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#10 - JRL 7065
February 17, 2003
Gazprom celebrates 10 years of no reforms
By Andrei Litvinov

On February 17 Russias gas giant Gazprom marks its 10th anniversary. Speaking at a meeting convened to celebrate the event on Friday Russian President Vladimir Putin reassured the companys management by saying the state-controlled concern would not be broken up, though it must become more transparent. However, it turns out that the companys management are less than keen on that prospect, too.

In truth, Gazprom came into being more than 10 years ago. As early as 1989 a state-owned concern was formed on the basis of the Soviet Ministry of Oil and Gas and the then-minister Viktor Chernomyrdin became the head of the gas giant. On Monday Russia marks the 10th anniversary of the governmental decree that created the Russian Joint Stock Company Gazprom in its present form.

That happened two months after Viktor Chernomyrdin the longest serving Gazprom chief to date was first appointed head of the Russian government in 1993. The special status of Gazprom has remained unchanged, and the formal transformation of the ''Russian'' into the ''Open'' Stock Company in 1998 barely changed anything.

One of the largest gas companies in the world, accounting for 20 per cent of the worlds gas production and 90 per cent of Russian domestic production, has always been controlled by the state. Presently, the government holds a 38.37-per cent stake in the company, and enjoys a majority on the companys board of directors. Such attention on the part of the state is hardly surprising: Gazprom provides 25 per cent of all tax revenues in the past 10 years the company has paid over $40 billion in taxes and accounts for 8 per cent of the nations gross domestic product.

Despite this, Russias state gas policy of late has been torn between two conflicting forces the main one aimed at preserving the gas monopoly as a powerful lever for maintaining influence at home and abroad; and a second lesser force led by liberal politicians attempting to reform the gas giant.

Surprisingly, those attempts began even before RAO Gazprom was founded. Back in February 1992 the government, headed by Yegor Gaidar, tabled a proposal to set up independent gas firms, at the same time preserving the unified state-owned gas transportation network. But within three months the author of the proposal, Fuel Minister Vladimir Lopukhin, was dismissed from his post.

In 1997 the International Monetary Fund, on which Russia was very much dependent on at the time, demanded that Moscow launch the long-awaited reform of the gas industry as a key condition for further extensions on loans.

But PM Chernomyrdin came to the defence of his brainchild, saying he would not allow anyone to plunder Gazprom. A year later Chernomyrdins successor as prime minister, Sergei Kiriyenko, attempted to deprive the companys CEO Rem Vyakhirev of his personal control over the governments stake, and demanded in the form of an ultimatum that the company immediately repay its debts to the budget.

Kiriyenkos efforts were thwarted when President Boris Yeltsin telephoned his young subordinate and explained that a strong Gazprom means a strong Russia. All those examples prove that if the state influences Gazprom then Gazprom, too, influences the state. The political weight of Gazproms top managers has always been so great, that they could settle any matter in the corridors of power without having to resort to any unnecessary formalities, such as board meetings.

On the other hand, the company itself, with its enormous financial resources, has always been ready to render services to the state, be it the presidential election or the sensitive NTV issue. In exchange the state agreed to shut its eyes to certain particulars, such as the fact that relatives of Gazproms top managers hold huge shares in the concern and its affiliates. In the past 10 years the company saw only one management reshuffle, and that happened only after Vladimir Putin came to power in 2000.

At this, the new CEO of the company Putins protege Alexei Miller was compelled to apply huge efforts to get back the assets the companys ''old guard'' had nearly completely embezzled.

The loudest and at the same time most scandalous achievement in that sphere proved the return of Sibur, the concerns petrochemical affiliate. A decision on the additional issue of Sibur shares, which would have diluted Gazproms portion in that company, was reversed only after Siburs chief Yakov Goldovsky found himself behind bars on embezzlement charges.

In the meantime, Gazprom has been gradually re-establishing control over companies like Zapsibgazprom and Stroitransgaz; the concerns relationship with Itera, too, has been undergoing changes. In the times of Rem Vyakhirev Itera was selling Gazproms gas to the former Soviet states and producing gas at Gazprom fields on preferential terms. At the same time, observers do not believe that the assets being returned to Gazprom have kept their value. In some cases, there are so-called ''shell firms'' that have lost all the assets they once had.

At any rate, the company is placing more emphasis on gathering in its wayward assets. It is also clear, however, that the concern has no intention of helping the government in implementing its plans for making the gas industry more transparent and market-oriented.

In September 2001 Vladimir Putin approved the proposals of the Kremlins work group headed by the first deputy chief of the presidential administration Dmitry Medvedev on changing Gazproms dual-market share structure and creating fairer trading conditions for shares at home and abroad. Currently, foreign investors are legally limited to buying Gazprom shares through American Depositary Shares, which cost more than local shares that trade for Russians only. That so-called ''ringed fence'', built to keep foreigners out of local markets, proved largely ineffective, and Medvedevs group suggested it ought to be removed. However, the companys board has still not found time to review those proposals.

The Ministry for Economic Development and Trade also tabled a plan envisaging a rather moderate reform of the gas industry back in 2001. The ministrys proposals are, in essence, aimed solely at creating a separate transportation company as a fully owned affiliate of the concern. The key goal pursued by the proponents of the reform is to make the company more transparent for the state and for minority shareholders.

However, Gazproms management rejected the ministrys plan as anti-national, threatening to jeopardize the normal gas supply in the country, and complained to the president. As a result, the government session dedicated to the gas market reform initially scheduled for early December 2002 was postponed till some time in February, and the other day Prime Minister Mikhail Kasyanov, as if wishing to mark the occasion of Gazproms anniversary, said he would not be able to hold the session until at least early March.

It appears that the analysts who predicted that there would be no radical changes to the strategically important gas industry in an election year were right.

On Friday Vladimir Putin himself confirmed the suggestion, as he spoke at the meeting convened to celebrate the companys anniversary. The government does not support any plans to break up Gazprom, Putin said. ''As a strategically important company, Gazprom should have been and has been kept as a unified organism,'' the Interfax news agency quoted Putin as saying. ''Today no reorganization is possible without approval from the state or Gazprom,'' Putin added. ''This issue is closed. Nobody will be able now to restructure Gazprom without the state's backing.''

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