, Yuganskneftegaz, was sold to state-controlled oil company Rosneft, whose board chairman is senior Putin aide Igor Sechin, for about half of what international auditors said it was worth. (Gazprom's chairman is Putin's chief of staff, Dmitry Medvedev.)

Russian news agency RIA Novosti estimates that 57.4% of the energy sector is now under state control.

This, it turns out, may be what Putin had in mind all along. Martha Brill Olcott of the Carnegie Endowment for International Peace, a Washington-based nonprofit organization, last year examined a doctoral dissertation published by Putin in the late 1990s.In it, Putin outlined his vision of an economy built on natural resources, in which "financial-industrial corporations" large enough to be "able to compete on an equal basis with the West's transnational corporations" would exploit Russia's mineral wealth. They also would provide social guarantees and protect the international position of the Russian state.

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