By Sergei Kolchin
The management changes that took place in Gazprom in 2001–with Aleksei Miller replacing Rem Vyakhirev in the corporation’s top job–were just the first of a number of major changes affecting the future of this, the biggest player in Russia’s economy. And if some critical decisions–the de-monopolization of the gas sector by means of separating gas production from transportation, or the sale of 2.5 percent of the state’s stake in Gazprom–have been put off until later, then other matters, such as the company’s implementation of investment programs, or the investigation of the assets it has divested into its affiliated enterprises (ITERA, SIBUR, Rospan), need to be resolved right now or in the near future.
The recent visit by President Vladimir Putin to Russia’s main gas-producing region, Yamalo-Nenets Autonomous Okrug, and his participation in the triumphant opening of the new polar gas-field, underlined the leadership’s increased interest in the strategically important gas sector, but carried no guarantees that Gazprom would receive the executive power’s unconditional support for its economic policy. Remember Putin’s (typical) remarks about Gazprom’s “missing” assets, and the huge difference between the gas prices set by Gazprom and the state and those set by entities selling the same gas on the foreign market.
The executive’s reservations about Gazprom were borne out by the government’s investigation of the company’s investment program for 2002. Gazprom, we know, has proposed a marked increase in its corporate investment of 7.3 percent more than in 2001. A significant part of the investment program is linked with the forthcoming commissioning of new gas pipelines (Yamal-Western Europe, Blue Stream, Polar-Urengoy). Gazprom’s figures for the level of financing needed for the program, however, differed by over 20 billion rubles from those of the Ministry for Economic Development. The potential sources of investment growth were also a subject of some disagreement between Gazprom and the government.
The Ministry for Economic Development is fixing the rise in gas prices and tariffs on the internal market at 35 percent. Gazprom had proposed an increase of 37.5 percent. In this way, the growth in the company’s revenues will be largely unaffected by even a significant increase in gas tariffs because the cost of gas on the domestic market is traditionally so low. According to Ministry estimates, raising tariffs by 35 percent will generate a revenue increase for Gazprom of only 4 percent (assuming consumers are relatively disciplined in settling their gas bills). The chief hope is therefore, as ever, for export earnings. But it is expected that prices for natural gas on the European gas market (Russia’s main outlet) will fall in 2002 from today’s US$110 per 1,000 cubic meters to US$90-95. It was against this background, in December, that Gazprom published its “Program for the development of gas resources in Eastern Siberia and the Far East, and the provision of an integrated transport channel for accessing the markets of the Asia-Pacific region,” though this sets out objectives for the future rather than anything ongoing in the area of Russian gas exports.
The second element in the quest for resources for Gazprom’s investment program is the sale of the non-core assets currently belonging to the company. And here is another discrepancy between the corporation’s figures and those of the Ministry for Economic Development. Gazprom estimates the potential proceeds from the sale of these holdings at 20 billion rubles, while the ministry puts them at only half as much. Apart from this, further substantial resources will be required for the recovery of the assets divested earlier to ITERA and SIBUR, as well as to a range of other subsidiary entities of strategic importance to Gazprom.
Finally, the prospects for securing loans, especially foreign loans, remain unclear. Gazprom is banking on obtaining loans to the tune of 175 billion rubles on the financial markets. But this figure too is subject to some doubt. Much will depend on the state of the world fuel and financial markets, the credit ratings given to Russia and Gazprom itself, and the state of the world economy.
It thus appears that Gazprom, like the Russian oil companies before it, is facing a difficult period, in which it will need to review its priorities and adapt to the new culture of “living within its means,” without the free hand it used to enjoy, largely as a result of its privileged relationship with the government. In the meantime, Gazprom must take some businesslike decisions on the problems which have built up in recent years concerning its relations with its subsidiaries, many of which have been run as the “fiefdoms” of the company’s previous management.
One such enterprise is SIBUR, which has concentrated in its own hands the control of the country’s entire gas-processing and gas-chemical industry. SIBUR developed problems meeting its financial obligations but, with Gazprom’s help, managed to pay off debts amounting to 2.2 billion rubles ahead of schedule. Gazprom granted SIBUR the required sum in December. Prior to this, investors had been troubled not only by news of a possible financial crisis in the company but also by the uncertain prospects for its development. Having paid off its subsidiary’s debts, Sibur’s main shareholder, Gazprom, decided to revise its plans for the subsidiary holding, though Gazprom’s new strategy in this respect has yet to be determined. However, this year SIBUR will cease to sell Gazprom, and a number of Sibur’s gas-processing plants will be put up for sale. These are the Tyumen group of three plants–at Surgut, Langepas and Nizhnevartavsk–located in the areas of influence of major vertically integrated oil companies: Surgutneftegaz, LUKOIL and TNK respectively. Thus Russia’s oil companies may fulfill their long-held dream to have their own say in price-setting in the sphere of petroleum gas processing and petrochemical production.
Despite the evident uncertainty about the company’s future, SIBUR has continued to implement large-scale projects for the modernization and development of its production capability. Work has now begun on a joint venture with the Japanese company, Yokohawa, in the Nizhny Novgorod region. Shortly before the work began, a contract was signed with the German company Basell in the same region. Third, representatives of SIBUR are planning also to construct a plant for the production of petrochemical raw materials in Tver, in cooperation with German companies. While it is losing some ground Western Siberia, SIBUR is thus increasing its presence in the Volga region.
In its relations with SIBUR, Gazprom has hit upon a relatively inexpensive means of retaining control over its subsidiary. Instead of purchasing shares, Gazprom has resolved to acquire them in return for settling some of Sibur’s debts, avoiding the need for any direct financial payment. Gazprom has at least two problems with SIBUR: The subsidiary’s debts to Gazprom and Sibur’s additional US$1.6 billion share issue. Gazprom needs to buy 50 percent of the share issue if it is not to lose control over the subsidiary company. A complex solution to both problems might be for Sibur’s debts to Gazprom to be converted into shares in the new share issue. But while this scheme was still under consideration, the sell-off of Sibur’s assets mentioned above began (affecting the Tyumen subdivision of the company). Gazprom must now define its position as regards its subsidiary, either entering into an agreement with the oil companies laying claim to their own share in SIBUR, or fighting to preserve its integrity and investing substantial new resources in the company. According to the deputy chairman of the Gazprom board, Vitaly Savelev, Gazprom considers it expedient to sell off Sibur’s non-core assets with a view to using the proceeds to buy back the hypothecated core assets. The question is to what extent the three gas-processing plants slated for sale are in fact non-core. Otherwise, it is just a matter of a straightforward redistribution of areas of influence between Gazprom and the oil companies, rather than a sorting of Sibur’s assets into core and non-core.
Meanwhile, another well-known “scion” of Gazprom, the international corporation ITERA, has announced the establishment of ITERA Holding, a group of industrial and manufacturing companies–seventeen in all, operating in Russia, Belarus and Moldova–under the management of non-gas sector assets. Because relations between Gazprom and ITERA are distinctly murky, further problems are likely to arise.
To summarize the current situation within and around Gazprom, the company, in our view, is truly entering a new stage in its development. The autonomy and self-sufficiency it once enjoyed, due to its political and financial influence on the country’s leadership, are a thing of the past. The new ruling elite has no intention of maintaining the former status quo. Meanwhile, the periodical predictions of a radical change in Gazprom’s leadership appear premature. Aleksei Miller’s team still has time to carry out “the government’s orders”–to bring the company into line with the government’s vertically structured economy, to normalize its internal corporate relations such that the interests of the company’s former management no longer prevail, to stabilize the company’s position on the foreign markets, and to preserve its stabilizing role within the national economy.
Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russia Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.