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New York Times
December 19, 2001
Did Russia's Gas Giant Just Glimpse the Future?
By SABRINA TAVERNISE
MOSCOW, Dec. 18 -- Alexei Miller, the 39-year-old executive handpicked by President Vladimir V. Putin to run Gazprom, Russia's giant gas monopoly, has cleared the first major hurdle in his struggle to bring the sprawling gas company under his control.
In an unexpected move, Mr. Miller forced Gazprom's board to vote on buying back control of a gas-producing subsidiary that had slipped out of Gazprom's control in 1999 in a transaction that investors call questionable.
The vote on Monday approving the buyback of the company, Purgaz, was an important victory for Mr. Miller, who was plucked from obscurity by Mr. Putin in May and charged with taming Gazprom, a largely state-owned company with more than 360,000 employees that for a decade has been run as an empire unto itself. The vote seems to indicate that Mr. Miller is making progress.
"Mr. Miller sprang this on people — there was a moment of silence, of uneasiness," in the boardroom, said Boris Fyodorov, a board member who represents minority shareholders. "This highly controversial question was finally resolved."
The buyback decision capped months of struggle between Mr. Miller and the powerful interest groups he has been wrestling with since his appointment six months ago. He has come under siege by old-guard Gazprom managers and hungry oil companies, all eager to grab pieces of the business while the company is still in disarray.
Mr. Putin has invested much political capital into bringing order to the company, which, as the supplier of one-quarter of Europe's natural gas, plays a crucial part in Russia's growing role as a world energy producer.
Mr. Miller's "intentions are both to stop the stealing and to recover lost assets, but there are such powerful vested interests trying to stop him," said William Browder of Hermitage Capital Management in Moscow, which owns Gazprom shares. "He's not running the company like his own personal piggy bank. That's important."
Rumors swirled this fall that Mr. Miller would be ousted. Then, in late October, when he was in the hospital, an Internet newspaper with ties to the Kremlin reported that he had been fired. The company denied the report, but its appearance showed how powerful the interests lined up against Mr. Miller are.
"There is a plot to get this guy," said Charles Ryan, executive chairman of the United Financial Group (news/quote), a Moscow-based investment bank. "They all want a situation where Gazprom is in chaos. The oil companies would get cheap assets and a lot of the old management's thievery would be obscured."
Mr. Miller took the helm at Gazprom after years of mismanagement and lack of investment had driven the company into decline. Production in Russia's gas industry, which controls a third of the world's reserves, has fallen 16 percent since 1990. Giant Russian fields, developed in the 1970's and 1980's, are producing less than they were a decade ago, and new fields must be tapped to halt the slide in output.
"Relying on the supergiant fields of the past is no longer enough," said Simon Blakey, director at Cambridge Energy (news/quote) Research Associates in Paris. "The Russian gas industry is at a turning point."
A major drag on Gazprom's development, analysts say, is low gas prices within Russia. The company sells gas at home for less than a tenth of prices in Europe. That means that Gazprom's European sales, though only a fifth of its total output in volume, make up two-thirds of the company's earnings.
The government has been slow to react to Mr. Miller's requests to raise prices. So Gazprom's ambitious investment program remains "wishful thinking," Mr. Fyodorov said during a conference call for investors after the board meeting.
At current prices, "the production level cannot be sustained," he said. "There was no point in discussing concrete projects when one-third of them would have to be thrown away."
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