Publication: Eurasia Daily Monitor Volume: 5 Issue: 6

As Russia wraps up seasonal festivities with the Old Style New Year on January 13, it is beginning to acknowledge changes in the economic climate that are caused by a peculiar combination of over-heating and under-investment. The most acute symptom of this complex malady is inflation, which in 2007 reached 12% (the government aimed for 7-8%) and was officially recognized as the main economic setback (Gazeta, January 8; Expert, December 26). The massive inflow of “petro-rubles” is certainly the key force driving this phenomenon, but it was the extra-generous government policy that secured the high impact. Economists continue to argue about the real value of money, but for most Russian families the disturbing conclusion is that the period of reasonably cheap food is over, and all the political promises of putting prices under control are just cheap talk.

Another wave of post-holiday news concerns accidents and breakdowns of energy supply, from the January 9 gas explosion in Kazan, Tatarstan, which destroyed an apartment house and killed ten people, to the mass public unrest in Makhachkala, Dagestan, caused by a protracted electricity blackout (Newsru.com, January 12; EDM, January 10). Much of this disturbing news, including a spectacular explosion on the Novgorod-St. Petersburg pipeline last Sunday, are caused by the critical dilapidation of gas infrastructure, which brings attention to the well-being of Gazprom, the quintessential “national champion” and monopolist on gas supply and export.

The giant company had a reasonably good but unspectacular year with its market capitalization increasing by 15%, compared with 60% growth in 2006 (RBC Daily, December 29). Despite the breath-taking growth of world energy prices, Gazprom reported its net profit dropped by 25% in the first six month of 2007, and officials do not expect any improvement in the final accounts for the year (Nezavisimaya gazeta, December 6). Its external debt reached $36 billion, which contributed significantly to the fast expansion of Russia’s total indebtedness (Vedomosti, January 10). Gazprom’s investment program was revised several times in 2007, so that the share of investments shrunk while acquisitions expanded, and the new investment program for 2008 approved just before the holidays appears – as presented very briefly on the company’s website – quite conservative and does not aim at compensation for the massive under-investment that has accumulated since the start of the Putin era.

Gazprom scored two major victories in 2007: wrestling control over the Sakhalin-2 project from the international consortium led by Shell and forcing TNK-BP to sell it the majority share in the license for developing the Kovykta gas field (Gazeta.ru, December 28). These “no-holds-barred” achievements have seriously tarnished its international reputation; besides, Gazprom has no clear plan for developing these projects. The key problem here, as well as in overall company accounts, is the yawning gap between domestic and export prices for gas, which in fact increased in 2007 despite the proclaimed goal to close it. This gap makes it very tempting for Gazprom to increase gas deliveries to Turkey (which is suffering in the first weeks of 2008 from the cuts in gas imports from Iran) while introducing drastic limitations for consumers in Krasnodar Krai (Kommersant, January 9).

The year 2008 is supposed to see very significant steps toward reducing domestic market subsidies, with a planned 25% increase in gas prices. This hike is certain to be very unpopular, and so constitutes a problem for president-designate Dmitry Medvedev, who has just opened his campaign in Murmansk oblast, promising more good things for everybody (Gazeta.ru, January 11). It is very tempting for him to put the responsibility for implementing painful but unavoidable decisions, like raising gas prices or advancing pension reform or tightening state expenditures in order to curb the galloping inflation, on his prime minister. Vladimir Putin, who has agreed to take this position after stepping down from the summit of power in the spring, is certainly aware of this temptation and is hardly eager to carry these “hot potatoes” – so the awkward duumvirate will inevitably come under strain.

One experience that Medvedev will bring to the Kremlin is chairing Gazprom’s Board of Directors, but that does not mean that he is going to staff the presidential administration (which he also knows first-hand) with “gasmen,” much the same way that Putin filled it with chekists. At Gazprom headquarters, nervous excitement about the presidential succession lasted for most of 2007, and Medvedev’s surprise ascent has brought no respite, since changes in the board would quite probably lead to further cadre reshuffling, including the long-awaited replacement of CEO Alexei Miller (Polit.ru, December 29). The current quarrel with Ukraine could provide a litmus test, as new Prime Minister Yulia Tymoshenko wants to get rid of the disreputable intermediary RosUkrEnergo and Gazprom’s Deputy CEO Alexander Medvedev and Gazprombank’s CEO Andrei Akimov are ready to go along, while Miller insists on keeping the arrangement (Newsru.com, January 11).

In general, it will be essential for Medvedev to demonstrate that he puts Russia’s interests above those of Gazprom. For that matter, his appearance at the launch ceremony of the Yuzhno-Russkoye gas field, together with German Vice-Chancellor Frank-Walter Steinmaier, may not necessarily be a perfect picture, since exports to Germany are not very popular with Russian consumers (Vremya novostei, December 19). European partners are quite relieved about the business-friendly face of the next Russian president, but the ugly mugs of the siloviki have not disappeared from Moscow’s corridors of power – and Medvedev would have a hard time selling any “liberal” proposition. As for Gazprom, it might be quite healthy for the company to rediscover that its main interests are related to its core business and not to building Olympic facilities in Sochi or expanding its assets in the media market. Being a state within a state and at the same time a favorite presidential “hobby” is hardly a recipe for success, but the “about average” performance in the absence of a comprehensible strategy has already made the company a key source of energy insecurity.