RUSSIAN ENERGY POLICY REMAINS UNDER PUTIN’S CONTROL

The purpose of a transitional period between a presidential election and the winner’s inauguration is to secure a smooth transfer of authority to the new leader and his team. Nothing of this sort has happened in Russia in the last two weeks. Outgoing President Vladimir Putin continues to make headlines with directives on domestic and international policy and even with a visit to the theater, while president-elect Dmitry Medvedev focuses on practical issues like small business development in Tyumen oblast (Gazeta.ru, March 12; RIA-Novosti, March 14). Putin even volunteered to explain to Western partners that since Medvedev is bona fide “Russian nationalist,” they will not enjoy dealing with him, which to all intents and purposes is a rather odd way to introduce your successor.

Last Thursday, March 13, Medvedev held his first working meeting in the Kremlin, but the significance of that event was somewhat devalued by the chosen topic – improving working and social conditions for fishermen – an issue that came to Medvedev’s attention during his visit to Murmansk in early January (Kommersant, March 14). One memorable remark from that visit was about the lack of protection for Russian fishing vessels against “harassment” by the Norwegian Coast Guard, due to the fact that the Russian Navy had no available ships, but these days Medvedev avoids any foray into national security matters (Rossiiskaya gazeta, January 12).

President Putin had far more serious issues to discuss during a meeting last Friday with Alexei Miller, Gazprom’s irreplaceable CEO (Newsru.com, March 14). One immediate question was about the deal reached by Gazprom and Naftohaz on prices and debt payments that was supposed to end the current gas war between Russia and Ukraine, the main casualty of which was the fragile co-existence between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko (Expert, March 13). The disposition for the next round had been outlined a few days earlier when Gazprom announced an agreement with three Central Asian state companies – KazMunayGaz, Turkmengaz, and Uzbekneftegaz – on importing their gas on the basis of “European prices” starting in 2009 (RBC Daily, March 12). That agreement at first glance appears to be a victory for the producers, who endured endless hard bargaining with Moscow and now would be able to calculate prices on the basis of a simple formula where the main variable is the world oil price. In fact, however, Gazprom stands to benefit from this arrangement, since it exports to Ukraine and Belarus more gas than it imports from Central Asia – and now it would demand “fair” prices, pocketing a nice profit from transit (Rossiiskaya gazeta, March 15).

Ukraine would not be able to plea for any support from the EU since, as Miller explained to Putin, already this year European importers would have to pay up to $400 per thousand cubic meters; (the earlier estimate was about $350), which would not lead to any reduction of demand (Gazeta.ru, March 14). Putin discussed these delicate matters with German Chancellor Angela Merkel earlier this month and so had a good preview of the EU summit last week where energy strategy was discussed only in general terms, while more detailed considerations were postponed until November, aiming at approving the yet-to-be-drafted Action Plan next spring (Kommersant, March 15). This gives Gazprom plenty of time for to advance its interests regarding the pipeline projects across the Baltic Sea (Nord Stream) and the Black Sea (South Stream).

Gazprom has more reasons to worry about its business on the domestic market, where prices also climb but at a significantly slower rate than for the import-export deals, while demand is certain to grow as regional applications for gasification have piled high during the electoral season. Miller most probably has secured Putin’s backing in his struggle against the “outrageous” Finance Ministry plan to increase tax on producing gas (Vremya novostei, March 13). That, however, is not enough to achieve a healthy financial balance, as Gazprom’s profits showed an unexpected decline in 2007 (after doubling in 2006), while payments on short-term credits are fast increasing (RBC, February 15; Gazeta.ru, March 11). Gross inefficiency in managing the behemoth company is the key reason for its troubles, underpinned by stagnant production, which could only be stabilized after the Shtokman field comes on line in the middle of the next decade. In the near term, Gazprom has to find a market that would accept a serious cut in deliveries, and the forthcoming price doubling for Ukraine might just solve this problem.

Medvedev, who still holds the position of chairman of Gazprom’s Board of Directors, is intimately familiar with these intrigues, but he seems to be cut out of their current spinning; he was not present at the Putin-Miller meeting and not involved in the deal making-and-breaking with Ukraine, so that his last success appears to be the visit to Belgrade in late February, when he wrapped up the agreement on Serbia’s participation in the South Stream project that had been reached in Moscow one month before. The widely expected appointment of Viktor Zubkov, who is eager to vacate his prime-ministerial chair for Putin, to chair Gazprom’s Board might signify Medvedev’s formal estrangement from the company. Besides Zubkov, two more ministers from Putin’s government will be represented on this Board (currently – German Gref and Viktor Khristenko), so he would not have to rely entirely on Miller’s loyalty.

It is not clear at all that Medvedev is ready to abandon this crucial lever of control, but he has so far shown no sign of irritation over Putin’s hard pulling of the blanket to his side. He knows perfectly well that Russians want to see him as a dynamic, determined, and resolute leader – and sternly reprimanding the head of the State Committee on Fisheries does not quite fit the bill. Firmly asserting presidential supervision over the autonomous fiefdom of Gazprom would greatly strengthen his position, but dualism in decision-making in energy policy may be a recipe for “interesting results,” in Medvedev’s own words.