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RIA Novosti
March 23, 2004
PUTIN: TREAT GAZPROM GENTLY
Vasily Zubkov, RIA Novosti economic analyst.

Several days before a fresh round of talks on Russia's WTO entry, the newly re-elected president of the Russian Federation, Vladimir Putin, made a key statement about the future of one of Russia's biggest companies: Gazprom.

According to Putin, Gazprom, as before, remains one of the pillars of the Russian economy. It is a "structure which largely forms the basis of our economic growth," the president emphasised. "At present gas is sold inside the country below cost price, thus ensuring most of the economic growth in other branches." It may be recalled that the European Commission set before Russia six indispensable requirements for joining the World Trade Organisation. They are: raising the domestic price of gas; repealing Gazprom's export monopoly; free gas transit; the right for foreigners to build pipelines; equal transit tariffs for domestic consumers and for export; and lifting export duties on gas. No compromise acceptable to both sides has so far been achieved.

It appears that following President Putin's remarks Russia will not agree to serious concessions regarding Gazprom at WTO entry talks.

Gazprom produces 94% of Russia's natural gas (NG) and controls one-quarter of the world's resources. Last year, Russia became the world leader in terms of the daily output of gas and gas condensate. In 2003, it produced 540 billion cu m (a 4% rise on 2002). By 2020, the annual production of NG in Russia is expected to reach 730 billion cu m.

More than one-third of Russia's natural gas is exported, going to nearly thirty countries. Gazprom's present share of world exports is 45%. With ruling prices and trends in gas demand, net profits of the Russian gas sector in the 2003-2020 period will total no less than $350 billion.

As if answering opponents from the European Commission, the Russian head of state called for treating the gas giant gently. This does not mean, however, that Russia's gas industry does not need to be liberalised, and its leader, Gazprom, will be negatively affected by any change. President Putin, while singling out two main areas of the concern's future development, pointed first to the need to ensure the "transparency" of its block of shares. What did he mean?

Gazprom's charter capital is just over $4 billion, with more than 23 billion ordinary shares issued. At present, the state owns the largest stake - 38.37%. Another 17.33% belongs to the concern's subsidiaries. This arrangement allows the government to control the company. But at the same time, as the state has no direct control over 51% of the stock, one cannot rule out the hypothetical chance that it will become a minority shareholder.

Moscow analysts in this context are discussing possible ways by which Gazprom subsidiaries' shares can be handed over to the state. One probable scenario is that the gas concern will merge with state-run Rosneft. Another way for the state to acquire the Gazprom shares it needs is to pay off the company's debts to the state budget or through massive tax breaks...

Economic Development and Trade Minister German Gref has announced that the government has scheduled to examine a plan to reform Gazprom this June. According to him, the market for the company's shares will be liberalised as early as this year. The ministry believes that it must result in the domestic and external shares markets merging. The present difference between prices on Gazprom paper inside the country and abroad reduces the capitalisation of the concern, which by the middle of this March was $46.2 billion. There is an opinion in the West that the Russian gas "monster" should be worth several times more. Already more than 10% of the concern's stock is in foreign hands (including 5% owned by Germany's E.ON).

In his public remarks, President Putin also responded to the issue of independent gas producing and oil companies gaining free access to Gazprom's transport infrastructure. In Putin's opinion, the "pipe" should be opened to "private" interests.

It is considered in Moscow that the "free access to the pipe" advocated by the president will make life easier for Russia's independent companies. And this will in turn increase the share of the private sector in the gas branch. One might be so bold as to say that competition with private firms on the internal market may compel Gazprom to work more effectively.

Another thing that may be expected in the future is that major private gas producers will have share participation in future pipeline projects, although, on the other hand, a big question mark still hangs over their mass exporting of NG. Putin did not miss the opportunity to mention this either.

Regarding the price for domestic gas, the president's point of view is this: the demand that it should be $110 per 1,000 cu m like in Europe (which the EU is insisting on, while the figure in Russia is three times lower) is unrealistic. Russians will not be able to cope with European rates any time soon. Ex-works domestic prices will of course grow - but not in one go and not by much.

Two conclusions can be drawn from Vladimir Putin's remarks. First, the reform of Russia's leading monopolies - the national power grid Unified Energy Systems, Gazprom, Russian Railways, Sberbank and others - will continue. Second, the fundamental reform of Gazprom will be a long and painstaking process, and it will last until the beginning of next decade.