Gazprom: rising star of new Kremlin capitalism

A golden skyscraper, soon to thrust 1,300 feet above the crumbling riverside palaces of Russia's ancient czarist capital, St. Petersburg, will announce the rapid emergence of a powerful new Russian company that's acting boldly, growing fast, moving West, and changing whatever it touches: Gazprom.

As Russia's No. 1 firm, the energy giant can certainly afford to house its new petroleum wing, Gazprom-Neft, in such extravagance. In the first nine months of last year, Gazprom's net profits leapt 80 percent. Roaring past industry behemoths Shell and BP last year, the state-owned natural gas monopoly is now the world's second-largest energy company after Exxon-Mobil.

But critics say the conglomerate, which owns a bank, soccer team, and media wing, is much more than the successful new kid on the global energy block. They describe the company as the Kremlin's flagship – and chief battering ram – in a strategy to restore state control of Russia's booming but petroleum-dependent economy, and use that accumulated power to further Moscow's agenda at home and abroad.

Worries over Gazprom's growing political role were boosted this month when, for the second time in just over a year, energy supplies to Europe were cut off amid a pricing dispute between Russia and one of its post-Soviet neighbors.

Since 2004, state control of Russia's oil industry has jumped from around 7 percent to over 35 percent, and is set to grow further this year, experts say. Gazprom and the state oil company Rosneft, headed by Kremlin-appointed officials, have been the key agents in takeovers of private oil companies such as Yukos, Sibneft, and, late last year, the Shell-run Sakhalin-2 project on Russia's Pacific coast.

Recently, the Kremlin has begun to apply the same business model to other sectors as well. Last year Russia's aircraft producers were deprivatized and merged into a single state-run conglomerate. The world's largest titanium producer, AVISMA, a profitable private company that supplies Airbus and Boeing, was taken over by the state arms monopoly Rosoboronexport. A massive state-run expansion of Russia's nuclear power industry is looming. Experts say the Kremlin has either begun, or is eyeing, forays into diamonds, forestry, telecommunications, automobiles, and banking.

"The Kremlin intends to build big industrial groups, something like South Korea's chaebol system, to stimulate Russia's economic development,"says Alexei Mukhin, director of the Center for Political Information, an independent Moscow think tank, referring to the monopolistic Korean conglomerates that have received government support.

Mr. Mukhin says the process has to be state-led, because Russia's experience in the 1990s showed that private businessmen became power-hungry and tried to buy their way into government. "Free capital is too unruly, and that's why [President Vladimir] Putin prefers to work with state officials whom he can control."

Gazprom's name has become a household word in the West, thanks to its recent role in forcing higher gas prices on Moscow's recalcitrant neighbors like Ukraine and Belarus, leading to brief supply disruptions and lasting political jitters in downstream Europe. Such moves have triggered accusations that Gazprom was acting as a political tool of the Kremlin.

"Gazprom is the core of the Russian state, and it expresses the will of the Kremlin," says Lilia Shevtsova, an expert with the Carnegie Center in Moscow. "It is not a normal company," but is closed, nontransparent, and unaccountable to all but its political masters, she says. "It operates like an intelligence agency."

Although Gazprom executives, rather than Russian diplomats, were the first to bring the bad news of higher prices to post-Soviet capitals, the company denies any political motives.

Gazprom's top public relations official, Anastasia Ivanova, insists that the Rus- sian government – which owns 51 percent – is "just a shareholder" and says the company's only goal is to commercialize the energy business and bring "normal market relations" to the former USSR after years of politically motivated subsidies from Moscow. "It is absolutely incorrect to say that Gazprom is an instrument of Rus- sian government foreign policy," says Ms. Ivanova. "Gazprom is a company with mixed capital, whose management works according to the rules laid down in the company charter."

The government has, however, taken extraordinary steps to spur the company's growth. Last year the Kremlin-dominated State Duma, the lower house of parliament, passed a law giving Gazprom the sole right to export Russian gas, squeezing out independent producers. The energy giant has also benefited from the government's pressure on foreign companies with shares in Russian oil-and-gas projects.

In December, Shell threw in the towel after being accused by the state of massive ecological violations in the Pacific-coast Sakhalin-2 project it managed, and agreed to sell 50 percent of its stake to Gazprom at a substantial discount.

Other foreign companies with stakes in Russian oil-and-gas projects coveted by Gazprom have found themselves under similar pressure from law enforcement and state environmental agencies. Experts say the next likely target is the British-Russian joint venture TNK-BP, which runs operations at Russia's largest natural-gas field, Kovytka in eastern Siberia. The state licensing agency Rosnedra is threatening to revoke the company's permit over a list of alleged violations, ranging from illegal logging to failing to meet production quotas.

Critics say state agencies like Rosnedra are clearly acting in cahoots with Gazprom, using tactics aimed at restoring key resources to state control while expanding the energy firm's grip.

"Sometimes it looks like a tail-wagging-the-dog situation," says Igor Tomberg, an expert with the independent Center for Energy Research in Moscow. "Gazprom is clearly part of the Kremlin's economic strategy, but at the same time the state works to improve Gazprom's market position, to help it expand beyond Russia's borders, and so on."

Assembled from assets of the former Soviet Gas Ministry and largely privatized in the 1990s, Gazprom holds about a quarter of the world's natural-gas reserves and is currently valued at about $262 billion. According to company figures, its net profits increased from $490 million in 2001 to $11.7 billion in 2005. The jump was largely due to soaring global energy prices but, experts say, also reflecting the Kremlin's growing discipline over the company.

In 2005, the Russian government increased its former minority stake to a controlling 51 percent, and Deputy Prime Minister Dmitri Medvedev, a top Kremlin aide and potential Putin successor, was appointed as the company's chairman.

Beyond its rapidly growing oil-and-gas empire, Gazprom has its own bank, an insurance company, and recently purchased the Zenit football team in St. Petersburg. Another wing, Gazprom-Media, has been widely criticized for buying up vibrant media properties, such as the independent NTV network and the central newspaper Izvestia, and turning them into Kremlin mouthpieces.

"The private share of the economy is shrinking rapidly," says Ms. Shevtsova. "The logic of bureaucratic capitalism is to grab more. Soon all the juiciest chunks of the economy will be under state control."