Publication: Eurasia Daily Monitor Volume: 1 Issue: 142

In the first days of December, the Russian government planned to review Gazprom’s performance and approve its investment program for 2005. The agenda for the meeting, however, was changed at the last moment when Gazprom announced a drastic revision of its plans in connection with its acquisition of Yuganskneftegaz, the most valuable asset of Yukos (, December 1). This decision was both a surprise and a long-expected move predicted by many experts and denied by the management (Vremya novostei, Kommersant, December 1). The rationale for expanding the behemoth of a company into the oil sector remains questionable, and the most fundamental question is about control inside Putin’s progressively twisted vertical power structure.

What makes this issue particularly evident is the intensity of disagreement within the government regarding Gazprom’s trajectory. German Gref, Minister of Economic Development and a long-time Putin loyalist, has loudly and persistently voiced this dissent. Back in October, when Gazprom management expressed a desire to swallow the tiny but promising Zarubezhneft, Andrei Sharonov, a deputy to Gref, bluntly stated that this wish would not come true (, October 25). In late November, Gref himself confirmed his opposition to Gazprom’s expansion and argued that unless new anti-monopoly legislation was adopted, “the country is finished” (Izvestiya, November 25). And when Gazprom management announced their intention to buy Yuganskneftegaz, Gref — as a member of Gazprom’s council of directors — spoke out against the deal (, December 3).

Gref’s arguments about the benefits of dividing Gazprom into several competing entities and the costs of increasing state control in the oil sector may be sound and thoroughly researched. He nevertheless has failed to convince Prime Minister Mikhail Fradkov, who prefers to stay clear of these career-damaging controversies. He may have much sympathetic attention abroad, but many foreign actors are courting the “hyper-monopoly” (in Gref’s words). In October, the Fitch international rating company indicated its support for Gazprom’s participation in the dismemberment of Yukos (Kommersant, October 27). After Silvio Berlusconi’s visit to Moscow, Italian energy giant ENI expressed its interest in a closer partnership with Gazprom (Kommersant, November 25). Putin’s recent visit to India has brought an agreement from its Oil and Natural Gas Corporation (ONGC) to make a bid for Yuganskneftegaz (, December 3, also EDM, December 7). Most importantly, Gazprom has received a recommendation from its long-term partner Deutsche Bank, which has also offered to open a credit line for financing the deal estimated at $9 billion (Moskovskie novosti, December 3). In the first week of December, the same Deutsche Bank pulled together a consortium of six banks to grant Gazprom an extraordinary, record-setting loan of $13 billion to fund the purchase (Kommersant, December 8).

It might have seemed that Gref’s liberal economic philosophy is being outflanked and outgunned by the far more numerous enthusiasts of state control over the “strategic” energy industry. In reality, this competition between economic schools of thought is intertwined with the Byzantine intrigues of the Kremlin and determined by the transformation of Putin’s regime. A bit of insight into the former appeared in mid-October, when the smooth “friendly takeover” of Rosneft was interrupted by a quarrel over how to control the oil “arm” of Gazprom. Sergei Bogdanchikov, the head of Rosneft, even wrote a letter to Putin, which would have remained a pathetic plea if not delivered by Igor Sechin, who sits both on the Rosneft board and in the presidential administration (, November 2). Alexei Miller, the head of Gazprom, and Dmitry Medvedev, the head of the presidential administration and a key member of Gazprom’s board, had to surrender and appoint Bogdanchikov as head of the newly created Gazpromneft (Kommersant, November 2). Bogdanchikov immediately started to argue for the acquisition of Yuganskneftegaz, while Miller insisted on following a more modest and balanced investment plan. It is clear now who has prevailed, and it is not that difficult to see why — the expropriation of this asset has always been the central point in the Sechin-orchestrated attack on Yukos (Novaya gazeta, December 2).

Gazprom thus is to become the largest Russian oil company, in addition to being the monopolist in the gas sector, but the character of state control over this giant remains uncertain. The government has no ability to influence its behavior and Gref, quite possibly, would have to resign (, December 3). The Kremlin, apparently, is bitterly divided over the chain of command, but a tightly knit group of chekists from St. Petersburg (led by Sechin) has proven its skill in elbowing and tripping. This group represents the interests of the special services that were among the bitter losers in the Yeltsin-era round of privatization, but they now demonstrate an insatiable appetite for grabbing every profitable asset (Moskovskie novosti, December 3). The ideology of “statism” is employed to justify this greed, so that re-nationalization of the “stolen” energy riches is presented as necessary for a breakthrough in modernization. In reality, the outrageous profits from oil exports are channeled to all sorts of political projects, from United Russia party activities to manipulating the presidential elections in Ukraine, while the volume of investment in the Russian economy is shrinking (Ekho Moskvy, November 30).

The bottom line is that an enormous chunk of the energy sector, which forms the backbone of the Russian economy, is deliberately cut out from the state’s economic strategy and is serving primarily short-term political interests driven by greed for power. Putin’s obsession with control has seriously weakened the system of state governance and left him hostage to a new breed of bureaucrats-oligarchs.