The announcement of a 9% third quarter year-on-year fall in profits by Gazprom, Russia’s state-controlled monopoly gas exporter, triggered fierce criticism from Russian Prime Minister Vladimir Putin. Putin scolded Gazprom for its “inefficiency” and warned that the company may lose its monopoly status to run the country’s gas transportation network.
Putin’s remarks could signal the prelude to a long-awaited change in Russia’s energy relationship with the European Union (EU) and an opening for foreign investors in major energy infrastructure projects in the country. However, the enmeshing of personal, political and business ties in Russia’s oil and gas industry means that any such change could become a long and tortuous process. And in Europe, state-controlled industries have a long tradition of defending their fiefdoms at all costs.
Falling Exports
Gazprom announced on 10 February 2011 that revenues from gas sales to Europe had fallen by 7% while expenses and operational costs had risen by 12%. Total gas exports to Europe, the Middle East and Asia fell by 21% over the reported period. Exports to Europe have been declining for over a decade. Russia accounted for 40.1% of gas European gas im ports in 2000 falling to 31% in 2008, according to the European Commission statistics office, Eurostat.Russia was still losing its share of the EU gas market through 2010.
Of Europe’s three main gas suppliers – Russia, Norway and Algeria – Russia, through Gazprom, has faced the greatest market pressure since the 2008 financial crisis and recession. According to Adnan Vatansever, senior associate and expert on Russian energy matters at the Washington-based Carnegie Endowment for World Peace, much of this decline could be attributed to Gazprom’s failure to invest in new pipelines and energy infrastructure. In the wake of the 2008 financial crisis, Gazprom announced a 22% cut in its capital investment budget.
After Gazprom's results were announced, Prime Minister Putin observed that the company's inability to invest in new infrastructure was a burden on the country’s economic development. Gazprom must allow independent gas producers access to its pipeline networks or else the government would change the rules governing the oil and gas sector.
Personal and Political Links
The same day, the personal links between Vladimir Putin and Gazprom with its supplier companies was the subject of a long article in the Russian business daily, Vedomosti , a publication affiliated to the Financial Times and Wall Street Journal.
Links between the Putin presidency and Gazprom were exposed in some detail in a 2008 report, “Putin and Gazprom”, written by former Deputy Prime Minister Boris Nemtsov and former Deputy Energy Minister Vladimir Milov. The report stated that when Putin first became president in 2000, he replaced the entire top management of Gazprom with his own cronies from St. Petersburg. Gas output over this period has been falling steadily. To meet demand, Gazprom has had to import supplies from mostly Central Asian suppliers at prices that have been higher than those it can sell to customers in its domestic market. One third of the Russian gas market is supplied by non-Russian gas.
The report added that rather than spending its profits on new gas field developments and infrastructure, the company has financed worldwide acquisitions as well as ballooning expenses. The company’s debt rose from US$13.5 billion in 2000 to US$61.6 billion in 2007. At the same time, some 6.4% of Gazprom shares, or US$20 billion, has disappeared from its books.
Boris Nemtsov today is the foremost critic of the Russian government who remains free. He was arrested briefly last New Year’s Day for 15-days for defying police instructions during a permitted demonstration in Moscow.
Attempts to reform EU-Russia energy ties and to allow foreign investment in Russian energy infrastructure have been ongoing for the last two decades. The only concrete results to date are those where individual members states, notably Germany, have forged links with Russia in projects such as the Nord Stream gas pipeline which will run under the Baltic Sea. Notwithstanding the recent share exchange between oil companies BP and Russia’s Rosneft, which received mixed responses from the capital markets, foreign entrepreneurs in Russia remain wary of what they call a worsening investment climate.
Maria Kielmas - Maria Kielmas
