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ANALYSIS-Russian Gazprom extends Kremlin reach in EU, Asia
By Sujata Rao

MOSCOW, Oct 26 (Reuters) - Russian President Vladimir Putin did not have to send out the tanks when last winter neighbouring Georgia's objections to Moscow's military bases on its territory got too annoying.

He simply shut the gas taps.

The episode became another example of how Gazprom -- the world's largest gas producer and provider of eight percent of Russia's gross domestic product -- has evolved into a vital tool on the Kremlin's domestic and foreign policy arsenal.

Gazprom's reach at home is all pervading.

The firm controls 30 newspapers, television and radio stations, subsidises hundreds of Siberian Arctic towns, owns schools, hotels, yacht clubs, aircraft and airports, while its 35-storey blue-glass headquarters towers over Moscow.

Then there are the gas assets: 150,000 km (94,000 miles) of pipelines and 300,000 workers spanning 12 time zones.

By 2020, its reserves of 30 trillion cubic metres will supply two-thirds of European needs and China's booming market.

"Gazprom cannot help but be a political instrument. When it makes a decision, you must view it against the prism of Russian foreign policy," said Stephen O'Sullivan, analyst at United Financial Group, which administers on behalf of clients some minority stakes in Gazprom.

In Russia, one hand washes the other. Analysts say the Kremlin-Gazprom partnership makes good political as well as business sense. If Putin uses Gazprom as a lever in foreign negotiations, he also pushes gas sales east, west and south.

Most recently, analysts say, it was Kremlin intervention that put Gazprom on the shortlist of international firms competing to build a $20 billion trans-China gas pipeline.

So when Putin was scouting for someone to help consolidate his hold on the 38 percent state-owned firm, he chose Alexei Miller -- a close ally from his own home town St Petersburg.

In a shock assault on Gazprom, which reflected Putin's concern for the strategically crucial firm, CEO Rem Vyakhirev, who for nearly a decade ran the firm as his personal fiefdom was sacked. Soon after, other Vyakhirev allies were shown the door.

"NO ONE KNOWS ANYTHING ABOUT GAZPROM"

It was about time, analysts say.

Gazprom is the new avatar of the Soviet Ministry of Gas -- in 1989 transformed into a company and then privatised.

Analysts say that during Russia's often-criticised privatisations of the early 1990s, swathes of Gazprom shares were snapped up by top managers and former Soviet officials.

"Somehow less than 40 percent has ended up in state hands. Auctions were manipulated so that favoured people got many shares at low prices," UFG's O'Sullivan said.

So tight a ship did Vyakhirev run, that the state, Gazprom's largest shareholder, had little idea of what the firm was up to.

When Deputy Prime Minister Boris Nemtsov was asked in a 1997 television interview about the company, he said simply: "To be very frank, no one knows anything about Gazprom."

That is now likely to change, analysts say, because Putin realises that Gazprom is likely to be far more effective than tanks in keeping ex-Soviet states firmly in Russia's backyard.

"Putin's clear view is to build very close relationships with all the ex-Soviet states and gas is an absolutely crucial element in that," said Jonathan Stern, Associate Fellow at the Royal Institute of International Affairs.

GAS - CARROT AND STICK

The diplomatic gas tool is not always used as bluntly as in Georgia. The approach in Turkmenistan was more pragmatic, but just as effective.

In 1999 Putin took a plane to the Central Asian state, which was in talks to build a $2 billion link to export its own gas directly to Europe and break its dependence on Russian pipelines.

Instead, Putin coaxed Turkmenistan to sell to Gazprom-linked trader Itera to sell on to ex-Soviet Ukraine and Moldova.

This move effectively scuttled Western hopes for a gas pipeline out of Central Asia, simultaneously freed up Russian gas for export to lucrative European markets and boosted Gazprom's multi-billion dollar pipeline project to Turkey.

Allowing Turkmenistan to supply the high-risk ex-Soviet market, where bills need chasing, frees up more Russian volumes to export abroad.

Today 35 percent of the European Union's gas comes from Russia and that will rise to 60 percent in the enlarged EU -- putting Europe's security of supply firmly in Russian hands.

Gazprom is also trying to elbow into the Kovykta project to supply China, a country with which Moscow wants to boost ties.

Putin's steps to open up Gazprom have won support from investors and lenders, who see its monopoly and sinister reputation as a symbol of all that is wrong with Russian reform.

But Gazprom will not be easily tamed and it could be years before the full extent of its secretive dealings become known.

Now more focus is likely on core gas business and efforts to prevent loss of company assets. This month Gazprom announced it would sell all its media assets to concentrate on energy.

And the new board, packed with Putin's coterie, will be more a Kremlin tool then earlier, anlaysts say.

"Now we shall see a closer relationship between the Kremlin and Gazprom under Miller," O'Sullivan says. "In fact Miller and the Kremlin -- they are one and the same."

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