Publication: Eurasia Daily Monitor Volume: 2 Issue: 168

Russian President Vladimir Putin’s brief visit to Berlin last week was not only perfectly timed for the German elections but also loaded accordingly: He delivered a valuable gift to his ally, Chancellor Gerhard Schroeder, and made a pro-forma introduction to the opposition leader, Angela Merkel. The gift was a $6 billion contract for building a pipeline under the Baltic Sea that would start delivering Russian gas to Germany in 2010. Gazprom had been entertaining this idea for several years but it was only since the start of 2005 that it got serious about it and entered into partnership with German giants BASF and E.ON that have subscribed for 24.5% each in this joint venture (RosBusinessConsulting,, September 8). The feasibility of this project is not in doubt, but its rationale does invite questions.

Most Moscow comments put emphasis on the prospects of reducing the volume of gas that must transit through Ukraine, currently some three-quarters of Russia’s exports to Europe (, September 8;, September 9). The sudden political crisis in Kyiv following the September 8 dismissal of Prime Minister Yulia Tymoshenko’s government is presented as clear evidence that a more reliable export route is needed, despite Putin’s “nothing unusual” comments in Berlin (Kommersant, September 9). In fact, quarrels with Ukraine about the terms and prices for gas transit have been going non-stop since the post-Soviet “divorce” 14 years ago, but it would be wrong to assume that Moscow has simply grown tired of this “good-neighborly” bargaining. Each of the many compromises on record involved unwritten agreements and side deals that were as profitable for the Gazprom leadership as they were for Ukrainian ministers and negotiators. What broke this mutually enjoyable pattern was the Orange Revolution in late 2004, since the new government in Kyiv began to insist on more transparent agreements, indicating also its desire to escape from the “single economic space” (Nezavisimaya gazeta, 29 August). Certainly, the business culture has not changed overnight and corruption has penetrated into the “revolutionary team,” causing the dismissal of Tymoshenko’s cabinet – but Gazprom has understood that Ukraine is indeed changing into a much less agreeable partner (Kommersant, September 1).

Hence the new determination to open the Baltic route despite the uncertainty about the scale of demand in Western Europe and the near certainty about very slow growth in production. Gazprom appears to dismiss the mixed lessons from constructing the “Blue Stream” pipeline to Turkey under the Black Sea, which remains only half-filled due to lower than expected demand in the Turkish market (Vedomosti, September 9). Apparently, the new pipeline, which would have the total capacity of 55 billion cubic meters a year (i.e. half of current transit through Ukraine), could be more useful for diversifying the export channels than for increasing deliveries. And that should remind European consumers about the inescapable problems of doing business with Gazprom.

One group of these problems is related to Gazprom itself, a monster of a company with market capitalization reaching the shining mark of $100 billion last week (Vedomosti, September 7). The plans for reforming this giant and creating a space for competition in both production and transportation that were designed in earnest only a few years back, have been shelved – and now the talk is only about growth and expansion. The underlying problems with inefficient management, wasteful methods of operation, and self-serving accounting have certainly not disappeared, but the steady growth in energy prices makes it possible to ignore them. Gazprom’s business culture is a peculiar mix of the old Soviet “command-and-control” and the new predatory “no-holds-barred” principles. It has no mercy for competitors and treats partners with a modicum of respect only as long as they are useful. It plays by its own rules even against trans-national majors: British Petroleum, for instance, has been pressured to cut Gazprom into the deal on developing the Kovykta oil-and-gas field in Eastern Siberia and ENI, which played a key role in constructing the “Blue Stream,” is now struggling to contain Gazprom’s offensive towards the Italian gas market (Vremya novostei, June 16; Izvestiya, August 30). German banks and energy companies have been enjoying the status of privileged partners, but it very well could change with a less Russia-friendly chancellor and a non-German-speaking president, if Putin will not have a change of heart about a third term.

That uncertainty relates directly to another group of problems about Gazprom – this business empire is also a major political actor that is directly involved in the fierce struggle for power around the Kremlin. Since the start of Putin’s second term, the main battlefield here has been the dismemberment of the oil giant Yukos and, against expectations of most observers, Gazprom has not been able to secure for itself any valuable assets. The state-owned oil company Rosneft has outmaneuvered all competitors in state-sponsored looting and even made Putin vouch for the legitimacy of its murky deals. Last week, Putin paid a surprise visit to Rosneft’s oil terminal in Tuapse and praised its performance (Vedomosti, September 8). He may think he is playing Gazprom CEO Alexei Miller against Rosneft CEO Sergei Bogdanchikov, but at the end of the day every “lame duck” president is going to be outplayed.

The apparently unstoppable run of oil prices allows Moscow to bury its problems under piles of petro-rubles – and it also exacerbates the post-revolutionary tensions in Kyiv. But in the mid-term, even if this perspective is irrelevant for today’s decision-makers, Ukraine stands to benefit from straightening its relations with Gazprom and abandoning the temptation to exploit its near monopoly on gas transit. Russia, to the contrary, might experience yet again the unpleasant sensation of a deflating oil bubble and discover the diminishing value of assets built on the assumption that cost efficiency is an outdated concept.