GAZPROM AND THE

RUSSIAN STATE
The question is not whether
energy and politics are
connected but how.
Javier Solana, European Union High Representative for Foreign Policy1

Dr Kevin Rosner
Series editor: Dr Kevin Rosner

GMB
Russia

Publishers note

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This edition first published 2006 by GMB Publishing Ltd.

Dr. Kevin Rosner

Hardcopy ISBN 1-905050-30-5 E-report ISBN 1-905050-85-2

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ii
 Russia

Contents

About the author v

Foreword vi

Introduction 1

1. Russian energy diplomacy 5

2. What is Gazprom? 9
Flat domestic production
Russian markets
Unfolding history
Troubles from the beginning
Downstream de-coupling

3. Gazprom and global energy 19

4. Recent restructuring 25

5. Confluence of Russian foreign energy policy 27

Gazprom share purchase
Governmental public diplomacy: sending the right corporate message

6. Gazprom management 31
Gazprom factions

7. Mergers and acquisitions 39

Non-core acquisitions
Core acquisitions
Companies with a Gazprom shareholding

iii
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8. Struggle for a Gazprom strategy 47

Building share value
Building performance
Challenges to building Gazprom share value
Ongoing and new export and development projects

9. Conclusion 55

Notes and references 57

About the series 61

iv
 Russia

About the author

Kevin Rosner, PhD is a specialist in Russian oil and gas, security of critical energy
infrastructure, and international energy security policy. He is an external expert to
the North Atlantic Treaty Organization and presently serves as the Director, NATO
Forum on Energy Security. He is a Senior Fellow, both at the UK Defence Academy
and at the Institute for the Analysis of Global Security (IAGS) in Washington DC.
Posts held include Senior Security Advisor to the Baku-Tbilisi-Ceyhan pipeline
company, Project Director with the Programme on Cooperation with the Russian
Federation at the OECD, and Project Manager with the UNESCO Science Division
in Paris. Dr Rosner is the founder of Therosnergroup, serving leading members
of the global oil and gas community with energy and security analytical products.

v
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Foreword

Vladimir Milov,
former Deputy Minister of Industry and Energy, Russian Federation
The emerging phenomenon of Gazprom is attracting enormous interest through-
out the world. This brand now seems more than just the name of a business group,
but rather a philosophic concept, symbolic of the superpower idea from energy
superpower, as it started back in the 1990s, to the key tool in global political power-
play that Gazprom is seemingly becoming now.
However, the world obviously lacks certain real information on what Gazprom
really is. After the Russian authorities had established total control over the national
media (a large part of which is controlled by Gazprom itself), they have been quite
successful in promoting a one-sided picture of what Gazprom is and what problems
and challenges it faces. And the international community sometimes buys it. During
recent months, Russian and international analysts had been saying and writing tons
of words on the Kremlin-promoted idea of transfer to transparent market prices
for gas in relations with the post-Soviet states. The fact is that, in reality, no one
clearly knows the actual price of gas supplied from Russia to Western and Eastern
European countries this information is kept away from public eyes and can not
be found in the open sources. For five years public attention was drawn to the fact
that Vladimir Putins aim was to eliminate the ring-fence around Gazproms share
trading it was believed that elimination of the ring-fence would help Gazprom
attract new direct investments, through free sales of shares to foreign investors. In
reality, however, elimination of the ring-fence came together with adoption of the
legislation that prohibited the reduction of the states 50 per cent plus stake in
Gazprom, which made the issue of new shares virtually impossible. Russias NTV
television channel carries daily advertisements proclaiming that Gazprom pays
one billion roubles to the state budget daily, however, not stressing the fact that
Gazprom actually pays only a little above $20 of tax per ton of oil equivalent
of hydrocarbons produced, compared to $80110 paid by private Russian oil
companies.
Sadly, one rarely finds real analysis of the real problems of Gazprom sharply
falling production from matured gas fields, underinvestment in production devel-
opment as a result of a bad investment track record, the inefficient nature of new
projects and commercial transactions, and huge financial problems. These prob-
lems are well-hidden behind high revenues from gas exports and generous political
support from the authorities.
What is Gazprom in reality? On one hand, its a story about control over resour-
ces total control, the materialization of a superpower idea, which attracts global
interest and, often, fascination. Gazproms story started in the early 1990s as an idea
to establish an instrument in the hands of the government that would accumulate
control over gas export revenue inflows and, when necessary, be allowed to easily

vi
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redirect this money for special purposes social, budgetary, private. The idea of
transforming Gazprom into a more market-based entity during the 1990s met
critical resistance from top decision-makers in Russia.
Since 2001, when President Vladimir Putin decided to introduce his closest
loyalists to Gazproms management board, the idea of control over resources has
been brought to the ultimate level, from a defensive to pro-active, and, in fact, quite
aggressive approach. Gazprom became an important centre of consolidation of
various assets that the Kremlin wished to establish control over, be it media, power,
nuclear, or oil.
On the other hand, the Gazprom story is about how control over resources may
not transform into development and value-building, but, instead, be used through
a short-sighted approach for spending of resources for various, often destructive,
purposes. Despite its fascinating scale, management practices in Gazprom have little
evolved since the 1980s. Value is leaking from the company through non-trans-
parent subsidiaries and affiliates, serving someones private interests. Expenses
grow much faster than profits. New projects prove to be quite controversial in
efficiency terms. Despite high revenues from gas exports and huge accumulated
debt, sufficient money has not been invested in the last 15 years in development of
new large gas deposits on Yamal Peninsula the model of their development based
on scale effect had clearly proved itself bankrupt. The recent engagement of
Gazprom in political pressure on the post-Soviet nations, not politically loyal to
Kremlin, puts the company at serious commercial risk the conditions of its long-
term gas supply contracts with European companies may be reconsidered, new
Gazproms foreign acquisitions may be blocked. Recently, for instance, UK author-
ities have started to seriously discuss the possibility of the legal protection of
Centrica and other British gas retailers from possible acquisitions by Gazprom.
This picture leaves a lot of uncertainty about the Russian energy giants future.
Kevin Rosners report on Gazprom, its status, future and political role is a good
attempt to analyze the realities of Gazprom in more detail, blending important eco-
nomic and management style analysis with political considerations. Of course,
theres a lot more to say and, in particular, with regard to various assumptions of
what the core strategic considerations Russian authorities might have with regard
to the future of Gazprom. As Kevin Rosner correctly puts it, legitimate questions
exist concerning the confluence of state policy and Gazprom corporate strategy.
But is there a strategy? Or, if there is, does the existing Gazprom model allow for
its successful implementation or is it a constraint on any successful strategic efforts?
As O Henry once put it, the only way to break up a trust is from the inside.
Kevin Rosners monograph certainly helps readers to better comprehend some
important issues around Gazprom, and is a definitive one step forward in under-
standing whats hiding behind the superpower facade.

vii
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Open Joint Stock Company

GAZPROM
Fact Sheet

Contact Information
Full name: Gazprom Open Joint Stock Company
Short name: Gazprom
Location: 16 Nametkina Str., Moscow, Russian Federation
Post address: 16 Nametkina str., V-420, GSP-7, Moscow 117997
Phone: +7 (095) 719-30-01 (for inquiries)
Fax: +7 (095) 719-83-33, 719-83-35
Official website: www.gazprom.ru
Email: gazprom@gazprom.ru
Notes: On 13 January 2006, trading in common shares of joint stock company Gazprom (RTS ticker symbol
GAZP) started on the RTS Classic Market. Since 2001, RTS Group facilitates trading in Gazprom stock on its
T+O Market (RTS ticker symbol GSPBEX). T+O trading is organized by NP St Petersburg Stock Exchange.
Transactions are cleared and settled by NP RTS Stock Exchange in Russian roubles.

Shareholder information at September 2005

Number of Employees 330,000
49.11% owned by Russian Government
26.07% owned by Russian legal entities (Gazprom subsidiaries)
11.50% owned by non-Russian resident entities (individual & legal)
13.32% owned by Russian individuals
*Calculations are those of the author alone based on available data

Evolution of Gazprom: shareholder structure (%)

2000 2001 2002 2003 2004 2005
Government 38.37 38.37 38.37 38.37 38.37 49.11
Citizens 17.68 16.07 15.06 14.03 13.32 13.32
Russian companies (Gazprom subsidiaries) 33.64 34.06 35.07 36.10 36.81 26.07
Foreign entities 10.31 11.50 11.50 11.50 11.50 11.50
Total 100 100 100 100 100 100
*Calculations are those of the authors alone based on available data

viii

The [gas] pipelines are our legacy from the
Soviet Union. We intend to retain state
control over the gas transportation system
and over Gazprom. We are not going to
divide Gazprom. The European Commission
had better forget about its illusions. As far as
the gas is concerned, they will have to deal
with the Russian state.
Russian President Vladimir Putin 2
A
s this monograph goes to print,
Russia has assumed the leader-
ship of the G8 process. Some
argue that Russia does not belong in
the same league as other G8 members,
whose economies are counted among
the largest in the world. However, the
Russians themselves believe they can
and should be counted among this
select group of industrial states, and
energy is used as their trump card in
a global play for power, dominance
and influence. The Russian President
intends to use the upcoming St Peters-
burg Summit to highlight the issue of
global energy security and, in partic-
ular, Russias role in contributing to
enhancing the worlds growing thirst
for oil and gas. This decision does not
come without considerable risk for
Russia itself, accompanied by the
scrutiny that will be focused on
Russias oil and gas sectors. Although
the Russian oil industry went through
considerable evolution through priva-
tization and restructuring in the
1990s, the case for Russian gas could
not have been more different.
Gazprom, for all its hope at being
perceived as a legitimate commercial
enterprise, remains largely a tool and
now the crown jewel of Russias quest
for empire. This was definitively set-
tled as a result of the governments
GMB Publishing
Russia
Introduction
reconsolidation of its majority owner-
ship position over the worlds gas
giant in 2005. Gazprom lost no time in
exercising its new-found power in
clamping down on Russian exports of
gas to Ukraine in January 2006.
Concurrent with this ownership
recapture, has been Gazproms own
push to gain control over an increas-
ingly important share of Russias over-
all energy complex. In October 2005,
Gazprom completed its acquisition of
Russias Sibneft for some 11 billion,
giving it control over 30 per cent of the
Russian oil industry.3 Sibneft will
become Gazpromneft, if all goes well,
at an extraordinary meeting of the
Gazprom board in May 2006, which
should complete the states recentral-
ization cycle of control over this
important component of Russias oil
sector.4 If all goes to plan, it will also
move its tax domicile to St Petersburg,
the hometown of Chairman of the
Gazprom Management Committee,
Alexey Miller; Gazprom Chairman of
the Board and First Deputy Prime
Minister of the Russian Federation,
Dimitri Medvedev; and of Russian
President Putin.
The process of creating national
energy companies, particularly in the
oil sector, is nothing new. This ten-
dency holds, as well, for the natural
gas sector. For example, over 76 per
cent of the worlds oil is produced
by national oil companies (NOCs),
with the largest concentration in the
Middle East.
What makes Russia different?
What the world finds troubling and
what makes Russia different are three
things.
1
Russia
First, 15 short years ago, the Cold
War was brought to an end with the
collapse of the Soviet Union. Through
an extended period of high oil prices
and economic recovery since 1997, the
Putin government has scrambled to
rebuild the states power apparatus
through the resurrection of control
over the energy sector. As elsewhere
throughout the world, energy is
power and that power now lies in the
hands of a government, contiguous
with Europe, whose stated ambition is
to re-establish influence and/or con-
trol over the national energy sectors of
the now independent former Soviet
states.
Second, Russia is the largest
exporter of oil and gas among the G8.
European Union (EU) G8 Member
dependency on Russian imports for
these fuels is growing. During the
heady days of the 1990s, EU Mem-
bers import dependency was allowed
to grow, if not encouraged, as depen-
dency was at least partially viewed
as preferential to continued and ex-
panded dependence on the decidedly
non-democratic regimes of the Middle
East, a classic example of expanding
energy security through diversifica-
tion of source country for primary
energy resources.
Third, EastWest cooperation since
1991 has been predicated on the as-
sumption of a Russian transition away
from autocracy to democracy, fueled
by liberal open markets. However,
step by step the early vestiges of
democracy have been slowly chipped
away. Among Russias best and
brightest in the liberal community,
there are few voices raised in Putins
defence. He has systematically
destroyed the fledgling democratic
institutions that appeared in the
1990s. The Duma is subservient to the
Kremlin, elections may be free but not
fair, the Federations governors are
now hand picked by Putin, and while
newspapers may criticize the govern-
2 GMB Publishing
ment, television carries few reports of
that nature. With the jailing of Mikhail
Khodorkovsky, the richest man in
Russia, the business elite and not
only the wealthiest oligarchs have
expressed concern about further
efforts on the part of the Kremlin to
interfere in their affairs, and complain
that government initiated corruption
is on the upswing.5
The transition on which EastWest
relations were predicated no longer
holds. Russia under Putin has pulled
back from both democratization as
well as from liberalization in the coun-
trys most important economic sector,
that of mineral extraction and trans-
port. In short, EU Members are
becoming increasingly dependent on
a country whose basic trajectories of
political and economic development
run counter to the precepts of their
own foundation, ie democratization
and competitive open markets.
The shifts in Russias energy sector
in 2005, in the internal ownership and
control over Gazprom, and in the
broadening and deepening of its
involvement in the Russian oil indus-
try, raise certain fundamental ques-
tions about the projected future
profitability of a company that ac-
counts for approximately 20 per cent
of global gas production. Key points to
be addressed are: what does structural
consolidation over Gazprom by the
Russian state mean for Gazproms
future and for the future of the
Russian energy sector? What will the
impact be on Russian energy policy as
a result of this consolidation? Specifi-
cally, what do these changes portend
for the future of natural gas exploita-
tion, production, distribution and
the ultimate export of Russian gas
to downstream consumers? And
finally, what are the implications for
downstream states energy sectors,
whose infrastructures and energy
resources themselves are increasingly
sought after by Gazprom?

These shifts have sets off alarm bells
regarding Russias energy diplomacy,
championed by none other than the
Russian President himself. Legitimate
questions exist concerning the conflu-
ence of state policy and Gazprom
corporate strategy. Do these two move
concurrently with one another on
separate but equal tracks? At what
point do the policies of the state and
the strategy of Gazprom as a corpora-
tion intermingle? What are the mani-
festations of this confluence, which has
both enormous domestic implications
for Russias own energy sector as well
as for the security environment of
states in Russias near abroad, where
energy has been recently used by
Russia as a tool for influencing the
decisions and behaviour of former
Soviet states, as exemplified in
Belarus, Ukraine, and Moldova?
One objective of this monograph
is to delineate the nature of the rela-
tionship between Gazprom and the
Russian government. Such an under-
standing will be based on an elabora-
tion of Russian energy diplomacy
on the one hand and Gazproms
corporate strategy on the other. An
exclusive appreciation in the role of
the state in its involvement with
Gazprom on the one hand, and the
role of this corporation in forwarding
the public policy goals of the Russian
state on the other, leads to a common
understanding and appreciation of
the numerous links that exist between
Gazprom and the state. Understand-
ing state goals and corporate objec-
tives is instructional insofar as it helps
GMB Publishing
Russia
clarify how the activities of both power
centres, ie Gazprom and the state,
may be coordinated. Hence, this study
is less about current history and more
about developing a flexible, mobile
methodology that the reader can
use to decipher the Gazpromstate
relationship.
A second step in deciphering
the Russian stateGazprom corporate
relationship is to look at how this has
played out through the select merger
and acquisition activities of Gazprom
at home and abroad. Actions speak
louder than words; they serve as an
appropriate measure for gauging
Gazproms behaviour, and that of the
Russian government, in fashioning
Russias overall energy strategy.
Key points
What does structural consoli-
dation over Gazprom by the
Russian state mean for
Gazproms future?
What will be the impact of this
consolidation for Russian en-
ergy policy?
Specifically, what do these
changes portend for the future
of natural gas exploitation,
production, distribution and
the ultimate export of Russian
gas to downstream consumers?
What are the implications for
downstream states energy sec-
tors, whose infrastructure is
increasingly sought after by
Gazprom?
3

Russian energy diplomacy
Putin effectively controls the company and
makes all key decisions about its strategy
and displays a surprising acquaintance for
a politician of his rank with the minute
details of its operations
Vladimir Milov, Institute for Energy Policy,
Moscow
O
ne of the foreign economic
policy instruments of former
Soviet diplomacy in its rela-
tions with Warsaw Pact members was
the conscious decision to create for
these states energy dependence on
the Soviet Union. The Soviet energy
grid is a tangible manifestation of
Soviet energy diplomacy, which found
its roots in the Brezhnev doctrine of
restricted sovereignty. In response to
the efforts, early in 1968, of the
Czechoslovakian Communist Party,
under the leadership of Alexander
Dubcek, to introduce a number of
reforms, including the abolition of
censorship, the Soviet Union adopted
a policy of combating anti-socialist
forces. This policy became known as
the Brezhnev Doctrine.6 Under the
masthead of socialist international-
ism, the Soviet Union rallied its then
Communist allies around a common
set of economic and political policies.
States would engage with one an-
other, each to their particular
strength. For the Soviet Union this
manifested itself in subsidizing down-
stream pro-Soviet states with subsi-
dized energy in return for political
acquiescence.
By the late 1970s, however, the
doctrines assumption that the inter-
GMB Publishing
Russia
1.
ests of all socialist nations were fully
compatible began to encounter some
undeniable exceptions. In the interest
of reviving a mired Soviet economy,
Moscow sharply raised the price
charged to its allies for badly needed
energy exports.7 Hence a Russia-first
policy, despite declarations to the
contrary, has been a long-standing
and well-understood feature of Soviet-
Russian regional foreign policy. The
use of energy as a political and eco-
nomic lever of influence is therefore
historic in nature, rationalized by the
interests of the Russian state in main-
taining its power and influence
through the exercise of its compara-
tive, ie energy, advantage.
However, not everything changed
immediately with the political and
economic transition of Central and
Eastern European (CEE) states after
the collapse of the Soviet empire.
Russian energy exports throughout
the 1990s had to compete with low
international prices for hydrocarbons
in neighbouring emerging market
economies and, as a result, subsidized
energy exports remained largely
intact. Another feature were the
historic links between the old Com-
munist nomenklatura across CEE,
who were, during transition, now
rapidly climbing into positions of
authority in downstream energy
industries, and the Russian nomen-
klatura who came to power in
Moscow. The Soviet energy grid
remained physically integrated, while
its operational control passed to these
new Red Directors of various
national persuasions. Over the pro-
cess of Russian transition, the Russian
5
Russia
oil industry became fragmented,
divided up between a small, new class
of oligarchs, with state control accord-
ingly degraded, while the Russian
gas industry remained monolithic
with state control remaining intact
and strengthened as a result of recen-
tralized ownership in the hands of
the government. Over the transition,
the technical and physical state of
former Soviet energy assets remained
abysmally unchanged, as these new
emerging economies now focused
on balancing national budgets,
retaining a semblance of health and
social services, while constructing
new governments and sustainable
economic infrastructures. Energy
systems, including pipelines pump
stations, refineries, processing plants
etc, ultimately ended up on the priva-
tization chopping block, based on
recommendations from International
Financial Institutions (IFIs). The
Russians were quick and interested in
picking up ownership positions in
these assets, which historically, techni-
cally and pragmatically corresponded
to the Russian energy network. As
Gazprom has grown in strength over
the past 24 months due in large part
to the acceleration in international oil
and gas prices so too has their finan-
cial ability to purchase these assets
accelerated. Yet, even without gaining
ownership control over formerly
state-owned downstream energy
assets in transit Russian states, Russia
is accelerating its access to Western
markets through development of
transport projects such as Blue Stream
and the Northern European Pipeline.
What has dramatically changed over
the past 2436 months is the political
complexion of some selectively impor-
tant former Soviet states. The demo-
cratic revolutions in Georgia followed
by Ukraine (in spite of recent re-
trenchment in the Ukraine parlia-
mentary elections in March 2006)
have driven a wedge between Russia
6 GMB Publishing
and these states, which hold economic
and foreign policy importance for the
pursuit of Russian interests across its
own wider neighbourhood. As a re-
sult, increases in energy prices to these
states have been accelerated as a sign
of Moscows growing political displea-
sure with their internal political devel-
opments, accompanied by Russias
own increasing dependence on en-
ergy exports to support the Russian
national economy.
Against this backdrop, Russian en-
ergy policy has emerged and evolved
over the two successive Putin admin-
istrations. Even while Russian Prime
Minister under President Yeltsin,
Putin went to great lengths to address
the strategy of commercial economic
relations with the CEE countries.
At the time, Prime Minister Putin
stressed not only the strong economic
relations between Russia and CEE but
with the CIS as well. Today, Russias
energy diplomacy stresses the strong
position and historic ties Russia has
with both regions and the importance
that energy plays in bilateral
relations.
Energy diplomacy has three im-
portant elements: (1) Russian state
protection of Russian companies in
the fuels-and-energy complex; (2) the
energy dimensions of Russias strate-
gic interests, particularly on a regional
basis; and (3) how Russian compara-
tive advantage in fuels and energy
can be used for both political and
economic advantage.
Russias energy strategy to 2020
also puts energy diplomacy into per-
spective and helps define RussiaCIS
relations in the energy sphere as well.
The strategy is based on a multi-vector
approach, which allows the Russian
state to seek alliances wherever possi-
ble while maintaining strong Russia
CIS ties across a broad range of
subjects. During a 22 December meet-
ing of the Russian Security Council,
President Putin was exceedingly clear

on the issue of energy and the power
of the Russian state when he stated,
energy is the most important force of
world economic progress. It always
was and will be for a long time. He
noted that Russia has competitive,
natural, and technological advan-
tages that could place it in a leading
position in the global energy sector.
In fact, he conceded, Russia has no sult of EU enlargement, with dispro-
other area in which to claim leader-
ship.8
The political drivers behind Russian
energy diplomacy are the accession of
the vast majority of the former War-
saw and Council on Mutual Economic
Assistance (CMEA) states to full NATO
and EU Members. Beyond this,
Ukraine, Georgia, and Azerbaijan
among others have signed Partner-
ship Agreements with NATO, which is
a first preparatory step towards mem-
bership. However, Prime Minister,
Putin stated that, There exist certain
problems connected with the EU and
NATO integration of this region.9
In short, as NATO moves closer to
Russias western and southern bor-
ders and as the EU engages Russias
largest block of downstream trading
partners, it feels itself increasingly
isolated. As a result, Russian energy
diplomacy is designed to maximize its
overwhelming presence and range of
influence across CEE and the CIS by
wielding its energy resources and
power availability to its greatest
advantage.
Further to the West looms the EU,
with its strict interpretation of compe-
tition policy and with a desire to see
sweeping energy reform inside the
Russian Federation. There are any
number of reasons for Russias eco-
nomic interests in a United Europe,
not the least of which are access to the
EUs 25 members and its 450 million
consumers. Resulting from the EUs
GMB Publishing
Russia
eastward expansion, Russia and the
EU now have a common border of
1,500km. The old EU of 15 had
already accounted for upwards of
40 per cent of Russian oil and gas
exports, 45 per cent of petroleum
product exports and 50 per cent of its
electric power exports. These figures
have expanded exponentially as a re-
portionate new Europe dependence
on Russian hydrocarbon exports.
However, in order to maintain, if not
expand, this market, Russia is being
asked to do a number of things that (1)
it does not wish to comply with and (2)
will require an extraordinary exercise
of Russian energy diplomacy. Briefly,
in return for Russian access to the
EUs internal market, EU President
Barroso has asked Russia to provide
(1) third party access to Russias
pipeline network for non-Russian
energy producers; (2) move towards
de-monopolizing Gazprom and Gaz-
export; and (3) rectification in the
differential between the internal price
charged for Russian gas and its global
market price. To date, Russia has
largely objected to all three proposals
and RussianEU relations are at a
standstill in the energy domain as a
result.
This does not hold true for
Gazprom relations with EU and non-
EU energy providers alike. Unlike in
Russia where Gazprom may speak
with the authority of the Russian state,
international oil companies (IOCs)
speak for the interests of their share-
holders, who are principally inter-
ested in maximizing profit and return
on investment (ROI). As a result,
Gazpromforeign business relations
in up-and-mid stream project devel-
opment continue unabated and
unencumbered by what some view as
niggling energy security concerns.
7

W
ith the decline of the Soviet
empire, the Russian state
became the new albeit prin-
cipal power in the region. At the
time of transition, the Russian states
economic vitality rested on its natural
resource base, and the most potent re-
source among this basket of resources
was gas. This still holds true today. In
1991, oil and gas alone accounted for
some 80 per cent of all Russian ex-
ports10 and the figures today are not
remarkably different. As a result, with
the Russian Federation as the largest
and most successful successor state of
the Soviet Union, Gazprom became
the worlds largest natural gas com-
pany by virtue of the fact that the
country itself owns and controls ap-
proximately 30 per cent of world nat-
ural gas reserves.11 The country is so
large, spanning eleven time zones,
and energy resources so geographi-
cally diverse that it can simultaneously
serve Pacific markets and successfully
send product to downstream Atlantic
states.
Gazproms profile indicates that it
owns 60 per cent of overall Russian
reserves and is responsible for ap-
proximately 94 per cent of the
countrys overall gas production. It
supplies gas to all of Russias regions,
exports its gas to 28 countries and it
accounts for approximately 25 per
cent of Europes natural gas imports.
Import dependence on Russian gas is
a subjective national function, ranging
from 40 per cent of all gas consumed
in Germany to nearly 100 per cent
of all gas available in the Slovak
Republic. These exports generated
$18.3 billion in revenue for the
GMB Publishing
Russia
2.
What is Gazprom?
Russian gas giant in 2004 alone, yet
most revenue was absorbed by even
faster rising costs. In 2005, net
revenue was reported at some
$7.33 billion, up a reported 26 per
cent from 2004.12 This is largely
attributable to a more than two-fold
increase in the global price of gas
exports and a ratcheting up of prices
to former Russian republics. While
exports only account for one third of
Gazproms production, they are
responsible for over two thirds of
Gazproms revenue, highlighting
Gazproms own dependence on for-
eign export markets for sustaining the
companys revenue base. In fact, in
terms of Gazprom domestic sales,
Gazprom expects to lose RUR9
billion, or $324 million, selling gas in
Russia this year and RUR11 billion in
2007.13 This is largely attributable to
the desire of the Russian government
to continue subsidizing its industrial
base with artificially low energy prices
and, concurrently, to cap cost-push
inflation from the energy sector.
Flat domestic production
Russian gas production has been
largely flat since 1999. In 2004, pro-
duction came in at 22.4 trillion cubic
feet (tcf), allowing exports to increase
slightly to 7.1 tcf, still making the
country the largest producer and
exporter of natural gas in the world.
Output was expected to marginally
increase in 2005, expanding exports
to 7.2 tcf, according to Ministry of
Industry and Trade officials at the
end of 2005 (official figures are
9
Russia
not yet available).14 Gazproms own
production figures anticipate growth
of only 1.3 per cent by 2008, and it is
anticipated that most new growth in
Russias gas sector will be accounted
for by new independent companies
between 2008 and 2030, according to
international sources.15
Russian markets
While the Russian Federation still con-
tinues to export significant amounts of
natural gas to customers in the CIS, its
real focus is on hard currency exports
to Members of the EU, Japan and to
Asia over the longer term.16 This is a
trend that began in 1992 and has
steadily increased since then. While
in Western Europe this is expressed
as import dependence on Russian
gas, Gazprom, in turn, is structurally
dependent on exports to Western
Europe (due to the western orienta-
tion of its pipeline network for
Russian gas transport).
Import dependence on Russian
hydrocarbons is more pronounced in
the newer 10 Members of the EU and
NATO than in Donald Rumsfelds
Old Europe of the EU-15. Tables 1
and 2 illustrate the significant differ-
7.5
10
ences in import dependence. Given
the absence of an EU energy policy,
and due to differences in the develop-
ment of legal structures, rule of law,
corporate governance, and varying
national security policies, particularly
across the transitional economies
of CEE, Gazprom historically had
greater access to some of these down-
stream markets than it has had in the
EU of 15 countries. This is now chang-
ing. As North Sea oil and gas are
rapidly being depleted, Europes
regional dependence on Russian
gas is deepening, while Gazprom is
increasingly interested in investing
and controlling the entire European
gas supply chain, from well-head to
consumer. While outward Russian
investment into CEE and Western
European markets implies energy
interdependence, largely considered
a stabilizing factor for global trade in
energy and power, such interdepen-
dence has security implications as well.
In countries with a weak rule of law,
accompanied by a weak ability to
enforce what rules do exist, vulnera-
bilities emerge in the management
and operation of these downstream
energy systems to corruption and
organized crime. This holds true
regardless of the nationality of owner-
ship. Negative security implications
56.7
6.6
71.6
12.3
13.8
7.3
4
World total: 180 tcm as of 1 January 2004
Figure 1: Global gas supply by region
Courtesy: International Energy Agency
GMB Publishing
 Russia

Table 1: Major European recipients of Russian natural gas exports, 2004

Rank Country Imports (bcf/year) Percentage of domestic natural gas consumption
1 Germany 1,110 44
2 Italy 777 29
3 Turkey 473 65
4 France 470 26
5 Hungary 378 72
6 Finland 269 100
7 Slovakia 261 100
8 Poland 258 60
9 Czech Republic 240 82
10 Austria 201 63
11 Bulgaria 184 94
12 Romania 177 24
13 Former Yugoslavia 74 -
14 Greece 74 92
15 Switzerland 18 17
Notes: Does not include exports through Ukraine and Belarus
Source: EIA, BP (2005), CIS and E. European Databook, 2005

for cross-ownership of energy net- governance and the lack of trans-

works are even more pronounced in
failed states, where energy operators
often compete with national govern-
ments for domestic power and influ-
ence. This has been particularly true
throughout CEE and in some of the
Caucasus and CIS states, where weak
parency have contributed to a de facto
transfer of power to mid- and down-
stream Russian intermediaries par-
tially or wholly owned and operated
by Gazprom.
In EU Member countries, the situa-
tion regarding energy security is

Table 2: Foreign dependency on Russian hydrocarbonsof NATOs newest allies to the east
Country/region %
Poland 99
The Baltics 100
The Czech Republic 82
Hungary 81
Bulgaria 94
Slovakia 100
Romania 55
Slovenia 62

GMB Publishing 11
 Russia

25
23 Production
Consumption
Trillion Cubic Feet per year

21
19
Net Exports (2004): 7.1 tcf/y
17
15
13
11
9
7
5

21.7 2005e
22.7 2005e
22.8 2005e
23.4 2005e
16.2 21.8 1993

14.5 21.2 1996

16.5 22.6 1992

14.0 20.8 1999

14.1 20.6 2000
14.4 20.5 2001
14.6 21.0 2002
15.3 21.0 2003
15.3 22.4 2004
15.2 21.5 1994
14.5 21.0 1995

13.4 20.2 1997

14.0 20.9 1998

Production

Consumption

Figure 2: Russian natural gas balance, 19922008

Source: 19922004: EIA, 2005: Interfax, 20062008: Gazprom

somewhat different. EU Members Soviet state decided to place consider-

have well-established legal structures able emphasis on natural gas produc-
and judicial procedures that can be tion and transport. The Ministry was
employed for monitoring and, if nec- charged with exploring, extracting,
essary, preventing asset transfer, if processing, and transporting the
deemed appropriate by national gov- countrys natural gas resources. In
ernment. This, however, does nothing 1989, the Ministry changed its name
for direct diversification of energy and to Gazprom and was officially reorga-
power supplies. European energy nized in accordance with the Decree
security is undermined not necessarily of the President of the Russian Fed-
by the growing weight of Russia in eration of 5 November 1992 and
supplying Europe with vast quantities confirmed by the Resolution of the
of gas, but in EU reluctance at bring- Council of Ministers of the Russian
ing new power on line whose source is Federation of 17 February 1993. Ac-
independent from Russia as an exter- cording to companys official position
nal source. Nuclear power is one such the history of the company begins
case in point. Large scale reintroduc- [began] with these two basic state
tion of nuclear power would afford decisions.17
some power generating diversification
away from natural gas fired power Gazproms lessons learned during the initial
plants, which again depend on Russia days of Russian privatization were to
imports. maintain control over gas development and
transport by avoiding the splintering
operations of privatization, which
Unfolding history disembowelled state control over Russias oil
industry.
Gazprom is the successor institution to
the former Soviet Ministry of Gas,
which was created in 1965 as the However, as indicated Gazprom
hardly began with a clean slate. On the

12 GMB Publishing

positive side, as the Soviet state gas
monopolys legal successor first as a
Russian joint stock company and then
restructured as an open joint stock
company Gazprom inherited the
Ministry of Gas land, mineral rights,
and natural resources, physical and
financial assets. However, it also
inherited a bloated employee pay-
roll, various social responsibilities
attributable to its predecessors stand-
ing as a state institution within the
centralized Soviet system, as well as
its predecessors opaque decision-
making structure.
Troubles from the beginning
From its very beginning, Gazproms
revenue profile was hampered by
maintaining non-core businesses,
which diluted its revenue stream
by redirecting funds to non-essential
ends. According to Alexey Miller,
Chairman of Gazproms Management
Committee, these non-core businesses
will be spun off as the company un-
dertakes large-scale restructuring.18
However, little evidence exists to indi-
cate that Gazprom has moved to focus
on its core business (gas production
and transport), while concurrently the
company is unable to keep pace with
the massive investment challenge it
faces simply to maintain its pipeline
network, let alone expand it. The
dilution of Gazprom capital into
Gazprom Media (which includes more
than 50 individual holdings) and its
2003 purchase of a 15.8 per cent stake
in Mosenergo are but two cases in
point.
Gazproms business practices have
also been slow to change. Industry
practitioners with long experience
of working with the company speak of
the continuation of a Gazprom or
Russian norm, which has little to do
with building a business model based
on efficiency and flexibility. This norm
GMB Publishing
Russia
reflects a desire to maintain the status
quo, while strengthening where
possible the Russia-centric core of
Gazproms Russian business relation-
ships. According to these practition-
ers, these relationships sometimes
conspire to favour inefficient Russian
companies and their products over
those of more technologically and
cost-efficient foreign competitors. The
Russian norm rests on the bedrock of
the Gazpromsupplier relationship,
which insists on Russian supplier
ownership through a long chain of
intermediaries,19 close bureaucratic
connections with company personnel
who may or may not financially bene-
fit directly from this relationship, and
an overall insular view for a company
with activities that are by their very
nature international. These practices
perpetuate Gazprom inefficiencies,
and in a distorted monopoly market,
provide no incentive effect for im-
proving corporate performance.
Viktor Chernomyrdin, who pre-
sently serves as the Russian Federa-
tion Ambassador to Ukraine, was
Gazproms main proponent both
inside as well as outside of the Yeltsin
administration during Gazproms
early transition period. From June to
December 1992, Chernomyrdin was
Deputy Prime Minister for Energy,
and during this period attempted
to establish a stabilization fund for
investment in Russias hydrocarbons
sector. However, Chernomyrdin was
famous for being appreciative of
investment without the investor. For
example, as Deputy Minister for
Energy Chernomyrdin convinced a
Russian investor to sink some
$15 million in the Shotmonovsky oil-
field in 1992. Chernomyrdian quickly
persuaded the Russian President to
transfer the company to Gazprom
shortly thereafter.20
Chernomyrdin diligently fought to
prohibit Gazproms unbundling
through privatization in such a way
13
Russia
that it would lead to a dilution of
ownership and control. After Russian
President Yeltsin appointed Cher-
nomyrdin to be his Prime Minister
in November 1992, Gazproms power
and influence within the family
and government increased accord-
ingly. While voucher privatization of
Gazprom shares did occur, strict limits
were placed on the percentage of
foreign ownership allowed (a limita-
tion incorporated into Gazproms
bylaws). 21
In short, Gazproms experience
with privatization was nominal at best.
This was in no small part due to Cher-
nomyrdins success in preserving the
companys monopoly position over
upstream gas development but also
in maintaining Gazexports control
over Russias midstream gas trans-
portation network inside the Russian
Federation. Whereas Russian oil
concerns must vie for access to the
countrys pipeline network, owned
and operated by a separate transport
monopoly, Transneft, Gazprom has
never been faced with a similar
dilemma. Further, whereas Gazex-
port ostensibly guarantees pipeline
access22 to alternative Russian gas pro-
ducers, Gazprom product continues
to dominate and feed the monopolys
pipeline network. As a result, many
Russian gas companies are now flaring
their gas because Gazprom refuses to
give them pipeline access.23
While monopoly control may be
viewed by some as a fundamental ad-
vantage, this same model has starved
Gazproms transport infrastructure
from receiving the necessary invest-
ment income for the expansion, main-
tenance and repair of its pipeline
system; it has institutionalized large-
scale inefficiencies that plague the
companys performance, and because
of the monopoly structure of the
market itself, there is no external
incentive (ie competition) to drive
change forward.
14
This is further complicated by the
fact that global energy markets are
imperfect, and while oil is a fungible
commodity, gas is not.24 This insulates
the Russian gas industry from direct
competition on Russian territory. His-
torically, gas has been a regional com-
modity. Unlike oil, gas has no spot
market and is physically grounded in
pipeline transit with perhaps the ex-
ception of LNG, which in the future
may develop a spot market for this
commodity and the industry re-
mains largely land-transit based. This
requires enormously long pipeline
networks that traverse multiple states,
leading to a multitude of vulnerabili-
ties. Monopolization, however, does
play into the hands of the Russian gov-
ernment. It gives them control over
what, arguably, is the countrys great-
est weapon: its energy card.
Monopolization however does play into the
hands of the government. It gives them
control over what, arguably, is the countrys
greatest weapon: its energy card.
Hence, Gazproms early lessons
learned during the initial days of
Russian privatization were (1) to main-
tain control over gas development and
transport operations by (2) avoiding
important and large-scale privatiza-
tion. Further, Chernomyrdin the
contrarian sought to build a vertical
Gazprom empire, modelled after
Western oil and gas giants at a time
when the former Soviet Unions
industrial infrastructure was under-
going privatization and, in some cases
dissolution, through asset stripping,
rent seeking and bankruptcy.
Downstream de-coupling
Where Chernomyrdin failed was in
maintaining control over the gas
transportation infrastructure in the
GMB Publishing

neighbouring states of Belarus
and Ukraine. The pre-independence
pipeline system in Belarus remains
under Beltransgas control.25 In
Ukraine, the Soyuz pipeline and
the two-thread UrengoyUzhgorod
pipeline remain under Kyivs control,
yet Gazprom will continue to push
for a shift in ownership for years to
come.26
Attempts at regaining control over
these infrastructures are in direct re-
sponse to the independence of these
former Soviet states. In some cases,
relations remain relatively stable as is
largely the situation with Russian
Belarus bilateral relations, but others
have worsened as has been the case
between Ukraine and Russia, particu-
larly in the post-2004 Orange Revolu-
tion period, with Ukraines push to
distance itself from Moscow in both
political and economic terms.
As a result of the dissolution of the
Soviet Union, Gazprom lost a large
part of its assets outside of Russia one
third of its pipelines and one fourth of
its compression capacity. In a very real
sense, part of Gazproms corporate
strategy today is indicative of an on-
going process of reclamation over
downstream energy assets lost in the
independence process that flourished
across former Soviet states. This has
provided the re-nationalization impe-
tus for surrounding effective control-
ling repatriation over the old Soviet
gas network on an extra-territorial
basis and in the recentralization of
domestic state control over hydrocar-
bons assets inside the Russian Feder-
ation. Anatoly Chubais, the Chief
Executive Officer of Russias electric-
ity monopoly, RAO UES, has charac-
terized this process of state building as
the quest for liberal empire. RAO UES
and Gazprom are state monopolies,
which view competition in zero-sum
terms. Competition is only tolerated to
the degree it is useful to, and serves
GMB Publishing
Russia
as a function of, corporate or state
building.
Above all, Gazprom operates as a
monopoly under post-Soviet monop-
olistic logic. It seeks to control the
entire supply chain, from upstream
exploration to downstream process-
ing and distribution. Its expression of
control domestically is through direct
ownership. Internationally, control is
expressed through a partial or wholly-
owned reconsolidated ownership
position in downstream gas infrastruc-
ture, with the effect of obviating
competition in accordance with its
own monopolistic logic. The com-
panys description of its own core
activties reflects this thinking. Accord-
ing to Gazprom its core businesses are
as follows:
geological survey operations on
the continent and continental
shelf;
well drilling;
natural gas, condensate and oil
production;
gas condensate processing and
oil refining;
natural gas transmission;
natural gas underground stor-
ing;
gas marketing;
research and scientific works
and design developments;
energy saving and environment
protection.27
Russias own long-standing attempt
at creating an international gas
cartel28 is also reflective of Gazproms
prominent position as the worlds
largest producer of natural gas and,
more particularly, in Gazproms aspi-
ration of being to the gas market what
Saudi Aramco is to oil.
In short, Gazprom seeks to be a
price-maker in the market. In order to
do this it must effectively organize an
international gas cartel capable of
15
 Russia
Gazprom employs
330,000
100,000 in
West Siberia
Figure 3: Gazprom: a major employer
Graphic courtesy of Gazprom in Questions & Answers, 2005, available at www.gazprom.ru
setting and maintaining prices. This
can be achieved either through
(a) multi-lateral cooperative efforts of
gas producers or through (b) com-
pelling actions. With respect to CIS
producers, compelling actions can be
principally defined as forcing CIS gas
northwards through the Russian ex-
port system, which in turn benefits
Gazprom vis--vis Gazexport through
(a) increased transit tariff generated
revenue or (b) through subsidizing the
Russian gas market with cheaper im-
ported gas, thereby allowing Gazprom
to expand its export capacity abroad.
A truly global gas cartel, along the
lines of OPEC, would require, by def-
inition, market-based cooperation
between Russia and Iran, which
together account for more than 50 per
cent of global gas reserves. Russian
support for the Iranian nuclear sector,
Russian arms sales to Iran, and non-
Russian intervention in Iraq are all
indicative of (1) closer Russian
Iranian relations but also (2) of
Russias long-standing ambition to
create a strategic triangle between
Moscow, Tehran and Beijing to
offset US influence globally.
16
Russian Foreign Minister Laverovs
objection to discussing a military
response to short-circuiting Irans
nuclear programme, calling it hypo-
thetical and inappropriate, is
further evidence that if pushed too
far by Western interests exemplified
by US and European rejection of
Irans nuclear ambitions Russia is
ready to intervene in the UN Security
Council by preventing a censure of
Iran in the form of a trade embargo or
the imposition of other non-military
instruments to punish Iran for its be-
haviour. RussianIranian cooperation
in the gas sector is but one aspect of an
increasingly complex relationship,
which also includes RussianIranian
nuclear cooperation and Russian
transfers of military equipment,
among other items.
Regardless of questions surround-
ing the credibility of creating a CIS or
more global gas cartel, Gazproms
vision stands as a testament to how the
companys perceives itself and, more-
over, how the Russian government
envisages Gazprom as a global indus-
try leader, capable of reshaping the
market for its own purposes.
GMB Publishing

Finally, Gazprom is Russias single
largest company with over 460,000
shareholders. It provides 25 per cent
of all Russian tax revenue (averaging
over $4 billion annually between
1993 and 2003) and accounts for at
least eight per cent of the nations
GDP. Russian state dependence on
Gazprom revenue (1) prevents state
de-coupling from interfering in
Gazprom pursuing its own corporate
strategy, and (2) because of Russian
tax policy as applied to corporate
activities, limits Gazproms ability to
redirect before profit income into
corporate investment. Russian state
tax policy is essentially Soviet redis-
tributive tax policy that allows the
state to use corporate income for
state-based purposes.
While Gazproms employment pro-
file is large and growing its number
GMB Publishing
Russia
of employees increased by over 80 per
cent between 1997 and 2003 its
reportedly 330,000 employees are but
less than half of one per cent of the
total Russian labour force.29 This is not
atypical for the hydrocarbon industry,
which accounts for a high revenue
stream but low employment. The
Gazprom anomaly, however, is that it
added employees while labour pro-
ductivity dropped by over 40 per cent
over the period 19972003. Unit
labour costs in the gas industry
jumped 107 per cent over the same
period, while they rose only 25 per
cent in the mostly privatized oil indus-
try. Hence, state intervention implies
under-performance, which is danger-
ous for a country largely dependent
on a small basked of commodity
exports for economic growth and
national economic sustainability.
17
 Russia

3.
Gazprom and global energy

A
ny appreciation of Gazprom as
a company, considering both
its strengths and weaknesses,
should be placed in the context of
global energy demand, the shift in
demand patterns, and, most impor-
tantly, in the increasing importance
of natural gas and its derivatives.
Overall global primary energy de-
mand growth is increasing, driven by
China, India and the developing
world.
Comparatively speaking, energy
demand will increase in mature
economies by 1.1 per cent per year
between now and 2025. This will be
easily eclipsed by growth across Asia
by some 3.5 per cent per annum
during the same period. In the tran-
sitional economies of Eastern Europe
and the former Soviet Union (FSU),
growth in energy demand is projected
to average 1.6 per cent per year. For
Gazprom, its corporate challenge will
be to meet this demand and to main-
tain and increase its market share as
the worlds largest natural gas com-
pany, particularly in what it considers
its own near-abroad.
Demand growth in the Russian
Federation itself may be curbed if,
according to the terms of its accession
to the World Trade Organization
(WTO), the Russian government is
forced, and Gazprom is allowed, to
charge market prices for its gas to
Russian industrial and individual
consumers. Clearly, there will be
much discussion within the context of
the G8 Summit in St Petersburg in
2006 on Russias terms of accession to
the WTO, and hard lobbying to avoid
bringing Russian domestic energy
prices in line with global market prices
can be expected from President Putin.
He can also be expected to argue that
Russia is liberalizing its gas market
and to point to the success of this
policy by citing increased production
figures from independent producers.

Table 3: World marketed energy consumption by region, 19902025 (Quadrillion Btu*)

Average annual percentage change
Region 1990 2002 2015 2025 19902002 20022025
Mature market economies 183.6 213.5 247.3 271.8 1.3 1.1
Transitional economies 76.2 53.6 68.4 77.7 2.9 1.6
Emerging economies 88.4 144.3 237.8 295.1 4.2 3.2
Asia 51.5 88.4 155.8 196.7 4.6 3.5
Middle East 13.1 22.0 32.4 38.9 4.4 2.5
Africa 9.3 12.7 19.3 23.4 2.7 2.7
Central and South America 14.5 21.2 30.4 36.1 3.2 2.3
Total world 348.2 411.5 553.5 644.6 1.4 2.0
* British Thermal Units

GMB Publishing 19
Russia
It is important to note, however, that
these companies are not allowed to
export their product but only to sell
it on the domestic market for prices as
low as one-fifth of the international
market price for gas. Such liberaliza-
ton also helps Gazprom balance its
books by having these independent
producers satisfy domestic demand,
thereby freeing up additional gas for
Gazprom exports. Even then, regional
European demand for natural gas has
already stirred Gazprom to attempt
to dominate the entire regional CIS
market, including all available gas
found in Kazakhstan, Turkmenistan,
and Uzbekistan. Due to Gazproms
slow-growth production, it needs
these supplies to satisfy contractual
commitments it has already made
downstream. In 1997, for example,
Gazprom began importing natural
gas from Turkmenistan to help fulfil
its supply contract with the Nether-
lands. Since then, Turkmenistan and
Russia have had repeated disputes
over the pricing of the natural gas,
resulting in a complete halt to natural
gas supplies in 2004. Turkmenistans
January 2005 agreement with Russia
guarantees initial natural gas exports
of 212 billion cubic feet (bcf) in 2005,
drastically increasing to 2.4 trillion
cubic feet (tcf) in 2007, and remain-
ing at 2.8 tcf from 2009 to 2028.
Turkmenistan maintains that the
$1.55/mcf price it agreed to is too low
in comparison to the resale value of
natural gas in European markets,
and it wants to raise the price to
$1.76/mcf in 2006 and $2.12/mcf
in the following years.30
Gazprom and the state have no vested
interest in allowing alternative natural gas
export routes from the CIS to develop that
obviate the Gazexport system and the
Russian Federation in general.
20
Gazprom and the state, together,
have no vested interest in allowing
alternative natural gas export routes
from the CIS to develop that obviate
the Gazexport system and, by impli-
cation, the Russian Federation. Part
of this can be explained as a corporate
effort to meet its downstream commit-
ments for natural exports, particularly
to its Western European clients, by
forcing gas northwards through
Russia; the other aspect of this equa-
tion is more unsavoury. The Russian
government effectively undermines
the attempts of FSU states in strength-
ening their own independence by
dissuading, at every turn, the devel-
opment of alternative transport net-
works that obviate Russian space.
Revenue independence, in short,
makes political independence possi-
ble. The fact is that Russia has never
ratified the European Energy Charter
with its Transit Protocol detailing
third party access to transportation
networks. The EU has unsuccessfully
argued this point with Russia. It has
offered access to its deregulating
internal market for energy in return
for Russian acceptance of third party
access. Thus far, the only thing the
EU has received is more Gazprom
gas and hence increased dependence
on Russian imports. Real issues it
would like to see resolved are the
de-monopolization of both Gazprom
and Gazexport; neither of these are
probable.
According to the IEA, fossil fuels
will account for over 90 per cent of
the growth in energy demand, with
natural gas playing an increasingly
important role in the fossil fuel mix.
World primary energy demand is
projected to expand by almost 60
per cent between 2002 to 2030, with
an average annual increase of 1.7 per
cent per year. Demand for gas will
grow at 2.3 per cent per year between
2002 and 2030 the fastest rate of any
fossil fuel. By 2030, gas use will be
GMB Publishing
 Russia

90 per cent higher than now, and gas
will have overtaken coal as worlds
second largest energy source. Total
world natural gas consumption is
projected to rise from 92 tcf in 2002 to
128 tcf in 2015 and 156 tcf in 2025.
Natural gas is expected to remain
an important supply source for new
electric power generation in the fore-
cast. It is seen as a desirable option for
electric power in many parts of the
world, given its efficiency relative to
other energy sources and its low
carbon content relative to other fossil
fuels, making it a more attractive
choice for countries interested in
reducing greenhouse gas emissions.
The industrial sector also remains
an important end-use consumer for
natural gas worldwide. The electric
power sector will account for nearly
50 per cent of the increase in global
natural gas demand over the 2002 to
2025 period, and the industrial sector
will account for another 36 per cent.
Natural gas is expected to be a
favoured choice for new electricity
generation capacity built over the
next two decades. Its relative environ-
mental benefits and efficiency make
natural gas an attractive alternative
to coal-fired generation. Moreover,
where fuel diversification is desired
(as in China, where generation is
heavily reliant on coal-fired capacity),
natural gas is expected to gain share
in the electric power mix over the
forecast period. The natural gas share
of total energy used to generate elec-
tricity worldwide increases in the
forecast, from 18 per cent in 2002 to
24 per cent in 2025, with other energy
sources showing small losses in market
share.31 Given Gazproms interest
and propensity to attempt to control
the entire supply chain, it is somewhat
surprising that they have not yet
moved more aggressively into the
distributed power and heat distribu-
tion networks of CEE and the FSU.
The fact is that in Russia Gazproms
three main fields (the Big Three) in
Western Siberia Urengoy, Yamburg
and Medvezhye comprise more
than 70 per cent of Gazproms total
natural gas production, but these
fields are now in decline (gas extrac-
tion falls by 2025 billion cubic metres
(bcm) each year). As a result, Gazprom
is actively studying new deposits suit-
able for large-scale exploration. The
company plans to substitute falling
extraction volumes from old deposits
with deposits in Nadym-Pur Taz
region, and then by development of
new fields on Yamal Peninsula and

Quadrillion Btu
800
History Projections

645
600 598
553
504

400 412
348 366
310
285
243
200 207

0
20
0

25
75

10
95
70

90

15
02
85
8
19

19

19

19

20
19

19

20

20

20

20

Figure 4. World marketed energy consumption, 19702025.

GMB Publishing 21
Russia
on the Arctic shelf, most notably,
on the shelf of the Barents Sea near
Murmansk (specifically the Prirazlom-
noye and Shtokmanovskoye gas con-
densate deposits). A gas liquefaction
plant is planned near Shtok-
manovskoye field, and possibly in
Leningrad Region near Ust Luga
port.32
With respect to the often discussed
Murmansk facility, it should be noted
that while two individual pipelines
have been discussed no decision has
yet been made on either. Confusion
on pipeline routes is rife within
Russias bureaucratic structure, as
Stephen Blank has pointed out.33
According to Blank, this is largely
attributable to what he calls the
primary of rent seeking, whereby
members of the bureaucracy seek to
manipulate decision-making for per-
sonal financial and power aggrandize-
ment. One of Blanks examples is the
case of Transneft in Murmask, whose
President is pushing for a pipeline
route to run close to property he owns
in order to enhance its resale value.
Gazprom is also striving to develop
new export markets, most importantly
North America, South-East Asia and
the UK. Since it is not possible to
extend pipelines to some of these
markets, Gazprom plans to start
production of new products such as
Figure 5: Fuel shares of world electricity generation, 20022025.
22
LNG (liquefied natural gas) and
various synthetic fuels (such as lique-
fied petroleum gas, petrol, etc). These
liquid products can be delivered
to customers using ocean tankers.
Gazprom has already started to look
for foreign partners with marketing
capabilities and regasification facilities
in North America, who would also be
willing to invest in Gazproms new
projects in Russia. ChevronTexaco,
Statoil and PetroCanada have signed
Memorandums of Understanding
with Gazprom. Whereas LNG will be
mainly delivered to North America,
Gazprom also plans to expand its
capacity in Europe by building a new
North-European Gas Pipeline, which
would enable it to saturate increasing
demand in its traditional European
markets, and to develop new ones.
The pipeline will stretch underwater
from Vyborg near St Petersburg to
Germany, with possible continuation
to the UK. Both of the anticipated
Gazprom export projects (North-
European Gas Pipeline and develop-
ment of Shtokmanovskoye field with
the construction of an LNG plant) are
located in Northwest Russia.
LNG is an important derivative
that will help the global market for
natural gas and a particularly impor-
tant one for Gazprom. However, like
all hydrocarbon products it has its
Percentage of total
100
80
Natural Gas
Nuclear
60
Renewables
Coal
40
Oil
20
0
2002 2010 2015 2020 2025
GMB Publishing

own set of challenges. Among these
are the marketability of LNG for dis-
tances under 3,500 miles,34 the cost
factors in constructing deep-water
port facilities capable of handling
ocean-going vessels, and the associ-
ated cost of liquification and regasifi-
cation facilities (although these are
declining and the cost efficiencies and
ROI on new facilities are increasing
given the present high price of gas,
which make projects like this feasible).
In spite of this, the future for Russian
LNG in the North American market
appears bright. Among the factors un-
derscoring this optimism are:
natural gas is the fastest growing
energy source in the US;
natural gas supplies approxi-
mately 25 per cent of US energy;
the US consumes about 25 per
cent of the worlds annual natu-
ral gas production;
natural gas demand in the US
is expected to increase almost
40 per cent by 2025.35
As a result, the future for Gazprom
natural gas and associated LNG ap-
pears ostensibly bright. However, it
should be pointed out that one major
incident involving LNG facilities and
terminals around the world could shut
down this growing industry, not
unlike the effect that Three Mile
Island and Chernobyl had on the
nuclear industry. This threat is largely
asymmetric, ie from global terrorism
and piracy, and while this high risk
threat may be perceived as having a
GMB Publishing
Russia
low probability, the threat remains.
Therefore, any investment decision in
long-term Gazprom performance,
predicated on increased access to
overseas markets, should take this
factor into account if that investment
is predicated on the revenue growth
of Gazprom from US markets.
Key points
Gazprom benefits from the
global increasing demand for
natural gas.
Import dependency on
Russian gas imports is most
pronounced in CEE, given the
architecture of the former
Soviet natural gas network; this
is changing, however, as the
availability of North Sea oil is
steadily decreasing and EU/
NATO Members increase their
natural gas imports from the
Russian Federation.
Gazproms revenue base for
hard currency imports is corre-
spondingly focused on West-
ern European markets.
While LNG is an alternative for
Russian gas exports and for the
creation of new markets, in the
mid-term Gazproms exports
will be land-transit based.
Gazprom requires additional
sources of natural gas from
the CIS in order to meet its
export commitments to West-
ern Europe.
23

G
azproms 2005 restructuring is
the centrepiece of Russian state
energy policy. It concurrently
provides a working success story that
proponents of state-based control
over strategic elements of the Russian
economy can point to, and also pro-
vides the government with an active
agent for state recapture over other
elements of Russias energy complex.
President Putin, himself a graduate of
the prestigious St Petersburg Mining
Institute in 1997, published in 1999
an article on the role of Mineral
Resources in the Development Strat-
egy of the Russian Economy. In it,
Putin posited that hydrocarbons were
key to Russias development and the
restoration of its former power. He
argued that the most effective way to
exploit this resource was through state
regulation of the fuel sector, and by
creating large and vertically inte-
grated companies that would work in
partnership with the state. 36
Gazprom is important, therefore,
not only for what it represents but
more importantly for what it is. Sur-
prisingly as large and influential as
Gazprom has been historically, recent
developments have imbued it with
even more power as a manifest tool
for government intervention. The
application environment for poten-
tial intervention includes not only
Russias domestic political landscape
and its national economy, but also
the global strategic environment
subject to impact through the exercise
of Russian foreign policy. In the
opinion of one Russias most re-
spected Western investment banks,
GMB Publishing
Russia
4.
Recent restructuring
Renaissance Capital, and its leading
analyst, Roland Nash:
Increasingly, energy is becoming Russias
single major foreign policy tool, not just in
the near abroad (Belarus, Turkmenistan,
Georgia, Ukraine), but also in its relations
with the worlds global powers. While this
can be frustrating for Russias partners, and
explains much about Putins obsession with
the strategic sectors of the economy,
pipelines and ports are clearly a much
healthier way to project international
influence than missiles or the financial
suicide threats of the Yeltsin era. 37
Setting Nashs rationalization of the
relative gravity of Putins choice of
pipeline politics over missiles aside, it
is worth noting the increased weight
assigned to energy as a tool governing
relations among and between states.
In an era pronounced by globalization
in which economics and the manage-
ment of a countrys national economic
assets have given rise to the concept
of economic security, energy and its
availability is key to maintaining an
economically secure environment.
Energys role in the national security
of nation states transcends the buying
and selling of commodities that drive
economic growth forward. In the
developed world, energy (or more
appropriately the absence of access to
national energy resources) is visibly
eclipsing traditional security threats
from the use of conventional (or non-
conventional) weapons (aside from
the threat of asymmetric warfare) as
an issue of concern; energy statecraft
is becoming a new measure of a
25
Russia
countrys ability to navigate forward in
an increasingly treacherous global
security environment. If used prop-
erly, energy statecraft can enhance
the producerconsumer dialogue and
therefore contributes to global stabil-
ity. If misused and if energy is chosen
as a tool for political leverage, it can
inflict a large and dangerous uncer-
tainty quotient into the global security
framework. This is a fine line that
those responsible for the pursuit of a
Gazprom corporate strategy have to
balance against the heavy weight that
has been placed on Gazprom by the
state as a result of this restructuring
process.
In conclusion, President Putins
choice of energy security as the
focal point for the G8 Summit in
St Petersburg is a positive step forward
for raising the visibility and impor-
26
tance of global energy security.
Russias concurrent threatening pos-
turing towards the Ukraine, Georgia
and Moldova among others, discredits
this otherwise positive policy and
injects uncertainty where stability
should reign. Russia, and potentially
Gazprom, will suffer over the long
term from these developments, caus-
ing Western European, import-
dependent nations to look for solu-
tions elsewhere while concurrently
encouraging other market players,
technologies and instruments to be
deployed to diversify away from
Gazprom market dominance. Having
said this, market and resource diver-
sification should be a coordinated ac-
tion for the purpose of enhancing
stability and should therefore avoid
increasing risk and threats to the
present profile of resource availability.
GMB Publishing

Confluence of Russian foreign
and energy policy
Gazprom share purchase
T
he event that formally linked
Russian foreign and energy
policy was the governments
2005 repurchase of a control-
ling interest in Gazprom shares.
In 2005, the government pur-
chased 2,542,500,000 shares (10.7399
per cent of the corporate charter
capital) for RUR203,501,700,000.
The transactions were endorsed by
Rosneftegaz38 shareholders and by
Gazproms Board of Directors on
16 June 2005. The share transfer
transaction was settled through a
series of three separate payments.
The first in the amount of
RUR16.2 billion was received by
Gazprom in July 2005. The second
and third payments were completed
in October and December 2005
respectively. At current exchange
rates, the transaction was valued at
approximately $7.11 billion, well
below the $8.39$9.92 billion the
transaction was valued at by Morgan
Stanley or the $10.2$11.5 billion as
estimated by Dresdner Kleinwort
Wassertstein.39
Although the acquisition price paid
for by the government for the
Gazprom stock was well below market
estimates, it was calculated close
enough to avoid the psychological
pitfall of spooking the foreign invest-
ment community and thereby under-
mining foreign investor confidence
in the companys future. In a convo-
luted ideological twist, government
GMB Publishing
Russia
5.
spokesmen rationalize the renational-
ization of Gazprom as a method of
paving the way forward for increased
foreign investment in Gazprom
shares. In fact, Gazprom media re-
ported on the share price valuation
and subsequent transaction that, in-
creasing the states share in Gazproms
authorized capital to a controlling
stake marks the initiation of the Com-
panys share market liberalization.40
Gazprom defines this liberalization as
no restrictions on Gazprom shares on
the Russian market, and the lifting of
restrictions on Gazprom share pur-
chases by non-Russian entities. It
would also mean that Gazprom shares
circulating in Russia could be freely
converted into ADRs.41
As widely circulated, the transaction
was intended to provide the state with
a controlling percentage of Gazprom
shares in excess of 50 per cent. How-
ever, according to calculations based
on the governments historic share
capital of 38.37 per cent, the present
shareholdings of the Russian govern-
ment in Gazprom authorized capital
only reaches a total of 49.11 per cent,
1,039 of total shares issued thus fall-
ing short of the oft stated 50 per cent
share total but well in advance of
any other individual or institutional
shareholder. This is supported by a
report filed by the influential Russian
business daily, Kommerstat, a media
holding of Gazprom subsidiary
Gazprom-Media. Kommerstat reported
that the government had miscalcu-
lated the states holding of Rosgazi-
fikatsiya (a majority state-owned
27
Russia
company that controls state-owned
stakes in regional natural gas distribu-
tion networks in Russia). The Russian
state must significantly increase its
share in the regional distributor from
74.5 per cent to more than 99 per
cent, or to otherwise ensure that the
regional distributor sells its securities
to Rosneftegaz. Therefore, the calcu-
lation of the Russian state govern-
ments holdings of Gazprom stock at
approximately 49.11 per cent without
the additional Rosgazifikatsiya shares
appears correct. Increasing the gov-
ernments stake in Rosgazifikatsiya to
virtually 100 per cent, resulting in the
contribution of minority stakes in
more than 50 state-owned regional
natural gas distribution organizations,
will push the governments majority
position in Gazproms authorized
capital above the 50 per cent threshold
as originally intended.42
The most telling aspect of this
government miscalculation in failing
to exceed the 50 per cent threshold in
Gazprom shares in its first attempt,
is that it suggests those driving policy
discount the importance of the com-
mercial and financial detail and place
a premium on the political implica-
tions of what otherwise should be
considered commercial transactions.
Simply put, government policy-
makers placed premium on the recen-
tralization of state control over
Gazprom rather than the financial
costs of achieving this control.
Governmental public
diplomacy: sending the right
Gazprom message
Exercising the governments pur-
chase of a controlling interest in
the company vis--vis the financial
markets was a palatable way of achiev-
ing this objective. It placated foreign
28
investors desire for at least quasi-
market measures used in the re-exer-
tion of the governments controlling
interest over Gazprom, coupled with
the fact that an approximation of a
market price for this controlling inter-
est was actually paid. Second, the gov-
ernments promise to raise the ceiling
percentage on foreign ownership
provides the illusion that foreign
investment in the firm is welcome, at
the same time prohibiting FDI share-
level investment from rising to a
majority shareholder position. There
has never been any doubt, however,
about the ultimate success of its policy
ie government recapture. The finan-
cial cost of this policy was a negotiated
one between Gazprom management,
as representative of its individual and
corporate shareholders who do in fact
have a commercial interest in what it
is paid, and the government, which
ensured ownership transfer at the
lowest relative cost. In short, the out-
come of the governments decision to
recapture Gazprom was never in
question regardless of the economic or
financial costs of the purchase. The
larger and much more relevant
question that this process raises is
whether Gazprom as a commercial
organization can be run profitably by
a management board interested less in
corporate finance than in the power
derived from its control.
A second important point bearing
on the desire to see Gazprom viewed
as a commercially efficient enterprise
is that state-owned and operated
energy industries, regardless of loca-
tion, are hardly the paragons of eco-
nomic efficiency. Already, Gazprom
has suffered from its legacy as the
successor institution to the Soviet
Ministry of Gas. The outstanding
issue is whether Gazprom can break
this trajectory in spite of its restruc-
turing. Considerations concerning
the long-term investment potential
for Gazprom should take account of
GMB Publishing

the recent past of the Soviet gas indus-
try under the Soviet regime, when the
Soviet gas complex suffered from a
long-term decline in capital invest-
ment, new field development and in
Gazproms case, flat output since
1999.
Russia beyond Putin is unknown.
Despite its huge reserves, short-to-
medium term investment in Gazprom
should factor in as a risk premium
the overall impact on performance
and the logic of the companys down-
GMB Publishing
Russia
stream investments in low- or non-
returning asset acquisitions. This risk
premium is counter-balanced by
Gazproms principal dominance over
Russian natural gas, its long history as
a reliable supplier of gas to its down-
stream customers (with the exception
of recent experience) and the demand
premium placed on an evolution away
from coal-based and nuclear power
generation by its geographically con-
tiguous neighbours to the west.
29
 Russia

6.
Gazprom management

G
azproms Board of Directors President forged while part of the
is comprised of 11 individuals St Petersburg Administration.
supported by a Management
Committee of 17. Both the Board
and Management Committee stro- Gazprom factions
ngly reflect the friendships, ties, and
relationships developed by the
Russian president over his own career
Market liberals
in the KGB and those relationships
forged during his tenure spent in Like Russia itself, there are many com-
St Petersburg, both as a student and peting factions in the government and
political appointee. The president Gazprom vying for the presidents
spent 15 years in the former Soviet ear. How to manage energy as an
KGB (now FSB) as a Federal Security efficient tool of state power is one
Agent and then went on to study at issue. Another is if and when Gazprom
the prestigious St Petersburg Mining should be used as a foreign policy
Institute.43 He also served as the lever when those in Russias near
abroad embark on policies that run
Director of the St Petersburg Foreign
contrary to those held by the Kremlin.
Economic Relations Department
There are at least three factions
attached to the Mayors office in
within the horizontal government
St Petersburg.
GazpromRosneft triad which com-
From a conceptual standpoint, part
pete against one another for power
of Putins vision was groomed by
and influence. The failure to proceed
Vladimir Litvinenko, rector of the
with the merger between Gazprom
school at the time when Putin was a
and Rosneft, which would have cre-
PhD student. Litvinenkos vision, in
ated a Russian state energy company
turn, may have been shaped by the
to rival Saudi Arabias Aramco, high-
Brezhnev doctrine, which strove to
lighted infighting between competing
retain influence and a good deal of
Kremlin factions allied to the two com-
control over the then Soviet Unions
panies, offers one analyst.45 However,
neighbours by keeping them largely
dependent on subsidized Soviet en- the Presidents position of once a
ergy imports as detailed earlier in this KGB man always a KGB man holds:
monograph.44 Litvinenko now serves he is loyal to those who have been loyal
to him both in and out of the Russian
on the newly created Russian Energy
security services.46 A further nuanced
Commission as a key member of that
approach points to the struggle
commission and is believed to have
among competing groups within the
been one of the principal architects of
Russias Energy Strategy to 2020. From Kremlins circle, broken down along
ideological lines.
an operational standpoint many of
The first group can be identified
the present Gazprom appointees orig-
with market liberalization and
inate in the political ties the Russian
includes the Russian Minister of
Economic Development and Trade,

GMB Publishing 31
 Russia
German Gref; (former) Russian
Presidential Advisor, Andrei Illainov;
and Viktor Khristenko, Minister of
Industry and Energy. Gref has stated
on more than one occasion that the
Russian government has no business
in taking an ownership position in
companies in economic sectors other-
wise governed by competition. For
his own part, Illainov had been
quoted, prior to his departure from
government, in characterizing the
governments prosecution of the
countrys most profitable oil company,
Yukos, as the swindle of the year.47
Taken together, while this camp may
sympathize with the economic security
importance of Gazprom, the tendency
would be to argue that the best way
of maximizing national economic
security, and thereby Gazproms con-
tribution to the national budget,
would be to allow the company to
function as a sensible and profitable
economic unit, unencumbered by
Kremlin politics.
The Russian Federation Minister for Economic
Development and Trade
German O Gref was born on February 8,
1964, in Panfilovo, Pavlodar Oblast,
Kazakh Soviet Socialist Republic.
Mr German O Gref was Legal Advisor,
Regional Agriculture Department, Irtish
Region, Pavlodar Oblast in 19811982.
He served in the Soviet Army from 1982 to
1984.
German O Gref
32
German Gref studied at preparatory
courses, Law Department, Omsk State Uni-
versity, and was a student at the University
from 1985 to 1990. He graduated from
Omsk State University and obtained his law
degree in 1990.
German Gref taught at the Law Depart-
ment, Leningrad University, in 1990, and
completed the post graduate programme at
the Law Department, Leningrad Univer-
sity, in 1993.
Mr Gref held various jobs at St Peters-
burg City Administration, including: Legal
Adviser, Economic Development and Prop-
erty Committee, Petrodvorets District
Administration in 19911992, Chief,
Petrodvorets District, City Property Man-
agement Committee in 1992, Chairman,
City Property Management Committee,
Deputy Head, Petrodvorets District
Administration in 19921994, Vice
Governor, Deputy Chairman, Director,
Real Estate Department, First Deputy
Chairman, City Property Management
Committee in 19941997, Vice Governor,
Chairman, City Property Management
Committee in 19971998.
Mr Gref served as Member of Board,
Ministry for State Property of the Russian
Federation in 1998, and First Deputy
Minister, Ministry for State Property of the
Russian Federation in 19982000. He
has been Member of Board, Federal Com-
mission for the Securities Market of the
Russian Federation since 1999.
German Gref was appointed Minister of
Economic Development and Trade of the
Russian Federation in 2000.
Source: www.gazprom.ru
GMB Publishing

The Russian Minister of Industry
and Energy Viktor Khristenko has
also been outspoken on the issue of
using the market and non-political
market instruments to address
Russian energy security. In a speech
to the Asian Economic Forum in 2005,
Khristenko stated that, Only by bal-
ancing this issue [energy security] at
the global, regional and national levels
can we correctly identify, diversify and
meet the risks of economic develop-
ment. An effective management of
non-political risks directly in the
hydrocarbon sector of the economy is
possible only through a comprehen-
sive attainment of the following goals:
greater access to and the trans-
parency of data on reserves,
demand and stocks;
market predictability through
broader use of long-term con-
tracts and dialogue between
energy producers and con-
sumers;
efficient development of the
energy infrastructure in the
interests of the market.48
Based on Gazproms continued
monopoly position in the Russian
market, both in terms of gas supply
and effective control over the transit
network, and in view of the absence of
meaningful Russian energy market
reform, the fact that Russian reserve
data is considered a state secret is
prompting the removal of Western
managers in the upstream Russian
GMB Publishing
Russia
oil sector who have access to this
information. Continued state propri-
etorship over all Russian natural
resources, and the lack of market
liberalization measures along the lines
of the GreffIllarnovKhristenko plan
have been stymied.
The Russian Federation Minister for industry
and energy
Viktor B Khristenko was born on August
28, 1957, in Chelyabinsk. He graduated
from Chelyabinsk Polytechnic Institute,
where he obtained his degree in construc-
tion management and economics.
In 1995, he graduated from the Academy
of National Economy, the Government of
the Russian Federation, holds a PhD
(Economics) degree, and is the author of a
number of research publications.
Viktor Khristenko was elected Deputy,
Chelyabinsk City Peoples Deputies Council
in 1990. From 1991 to 1996 he served as
Deputy Governor, Chelyabinsk Oblast.
Mr Khristenko was appointed Represen-
tative Plenipotentiary of the President of
the Russian Federation in Chelyabinsk
Oblast in 1997.
Viktor Khristenko served as Deputy
Finance Minister of the Government of the
Russian Federation from 1997 to 1998.
Mr Khristenko was appointed Deputy
Prime Minister of the Government of the
Russian Federation in 1998, and from
1998 to 1999 he served as First Deputy,
Minister of Finance of the Government of
the Russian Federation.
In May 1999, Dr V B Khristenko was
appointed First Deputy Prime Minister of
Viktor B Khristenko
33
 Russia
the Government of the Russian Federation,
and on 10 January 2000 was appointed
Deputy Prime Minister of the Government
of the Russian Federation.
Viktor Khristenko is Member, Board of
Directors, Gazprom.
On 9 March 2004 Viktor B Khristenko
was appointed the Russian Federation
Minister for industry and energy.
Viktor Khristenko is married with three
children.
Source: www.gazprom.ru
Silivoki
A second identifiable group comprise
those relationships based on the
Presidents KGB past. These originate
from the silivoki or security service
personnel who worked with the
President while he served his tenure
with the KGB and then its successor
organization the FSB. The silivoki
seek to re-establish a strong Russian
state that will project Moscows
security interests in areas formerly
dominated by the Soviet Union. Ex-
ploitation of Russias massive energy
wealth is viewed as a means to this end.
They are Russian nationalists and, in
some cases, neo-imperialists, who
selectively choose market mecha-
nisms to advance their position when
opportune, while just as selectively
discount the economic component of
the energy trade in purely commercial
terms over larger policy considera-
tions; they prefer to see an extension
of Russian energy policy as an exten-
sion of foreign policy and are the most
contentious and often the most influ-
ential group affecting Russian foreign
energy policy.49
Those belonging to this group
include Aleksander Ryazanov, the
deputy chairman of Gazprom, and
reportedly the head of the siloviki
faction within the gas giant. Ryazanov
became chief executive of the Sibneft
oil company after it was purchased by
34
Gazprom in 2005. He has also been
appointed head of UkrGazEnergo,
the newly created UkrainianRussian
joint venture, to act as an inter-
mediary between Ukraines state-run
Naftohaz Ukrayiny and the Swiss-
based RosUkrEnergo.50
In February 2006, Gazprombanks
subsidiary Arosgas Holding sold its
shares in RosUkrEnergo to Gazprom
itself, thereby consolidating the com-
panys position both through manage-
rial control through UkrGazEnergo
and ownership control (50 per cent)
of RosUkrEnergo.51 When the Russia
Ukraine agreement was signed in
early January, and then a second deal
signed in February, the ownership
structure of RosUrkEnergo was, and
remains, largely opaque. It is of little
doubt that had all Ukrainian authori-
ties, particularly those in the Parlia-
ment, understood Gazprombanks
involvement in RosUrkEnergo, the
agreement ending the Russia
Ukraine gas crisis would have been
subject to a much greater degree of
scrutiny prior to its signature by the
Ukrainian President.
Gazproms habitual exercise of
obscuring its involvement in down-
stream subsidiaries and its back-door
method of ultimately making its pres-
ence known to downstream states
unnecessarily complicates its own cor-
porate image as a commercially driven
organization. It in fact creates the
impression of unscrupulous be-
haviour, regardless of the legality of
that behaviour, with specific intent to
defraud its partners and customers.
It belies a basic appreciation and
respect for the value of its corporate
reputation and undermines its
long-term objective of becoming a re-
spectable member of the international
business community.52 Numerous
other examples of Gazprom obscuring
its involvement in investment deals
range from Poland to the Baltics,
where at the ministerial and prime
GMB Publishing

minister levels respectively, individu-
als have come under investigation
accused of representing Gazprom
interests to the detriment of their
own national interests in the privati-
zation of critical energy infrastruc-
tures sought after by Gazprom itself.
Deputy Chairman of Gazproms Management
Committee, President of Sibneft
Aleksander N Ryazanov was born in 1953.
He graduated from I. M. Gubkin Moscow
Petroleum and Gas Industry Institute in
1979, and from USSR Finance and
Economics Institute by correspondence.
Additional education: USSR Finance and
Economics Institute (by correspondence).
Mr Ryazanov was Director, Surgut Gas
Treatment Plant, from 1988 to 1994.
He also was the top manager at Sibnefte-
pererabotka after an upgrade training
course in the USA.
Aleksander Ryazanov was elected
Deputy, State Duma, the Russian
Federation Council, in December 1999
representing Nizhnevatorsk single man-
date (candidate) Electoral District. He has
been a member of the Yedinstvo faction
since 2001. He is (was) Chairman, Prop-
erty Committee, Deputy Chairman, State
Duma, in charge of investors rights
protection.
Aleksander N Ryazanov was appointed
Deputy Chairman, Management Commit-
tee, Gazprom, on 5 November 2001.
Gazprom Board of Directors appointed
Aleksander N Ryazanov Member, Man-
agement Committee, Gazprom.
Aleksander N Ryazanov
GMB Publishing
Russia
On 21 October 2005, Sibneft Board of
Directors appointed Aleksander Ryazanov
acting President of the company.
On 23 December 2005, Aleksander
Ryazanov was approved as President of
Sibneft at an extraordinary general meet-
ing of shareholders.
Source: www.gazprom.ru
The St Petersburg clan
The most prominent St Petersburg
key legacy contributor to the Gazprom
Management Committee is its Chair-
man, Alexey Miller, who concurrently
serves as the Deputy Chairman of the
Gazprom Board of Directors. Miller
was hand picked by Russian President
Putin, as yet another member of the
St Petersburg clan, to rid Gazprom of
corruption, set the company on the
road to profitability, and to serve as a
loyal leader to the behest of the
Russian President in his capacity as
the Gazprom CEO.
Complementing Millers St Peters-
burg connection with the Russian
President is Gazprom Chairman of
the Board and First Deputy Prime
Minister of the Russian Federation,
Dimitri Medvedev. Prior to these
appointments Medvedev served as
Putins chief of staff and was one
of the principal architects of the
Presidents successful re-election
campaign. That campaign reflected
a decision-making style intent on
marginalizing the opposition by dis-
crediting their credibility through
innuendo, opportunism and a clear
35
Russia
sense of legal minimalism. However,
he is also viewed as a pragmatic
deal-maker, with a keen sense of how
short-term compromise can lead to
the fulfilment of long-term, clearly
articulated objectives.
Turning towards Russian energy
policy and Gazprom in particular, he
embodies the Presidents will to see
Gazprom become a formidable mech-
anism for the advancement of state
policy. There is a great deal of specu-
lation that Medvedev may ultimately
prove to be Putins hand-picked
successor to the Russian presidency,
although Russian Defence Minister
Sergi Lavarov is also well positioned
to inherit this position. Another Putin
successor candidate, and also a
Gazprom insider, is Deputy Chairman
of Gazproms Management Commit-
tee and Director General of Gazex-
port, Alexander Medvedev. Should
either Medvedev ascend to the
Russian presidency, Gazproms
political future would be stabilized,
providing additional investor confi-
dence that the monopoly would
largely remain untouched. While
political connections are a prerequi-
site for Russian longevity, such a close
connection to the Kremlin also has its
downside in preventing necessary
reform and the restructuring of
Gazprom to move forward.
36
Deputy Chairman of the Board of Directors,
Chairman of Gazproms Management
Committee
Alexey B Miller was born on 31
January 1962, in Leningrad. He gradu-
ated from high school in 1979 and became
a student of N. A. Voznesenskii Leningrad
Finance and Economics Institute.
Upon graduation A B Miller was
engineer-economist, the General planning
division, LenNIIProekt Leningrad Civil
Construction Research and Design Insti-
tute.
Alexey Miller was a post-graduate
student at N. A. Voznesenskii Leningrad
Finance and Economics Institute from
1986 to 1989, and obtained PhD (Eco-
nomics) degree in 1989.
In 1990, Mr. Miller was appointed
Researcher, Leningrad Finance and
Economics Institute, and then Head of
Section, Committee on Economic Reform,
Leningrad City Council.
From 1991 to 1996 Alexey Miller served
with the Committee for External Relations,
St Petersburg Mayors Office. He was
Head, Markets Monitoring Section, For-
eign Economic Relations Department.
Later, he was appointed head of the
Department, and Deputy Chairman of the
Committee.
From 1996 to 1999, Mr Miller was
Director, Development and Investments, at
Morskoy Port of St Petersburg Open Joint
Stock Company.
From 1999 to 2000, he served as
General Director, Balttiiskaya Trubo-
Alexey B Miller
GMB Publishing

provodnaya Sistema (Baltic Pipeline
System).
In 2000, Mr. Miller was appointed
Deputy Minister of Energy of the Russian
Federation. He has served as Chairman of
the Management Committee, Gazprom,
since 2001.
Source: www.gazprom.ru
Chairman of the Board of Directors, First
Deputy Prime Minister of the Russian
Federation
Dmitry A Medvedev was born on 14
September 1965, in Leningrad. He grad-
uated from the Law Department,
Leningrad State University, in 1987.
Upon completion of the post-graduate
programme at the University in 1990, he
obtained a PhD (Law), and assistant
professorship.
Mr Medvedev taught at St Petersburg
State University from 1990 to 1999. From
1990 to 1995 he served as Advisor to the
Chairman, Leningrad City Council, and
Expert Consultant, Committee for External
Relations of the St Petersburg Mayors
Office.
Mr Medvedev was appointed Deputy
Chief of Staff of the Government of the
Russian Federation in 1999. In 1999
2000 he was Deputy Head, First Deputy
Head of the Presidential Administration.
Mr Medvedev was Chairman of the
Board of Directors, Gazprom, from 2000
to 2001, and Deputy Chairman of the
Board in 20012002. He has been Chair-
man of the Board of Directors, Gazprom,
since June 2002.
Dmitry A Medvedev
GMB Publishing
Russia
Mr Medvedev was Chief of Staff of the
Presidential Executive Office from October
2003 to November 2005.
Mr Medvedev was appointed First
Deputy Prime Minister of the Russian
Federation in November 2005. Dmitry A
Medvedev is married with one son.
Source: www.gazprom.ru
Chairman of Gazproms Management
Committee, Director General of
Gazexport Ltd.
Alexander Medvedev was born in 1955
on 14 August, in Shakhtersk, Sakhalin
region.
He has a Higher Science degree: PhD
(Economics) and graduated from the
Moscow Physics and Technology Institute
in 1978.
His profession is in automated
control systems and since 2001 has Acting
Member of the International Academy of
Investments and Construction Economics.
Between 19781989 he was an employee
of the Foreign Economic Relations Depart-
ment of the Moscow Institute for Global
Economy and Foreign Relations Research
(IMEMO) of the USSR Academy of Sci-
ences, and later on a Senior Researcher,
Acting Leader of the Group, Secretary for
the Complex Programme of Scientific and
Technological Progress (USSR Academy
of Sciences and USSR GKNT), Moscow.
Between 19891991 he was Director of
Donau-Bank AG, Managing Director of a
branch of Inter Trade Consult, GmbH,
Austria; between 19911996, Director
of IMAG Investment Management &
37
 Russia
Alexander Medvedev
Advisory Group GmbH, Austria; between
19971998, Vice-President of Vos-
tochnaya Neftyanaya Kompania, Moscow;
and between 19982002, Director of
IMAG Investment Management & Advi-
sory Group GmbH, Austria.
38
Since 2002, he has been Director
General of Gazexport Ltd, and Member of
the Gazproms Management Committee,
Moscow; and since April 2005, Deputy
Chairman of Gazproms Management
Committee.
Source: www.gazprom.ru
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Mergers and acquisitions
T
he global oil and gas industry
has itself been experiencing
an intense decade of merger
and acquisition activity. Compelling
reasons for industry consolidation
include higher costs for exploration
and production in increasingly harsh
and remote climates, thereby requir-
ing a larger scale to pursue, compete
and to develop expensive upstream
resources. Government sponsored
privatization and market liberaliza-
tion policies have also provided
investment opportunities in what
were once state-owned monopolies.53
According to the United Nations
Conference on Trade and Develop-
ment (UNCTAD), of the 1,035 regu-
latory changes made globally between
1991 and 1999, 974 were specifically
aimed at increasing foreign direct
investment and M&A activity.54
Historically across CEE, state-owned
energy monopolies were the stan-
dard, with privatization allowing
the purchaser to access a historically
non-competitive market on an advan-
tageous basis.
As previously stated, Gazprom has
been extremely aggressive in down-
stream acquisitions largely tied to
their corporate competencies (gas
production, transport, and distribu-
tion). However, the entire question of
foreign portfolio investment should
take into consideration a number of
criteria. These criteria are as follows.
First, Gazproms core competency is
Russia itself and the obvious fact
that it is Russias and the worlds
largest producer of natural gas. Its
convenient relationship with the
government, its history and expertise,
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Russia
7.
and the up- mid -and downstream
assets it holds are all objective indica-
tors of its strength and competitive
advantage in the Russian market.
One should keep in mind, however,
that as Gazprom moves abroad this
competitive advantage decreases
exponentially. While Gazprom may
be admired for its size and power,
it is also feared. Downstream part-
ners have difficulty in determining
whether the company is acting out of
pure commercial interests or in some
combination of commercialRussian
state interest(s). This is a decided
disadvantage in its desire to acquire
downstream assets that make perfect
commercial sense to Gazprom as a
commercial entity.
Second, investment risks in many
downstream states are diminishing
as these states turn to the rule of
law and the judiciary to enforce
commercial contracts and agree-
ments. Having said this, Gazprom
outward investment may be seen as a
viable risk mitigation strategy, but
these investments do not always
increase the ROI to Gazprom as a
holding company. There are many
reasons for this, not the least of
which is that Gazprom, Gazprombank
or Gazexport have all been active
in establishing opaque subsidiaries
across the large space of CEE. As a
result, repatriation of capital earned
abroad cannot be taken as a given, and
as a result Gazproms downstream
investments may not necessarily show
up on the companys balance sheet.
Another point is that in the early
days of transition, particularly in CEE
because of the weaknesses in the legal
39
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structures of these economies and
because of historic ties to Moscow
exemplified by the red directors ie
former officials now company direc-
tors with long-standing ties to the
Communist party and Gazprom, rela-
tionships were already established
between the representatives of these
foreign entities and Gazprom. This
made it easier for Gazprom to acquire
them.
However, during the Yeltsin era
competition for foreign assets also
meant competition between Russian
firms abroad seeking to acquire these
assets. Competition between Lukoil
and Yukos over the Bulgarian
Neftokim refinery is a case in point.55
The Putin administration has success-
fully brought this practice to an end by
(1) having effectively destroyed
Yukos (Russias most efficient oil
company) and (2) having effectively
engineered non-competition between
Russian firms for foreign-owned
assets by pre-determining which
Russian firm would compete abroad
for these assets. Such a step is
reflective of Putins insistence on
protecting the interests of Russian
companies in the fuels and energy
sector (FES) abroad and, in turn,
protecting the interests of the
Russian state by having the Kremlin
pre-qualify which Russian firms will
be allowed to compete for down-
stream energy assets abroad. It is a
capital vetting process that allows
Kremlin-minded enterprises to flour-
ish, while effectively punishing those
companies who see no role for the
Russian government in this process.
Yet another advantage of Gazprom
owning downstream assets is the
capability of transfer pricing to its
downstream subsidiary. The tax
regime outside of Russia is much
more lenient than it is domestically,
therefore owning and producing
abroad has, at least in the abstract,
40
positive implications for Gazprom as
well.
Third, downstream investments,
particularly in a developed or mature
economy have a comparatively lower
margin due to the higher level of
competition in these foreign markets.
This may, in fact, contribute to the
frequent accusations that Gazprom
often acts on the margins of foreign
legal systems, given the behaviour it
exhibits in obtaining these assets at the
lowest possible cost. A much more
sceptical view of this would be that
Gazprom is allowed to act in Russia
without impunity and, as a result, the
expectation that they would behave
differently in a foreign market is
suspect at best.
Non-core acquisitions
Finally, it is important to note that
downstream acquisitions can, and
should, have a positive net gain for the
acquiring company, ie Gazprom, as
long as these assets are performing.
However, many in the Moscow
investment community have objected
to what they consider Gazproms
portfolio investment through acquir-
ing non-performing downstream
assets, which is explained easier by
the political capital these assets carry
with them for Moscow to use later as it
sees fit, rather than a commercial
transaction rationalized by the need to
exercise capital for pure commercial
gain.
This also applies to Gazproms
maintenance of non-core businesses in
Russia itself.
For instance, Gazprom says it is steadily
unloading non-core assets farms, holiday
resorts and so on that were either left over
from Soviet times or received as barter
payments from customers thereafter. Yet it
continues to make questionable
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acquisitions, given its existing assets and
debt ($18 billion at the end of 2004, before
it bought Sibneft). From a commercial point
of view, for example, Gazprom's media
business seems less than sensible. Why did its
media arm recently buy a majority stake in
Izvestia, a loss-making newspaper? In 2001,
Gazprom also controversially took over
NTV, a television station whose founder,
Vladimir Gusinsky, was the first of the
oligarchs to fall out with Mr Putin but why
does Gazprom need a media arm at all?56
Core acquisitions
Objectively speaking, Gazprom and
other Russian companies were often
the only upstream buyers interested
in downstream energy assets where,
in addition to the acquisition price,
considerable additonal upfront in-
vestment was necessary to repair and
replace outdtated equipment and
machinery simply to bring the asset
up to industry standard.
Russian companies in the oil in-
dustry, in particular, have been riding
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Russia
the wave of economic growth in the
country leaving them, ostensibly, with
resources that could be marshalled
for acquisition purposes. Also, as
many of these assets were tied to
the old Soviet pipeline network,
acquisition could be justified as an
extension of the Russian supply chain
in oil refining, for example. Russian
oil and gas companies, and Gazprom
in particular, have successfully been
riding the wave of privatization that
has moved across Central Europe.
Late transition countries, spurred on
by the hope of EU integration or at
least in part by the establishment of a
favourable trade regime with the EU,
too will move along the privatization
scale. As a result, Gazprom will follow,
at least if they are allowed to do so by
the EU.
Aside from these investment-related
concerns regarding Russian outward
investment, is the fact that the
Russian state is navigating to position
a Gazprom monopoly in a capacity
with decision-making influence
over super-critical infrastructures in
downstream states.
41
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Table 4: Sample Gazprom downstream acquisition activity57

Acquisition Country Asset type Product Product/ancillary
activity
ArmRosgazprom58 Armenia Electricity supply Russia to Armenia Gas Re-export of Electricity
exports from Armenia to Georgia
(generating facilities
owned by RAO UES)
AS Eesti Gaas Estonia National gas company Natural gas Gas for power genera-
Gazprom share holding tion. Eesti Gaas owns the
(30.64), Estonian gov- companys gas trans-
ernment share calculated portation system, effec-
at 27% tively under Gazprom
control
Panruysgaz Hungary Gazprom shareholding Gas trading and trans-
50% port
Gazsnabtranzit, Moldova Gazprom shareholding Gas transit, transport
50% of authorized and delivery
capital
Volta Italy Gazprom Gas trading and
transport
Latvias Gaze Latvia Gazprom shareholding Gas trading and trans-
25% port
Stella Vitae Lithuania Gazprom shareholding Gas importer Exports electricity, fertil-
30% izers and other chemical
materials; imports natu-
ral and liquefied gas,
fertilizers and other
chemical materials
SPP Slovakia Slovak national gas com- Gas transit Provides all gas coming
pany. 49% owned by a out of Ukraine into
consortium of Gazprom, Western Europe via
Rhurgas & GDF Slovakia
Slovrusgaz Slovakia Gazprom shareholding Gas trading and
%50 transport
EvRoPol Gaz Poland Gazprom shareholding Gas transit for Russian
46% gas through Poland
RosUrkEnergo Ukraine February 2006 Gazprom Gas transit and distribu-
acquisition of 50% of tion in Ukraine
shares in RosUrkEnergo
from Gazprom bank
subsidary

42 GMB Publishing
 Russia

Table 5: Some major stakes of Gazprom in European gas joint ventures

Country Joint Venture Stake % Activities
Germany Wingas 35 Gas transportation and storage
Wintershall Erdgas Handelshaus (WIEH) 50 Gas trading company. Single trader of
all the gas exported by Gazexsport un-
til 2012.
Zarubegas Erdgashandel 100 Gas trading
Verbundnetz Gas (VNG) 5.3 Gas transportation and marketing
Ditgaz 49 Gas trading
UK/Belgium Interconnector 10 Pipeline which connected Bacton (UK)
with Zeebrugge (Belgium)
Poland Gas Trading 35 Gas trading
Europol Gaz 48 Gas trading
Italy Volta 49 Gas trading and transport
Promgaz 50 Gas trading and marketing
France FRAgaz 50 Gas trading
Austria GHW 50 Gas trading company
Serbia Progress Gas Trading 50 Gas trading
Slovenia Tagdem 7.6 Gas trading
Greece Prometheus Gaz 50 Marketing and construction
Finland Gasum Oy 25 Gas transportation and marketing
North Transgas Oy 50 Construction of a pipeline beneath the
Baltic Sea
Estonia Eesti Gaas 30.6 Gas trading and transport
Latvia Latvijas Gaze 25 Gas trading and transport
Bulgaria Topenergo 100 Gas trading and transport
Romania WIROM 25 Gas trading. The stake of Gazprom is
hold by WIEH
Hungary Panrusgas 50 Gas trading and transport
Turkey Turusgaz 50
Yugoslavia JugoRosGaz 50 Gas trading and transport
Slovak Republic Slovrusgaz 50 Gas trading and transport
Sources: Heinrich (2001); Compiler Trade Portal
http://www.compiler.fi/idankaupan/tutkimukset/specialreports/LTKK-report5-engtable. html#Table%201.

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Russia

42. Podzemgazprom
43. PRT 1
Companies with a Gazprom 44. Samaratransgaz
45. Servicegazprom
shareholding 46. Severgazprom
47. Severneftegazprom
48. Surgutgazprom
100 per cent ownership 49. Surgutstroygaz
50. Surgutstroygaz Building
1. Astrakhangazprom Company Ltd
2. Bashtransgaz 51. Szhizhenny gaz
3. Burgaz (Liquefied gas)
4. Ecological and Analytical Centre 52. Tattransgaz
5. Ecomed-91 53. Temryukmortrans
6. Gazexport 54. Topenergy
7. Gazflot 55. Tomsktransgaz
8. Gazkomplektimpex 56. TyumenNIIgiprogaz
9. Gaznadzor 57. Tyumentransgaz
10. Gazobezopasnost 58. Uraltransgaz
11. Gazpromavia Aviation Company 59. Urengoigazprom
12. Gazpromenergo 60. Volgogradtransgaz
13. Gazprom Finance B.V. 61. Volgotransgaz
14. Gazprom Marketing and 62. VNIIgaz
Trading Limited (GM&T) 63. Yamalgazinvest
15. Gazprominvestarena 64. Yamburggazdobycha
16. Gazprominvestholding 65. Yugtransgaz
17. Gazprommedstrakh
66. ZGG GmbH
18. Gazpromokhrana
19. Gazpromrazvitie Ownership over 50 per cent
20. Gazpromstroyengineering
21. Gazpromtrans
Brest-Gazoapparat
22. Gazsviaz
Dialoggazservice
23. Informgaz
Ditangaz
24. Informgazinvest
Druzhba
25. Irkutskgazprom
Druzhkovski ZGA
26. IRTs Gazprom
Electrogaz
27. Kaspiygazprom
Fatherland Fund
28. Kavkaztransgaz
Fora Gazprom
29. Kubangazprom Gazenergoservice
30. Lentransgaz
Gazcom
31. Mostransgaz
Gazmash
32. Mezhregiongaz Gazprombank
33. Nadymgazprom
Gazprom-Media
34. Nadymstroygazdobycha
Gazpromgeofizika
35. NIIgazeconomika
Gazprom Kran
36. North Transgas Oy
Gaztelekom
37. Novourengoysky GCC
Gaztorgpromstroy
38. Noyabrskgazdobycha
Gazstroydetal
39. NPTs Podzemgidromineral
Giprogaztsentr
40. Orenburggazprom
Giprospetsgaz
41. Permtransgaz
Kostromatrubinvest

44 GMB Publishing
 Russia

Krasnodargazstroi Gaztransit
Lazurnaya Gaz-Truby
Lengazspetsstroy Gazum
Metaprom Horizon
Orgenergogaz Horoshevskaya energy company
Peter-Gaz B.V. Hotel Tyumen
Promgas Inkombank
Rivmar Insurance Company Sogaz
SevKavNIPIgaz Interconnector (UK) Limited
AK Sibur Interfin
Spetsgazavtotrans Iveko Uralaz
Spetsgazremstroy KazRosGaz
Tsentrenergogaz Khimsorbent
Tsentrgaz Latvias Gaze
TsKB Nefteapparatury Media-Most
Urengoystroygaz Moldovagaz
VNIPIgazdobycha Moskovskii Vekselnyi Bank
Volgogaz Mospromagrotorgdom
Volgogradneftemash Motors technology
Vostokgazprom Noyabrsky Gorodskoy Bank
Zapsibgazprom Orenburgskaya Finance Company
Zarubezhneftegaz Prometey-Sochi
Promstroybank of Russia
Ownership up to 50 per cent Rosshelf
Sibneftegas
Arctic Energy Slovrusgaz
Armrosgazprom Stella Vitae
Belgazprombank AKB Tobolsk
Blue Stream Pipeline Company Tomskgaz
B.V. Trade House Rus-gaz
Chestem Turusgaz
Commercial Bank Olimpiiskii Union of energy exporters
SR-DRAGA IK Vega
Eesti Gaas VIP-Premier
EuRoPol Gaz Vologdapromresurs
Exchange Russian Gas Volta
Gas-oil Yugorosgaz
Gaz-Agro-Friport YuzhNIIgiprogaz Institute
Gazavtomatika
Gazpromenergo Source:Gazprom

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8.
Struggle for a Gazprom strategy
A
ccording to Gazprom, its
primary short-term corporate
strategy is to enhance the
companys capitalization.
The strategy is supposed to be realized
through improvement in the legislation of
the Russian Federation, liberalization of the
share market of Gazprom, convergence of
share prices in Russia and abroad,
expansion of foreign participation in the
registered capital of the Company up to
20%, simplification of the procedure of stock
purchase and sale. The corporate
management sophistication will assist the
solution of the problem through
development of directive documents of the
Company regulating procedures of decision-
making and relations with different social
groups.59
Obviously the governments pur-
chase of a controlling stake in the
company has raised considerable
capital that could be used for invest-
ment purposes. However, raising
capital is one thing and spending it is
another. Over the past three years,
Gazproms expenses have been accel-
erating at three times its rate of
profitability. In order to re-capitalize
the company, Gazprom will first have
to stop the haemorrhage of presently
available capital through cost contain-
ment. It has thus far failed to prove
its ability to do so.
The link between re-nationalization
and capitalization was a carrot that
Russia provided to foreign investors.
From a strict investment standpoint,
the government has promised that
restructuring will lead to the lifting of
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Russia
restrictions on the ability of foreign
investors to purchase outstanding
shares in the Russian company be-
yond the level of state ownership
(49 per cent). Long-term investors
should be keen to watch for the issue
of ADRs in London and New York for
Gazprom shares late in 2006. Further,
foreign ADRs should not suffer from
the heretofore preferential treatment
Russian ADRs have received (at a
discount) in the past in an attempt at
levelling the playing field for the
foreign investor. Therefore, lifting the
restrictions on the foreign ownership
of Gazprom stock will lead to further
increasing the companys capitaliza-
tion. There is little doubt that both
steps that the Russian government
(1) has taken and (2) has promised to
undertake should capitalize Gazprom
at a sufficient level to undertake some
of the important domestic and export-
driven investment it requires. From
an investor standpoint, long-term
Gazprom sustainability will depend on
its abilities to (1) build share value
based on (2) demonstrated perfor-
mance.
Building share value
There are numerous obstacles in
building Gazprom share value. First,
is the pejorative regulatory regime
under which the company must
operate. Second, are the massive ex-
penditures that must be made simply
to maintain the Gazexport system.
Third, are constrictions on Russian
gas exports, the vast majority of which
must run through Ukraine. This
47
Russia
requires confronting challenges re-
lated to the building of new pipelines
and in meeting the capital require-
ments that will necessarily follow.
Finally, Gazprom must persistently
maintain output and, in doing so,
find more gas in increasingly harsher
and more remote climates simply to
maintain current production levels.
This implies even more investment,
which at present Gazprom has thus far
been either incapable or unwilling to
meet.
Building performance
The link between Gazprom re-
nationalization and company perfor-
mance has yet to be demonstrated.
The issue of gauging corporate
performance is itself nuanced by
whether performance is measured in
conventional investment terms or
from a non-fiduciary Russian state
perspective. Further, building a per-
forming company in economic terms
will require Gazprom to demonstrate
its ability to navigate the numerous
political barriers it will encounter in
the process of building a successful
company, while concurrently retain-
ing the ability to adhere to its corpo-
rate strategy driven by the desire to
maximize profit. The underlying
working assumption here is that there
is a reciprocal relationship between in-
creased Russian government control
over Gazprom and increased investor
confidence. In short, government
involvement in Gazprom is the lowest
common denominator ensuring busi-
ness continuity as measured against
the devastating prosecution and ulti-
mate dismemberment of oil compa-
nies such as Yukos and its imprisoned
founder, Mikahil Khodorkovsky.
Without the confidence of continuity
Gazprom would not even be afforded
an opportunity to move forward with
an expectation of creating value.
48
Challenges to building
Gazprom share value
Regulatory regime
There are potential downside impli-
cations and risks to the Russian
governments majority position in
Gazprom that investors need to be
aware of. Consideration of these
risks provides the backdrop against
which future Gazprom productivity,
profitability and efficiency may be
calculated. The Russian governments
further tightening of control over
the private oil sector by Gazproms
purchase of Sibur is another indica-
tion of the governments willingness
to consolidate the entire oil and
gas sector, as much as possible, in
Gazprom and Rosnefts hands.
What we do know is that government
ownership, exercised through a
monopoly structure, crushes competi-
tion and therefore quashes any
incentive to remain profitable and in-
ventive. What we do know is that where
the Russian state has intervened,
productivity has either flattened or
fallen as costs have risen. Further,
what we do not know is whether, in the
absence of competitive forces, the
government will continue to liberalize
the market domestically, forcing
both industrial and residential con-
sumers to begin paying something
closer to the market price for gas. This
would obviously have a positive
effect on Gazproms bottom line. In
2004, the domestic price for Russian
gas was about $29 per thousand
cubic metres (tcm) versus approxi-
mately $140 per tcm on the open
market. Again, while present gas at
subsidized prices has a deleterious
effect on Gazproms bottom line, they
have enormous implications for the
Russian economy, which is large, cold
and inefficient.
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The other issue Gazprom will have
to strongly lobby for is for changes
to its tax regime. Without tax relief,
almost anything the company does
to enhance performance and create
value will be mitigated by an ever
increasing and encroaching tax im-
posed on net profit. The dilemma is
that those who politically benefit from
tax revenue in terms of Gazproms
contribution to Russian national eco-
nomic security, a balanced budget
and the redistribution of Gazprom
tax proceeds to other sectors of the
economy, are the same that govern
the company itself.
Maintaining the Gazexport system
In order to maintain Gazproms
150,000 kilometres of pipeline,
Gazprom will require considerable
mid-stream investment. According to
the Energy Strategy of the Russian
Federation to 2020, investment in the
transport sector alone should top
$80 billion between 2001 and 2020.
Unfortunately, the Strategy does not
provide separate assessments for in-
ternal and export investment require-
ments.60 Clearly not all of these dollars
will be spent on maintenance but a
good deal of necessary investment will
be made for this purpose. The reason
is simple. More than 70 per cent of
the high pressure, large diameter
transmission lines were commissioned
before 1985 and more than 19,000
kilometres are beyond their design
life-span and need replacement. In
general, the high-pressure transmis-
sion system for which Gazprom has
responsibility is in better condition
than the low-pressure transmission
systems maintained by regional and
local companies with meagre invest-
ment resources.61 This does not even
begin to address the condition of
pipeline systems on which Gazprom
exports depend that are now under
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Russia
ownership and operation by compa-
nies outside Russian territory.
According to published reports,
recent Gazprom announcements indi-
cate they are taking the investment
issue in critical infrastructure seri-
ously. According to a RBC-Moscow
2005 report Gazproms investment
programme for 20052007 is esti-
mated at $27 billion, head of the
investments and construction depart-
ment of Gazprom, Valery Golubev,
told journalists at a press briefing. In
2006, Gazprom is to invest RUR284.8
billion (around $10.17 billion) in gas
production, its transportation and
storage, drilling, refining and explo-
ration work. Its investments in 2007
are estimated at RUR283.1 billion
(around $10.11 billion). Exploration
work will enable Gazprom to enhance
an increase in gas reserves worth
586.7 billion cubic metres in 2006 and
500.8 billion cubic metres in 2007.62
Based on generalized data it is impos-
sible to disaggregate what will be spent
on maintenance, but clearly the issue
has to take priority if Gazprom seeks
to maximize exports to its Western
downstream customers.
In addition to straightforward
pipeline repair and maintenance,
clear indications are that human in-
tervention in the form of terrorist
attacks against pipe and associated
infrastructure are accelerating on
Russian territory. The area of the
North Caucasus with the comprehen-
sive attack on Russian gas pipelines
running to Georgia and on electricity
transmission lines in January 2006 is
but one case in point. Having said this,
attacks in 2005 against Russian infras-
tructure have occurred in Samara,
Novorissik and elsewhere, prompting
a pipeline security review of the do-
mestic Russian transport system and
calling on the introduction of pipeline
security and surveillance technologies
to combat against these attacks.
49
Russia
Ongoing and new export and
development projects
Ongoing Gazprom development and
export related projects with interna-
tional E&P providers include a joint
venture with Shell to develop the
deeper oil and gas deposits of the
Zapolyarnoye field; with ENI, to de-
velop deep horizons of the Asktrakhan
field, which contains high sulphur gas;
and to develop the remote offshore
Shtokmanovskyoye Barrents field
deposit(s) with a Western consortium
involving, among others, Conoco-
Philips and Frances Total. All of these
are of course upstream development
projects.
On the mid-stream front, the burn-
ing issue at present is the development
of the Northern-European or what is
sometimes referred to as the Trans
Baltic Pipeline. In many development
cases, Gazprom is offering, in part,
upstream swaps of undefined future
energy resources in return for imme-
diate investment in infrastructure.
There is no lack of interest from in-
ternational oil companies (IOCs) and
international gas companies (IGCs)
for entering into what otherwise
resembles modern barter trade.
Gazprom sees itself, and correctly so,
in a position to maximize its over-
whelming presence in European
regional gas development through a
multi-vectored strategy developed
over time with a multitude of partners.
Table 6: Projected investments in the Russian gas sector 20012020 ($billion)
Investments 20012005 20062010
Production 1213
Transportation 18 1719
Storage 34
Total 35
50
Overall, new export projects aimed
at maintaining and expanding market
share will depend crucially on the
maintenance of (oil and gas) prices at
the levels of 200305. European
exports will also depend on the pace
of EU market liberalization and
Gazproms ability to agree mutually
acceptable terms for transit, princi-
pally with Ukraine and Belarus. In
particular, the role of Ukraine in
the export of Russian gas cannot be
underestimated. The Ukraine pro-
vides the transit corridor for 70 per
cent of total Russian gas exports and
for more than 90 per cent of Russian
gas exports to the EU.63 This is
complimented by the states ambitious
strategy of reconstructing the old
Soviet gas network that it once
dominated, through overt and covert
attempts at gaining control over the
transport networks in these transit
states. More specifically, realization of
Gazproms export strategy involves an
enhanced ability to realize unimpeded
transit across Ukraine or to obviate
Ukraine territory altogether.
All Russian gas exports to Europe
with the exception of exports to
Finland and those to Turkey via Blue
Stream must pass by pipeline through
either Belarus, Ukraine or Moldova.
The Ukraine is far and away the most
frequented corridor for Russian gas
transit, accounting for the transit of
80 per cent of all Russian gas exported
to Europe in 2004.
There is very little Gazprom can do
about bypassing the Ukraine until at
20112015 20162020 Total
17 19 2324 73
2021 2223 80
4 5 6 19
39 45 53 172
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least 2010 for Russian gas exports.
Second, as long as Moscow depends
on Western Europe for its exports,
and thereby on the generation of hard
currency from these markets, it will
need Ukraine even if alternative
routes do become available after 2010.
Third, alternative export pipelines
and modalities (deep-water vessels
for LNG for example) are expensive
to develop and Gazprom needs
to ensure it will have sufficient excess
supply to fill these pipes. This is en-
tirely unclear at present given the slow
rate of production and Gazproms
inability to take in new gas sources,
which in principle could replace
falling production in the Nadym-
Pur-Taz production fields. New pro-
duction could come from the Barents
Sea and by additional production
from the Yamal fields. Yet, getting
this gas out is an issue and with the
present halt in the Yamal II pipeline
a new land-transit based pipeline ie in
the form of the extension of Yamal I
is highly unlikely at present.64 All of
this brings us back to the Ukraine and
its importance to Gazprom.
Blue Stream
The RussianTurkish Blue Stream
gas pipeline was launched as the result
of the signing of an intergovernmental
agreement between Russia and
Turkey. It was executed through the
creation of a joint venture between
Gazprom and Italys energy giant,
ENI. Construction began in the
late 1990s and was completed in
October 2002. The pipeline consists of
three main parts. The route comprises
a 222 mile section in Russia from
Izobilnoye (where there is a Russian
gas plant) to Dzhugba on the Black
Sea Coast (the Russian onshore
section); a 235 mile section on the
bottom of the Black Sea connecting
Dzhugba to Samsun on the Turkish
coast (underwater section); and a
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Russia
further 300 mile link from Samsun to
Ankara (Turkish onshore section).
Blue Stream is therefore intended
for deliveries of Russian natural gas to
Turkey going under the Black Sea,
with the express intention of avoiding
third countries issues. Blue Streams
design capacity of 16 bcm should be
reached in 2007, providing a major
alternative to the Ukraine above-
ground gas transit to Western mar-
kets. Having said this, even if the pipe
is filled to design capacity it will still
constitute a minor bypass solution
compared to the volume of 132 bcm
transiting Ukraine at the present
time.65 In addition, capacity through-
put is only one Blue Stream issue. The
larger issue looming is Turkeys ability
to absorb Blue Streams off-take.
Turkey halted deliveries of Blue
Stream gas in July 2005, as they also
did in March 2003, due to price-
related issues arising from the over-
supply of gas on the domestic Turkish
market from partnering countries,
Azerbaijan and Iran.
Interestingly enough at the inaugu-
ration of Blue Stream, Russian Presi-
dent Putin made several statements to
the effect that he welcomed additional
RussianTurkish pipeline projects,
positing Turkey as a possible Russian
favourite southern-bypass of Ukraine.
Whether this is a Turkish-specific
strategy designed to assist Gazprom in
capturing the Turkish gas market or
an obvious strategy to avoid Ukraine
or a mixture of both, the message is
clear that part of Gazproms export
strategy is a consolidated effort at
avoiding Ukraine space.
Northern-European Gas Pipeline
(NEGP)
The development of the Northern-
European Gas Pipeline (NEGP) is
expressly designed to avoid CEE
transit states in order to access the
51
Russia
Western European market directly.
The first joint meeting of the NEGP
was held in February 2003. The
project accelerated decidedly after
the election of President Yushchenko
in Ukraine, coupled with the nomina-
tion of Yulia Tymoschenko as Prime
Minister. Tymoschenko has been an
outspoken critic of Russian interests in
the Ukraine market and was a most
vocal opponent of the agreement be-
tween Russia and Ukraine, which
brought the January 2006 Ukraine
gas crisis to a temporary halt.
The pipeline is planned for commis-
sioning in 2010, consisting initially of
a single pipeline of a 1,200 kilometre
underwater link from Portovaya bay
near Vyborg on Russias Baltic coast
to Germanys coast in the Greifswald
region. Its designed annual transmis-
sion capacity is 27.5 billion cubic
metres (bcm). The project envisages
laying a second pipeline and the dou-
bling of the projects transmission
capacity to 55 bcm. The pipeline will
also have a spur to deliver gas to con-
sumers in Sweden. The gas pipeline
construction will help expand gas
supplies to Scandinavian countries as
well as provide reliable gas supplies to
consumers in Western Europe, the
North-Western region of Russia and
the Kaliningrad Region, as gas con-
sumption continues to grow in these
areas. Again, even if this project is
completed on time by 2010, NEGP
throughput at 27.5 bcm/annum regis-
ters again at only one-fifth of
Ukraines present transit capacity of
132 bcm/annum.
Initially, capital costs were estimated
at approximately $6 billion. Interest-
ingly enough, Gazprom announced
on 5 April 2006 that the above-ground
cost of construction is estimated at $6
billion with an additional $5.4 billion
allocated for the undersea portion of
the pipeline. This can be compared to
the estimated $900 million cost of the
Yamal II stretch of pipeline, which is
52
one-twelfth the cost of the NEGP.
Again, with the lack of approval on
Yamal II, the NEGP can be clearly
seen as an attempt to bypass all land
transit countries. The German part-
ners in this venture did not consult
with their Polish neighbours on the
NEGP. Gazproms strategy can there-
fore be seen as an attempt on the one
hand to reach Western European
markets directly, with the effect of
driving a wedge between Germany
and Poland, both NATO and EU
Members. NEGP also posits Ukraine
interests against German interests,
again causing a schism between these
two states in the continuation of
Gazproms successful divide and con-
quer strategy that has prevented
strong IEA member condemnation of
the lack of Russian energy reform by
dividing IEA members along bilateral
Russiadownstream state lines.
Expansion eastwards demands
Gazprom intervention in East Siberia
for upstream development, continued
growth of a Gazprom presence in
Shakalin, and pipeline construction to
China in developing this largely new
and important market. Beyond China
both South Korea and Japan beckon
as major downstream markets inter-
ested in expanding their off-take of
Russian hydrocarbons. Gazprom is
clearly interested in developing East-
ern Siberian licensed blocs initially
allocated to TNK-BP. However, with
changes in Russian law stipulating that
only companies with a 51 per cent
Russian ownership may hold Russian
licences, this weakens the 50/50
TNK-BP split, allowing for Gazprom
to play an increasingly significant role
in the development of these upstream
gas deposits.
In summary, Gazprom is pursuing
as a large part of its strategy an anti-
Ukraine vector, seeking both through
northern and southern bypasses to
obviate the transit of Russian gas
through this transit country. The vec-
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 Russia

tor includes driving alliances with its splitting NATO and EU Alliance
downstream EoN Rhurgas (German) Members. The fact remains, however,
shareholder, making Germany in- that in the medium term (20062015)
creasingly dependent on Russian im- even if NEGP and Blue Stream
ports of natural gas, developing become come fully operational, this
Turkey as a major southern transit will still fall short of replacing less than
hub for Russian gas, and in engaging 50 per cent of Russian gas now tran-
other players throughout the region siting Ukraine. Clearly, however,
(Greece, Romania, Bulgaria and the the anti-Ukraine dynamic should be
Balkans) in a large number of pipeline appreciated and will play into mid-
proposals that feed Gazproms down- stream RussianGazprom pipeline
stream interests while simultaneously development for years to come.

Oil pipeline Barents

Proposed oil pipeline Sea Nadym
Varandey Timan-
Gas pipeline Murmansk Pechora West
Proposed gas pipeline Basin
Siberian
Refinery Pechora Basin
Tanker terminal Krasnoleninskaya
Proposed Murmansk
o 500 Numbers pipeline routes Ukhta
o 500 Nos
e

ts
op

Finland
gh
ur

Li
-E

Norway
al

er
m

Primorsk
th
Ya

or

St. Petersburg
N

North Sweden Baltic Pipeline

Baltic System (BPS)
Sea Sea Kirishi
U.K. Denmark Ventspils Yaroslavl
ood
th erh
North Transgas Bro
Butinge
Restock Rostock Kaliningrad
Gdansk MOSCOW Samara
Nor Yamal-Europe
Germany ther Belarus
nD
Leipzig ruz
Poland hba a
l II

France PRAGUE hb yuz

Kazakhstan
uz
a

Czech. r So
Yam

Rep. r nD Central
Switz u the Asia
Austria Transgas So Ukraine
Atyrau
Hungary
Proposed reversed Caspian Pipeline
Omisalj
Adria Pipeline Odesa Consortium Project
Uzb.

Croatia Tikhoretsk (CPC)

BOS & Romania Novorossiysk
Adriaic Her. Serbia Tuapse Caspian
CPC terminal
Sea and Sea
Black Sea
Italy Mont. Bulgaria Blue Georgia Turkm
Bosporus Stream Azerbeijan
Alb. BAKU
Med. Sea
Greece
ANKARA
Turkey Iran
Iran
Figure 6: The Russian pipeline network
Source: CIA

GMB Publishing 53

G
azprom as a company is a
formidable presence to be dealt
with, from almost every aspect.
Commercially, it has unique access to
unparalleled reserves of natural gas,
which is only equalled by the unpar-
alleled political support it enjoys in the
Kremlin among advocates of reconsti-
tuting a strong Russian state based on
exploiting the countrys rich natural
resource base. Advocacy of Gazprom
can range from economic arguments
that favour economies of scale in large
up- and midstream gas development,
which reflects Gazproms present tra-
jectory, to political arguments that
directly link the aspirations Russian
neo-imperialists to the ability of the
state to extend its influence over its
near abroad in the form of granting or
withholding energy resources based
on policy considerations that some-
times, but not always, have nothing to
do with energy but everything to do
with power in its accumulated and
expressed form.
The Russian President is without
question the companys greatest
advocate in charting a state policy that
enhances the states international
standing through the building of a
Russian oil and gas empire with
Gazprom at its core. For years the
question of whether Gazprom was
a commercial or a state-controlled
enterprise ignited hand-wringing
among analysts. This question is moot;
it was definitively settled with the
repurchase of the Russian state of a
controlling ownership position in the
company. Any lingering uncertainty
has been verbally clarified by the
Russian President himself as a result
GMB Publishing
Russia
9.
Conclusion
of the appointments he has made
to Gazproms Board of Directors and
Management Committee. Perhaps
these Gazprom appointments can
be likened to the appointment of
US Supreme Court nominees by an
American President. Appointments
are made to ensure the continuation
of a political legacy or vision long
beyond the official tenure in office of
the appointing official.
In Gazprom we know who we are
dealing with and it is with the Russian
President who sits in the Kremlin.
Yet the confluence of Russian foreign
and energy policy runs much deeper.
This is a Russian systemic issue. It
is institutionalized across local,
regional and national Russian political
lines. Its commercial effects flow
downwards and outwards from the
citadel of Gazproms gleaming blue
international headquarters into the
soft and weak underbelly of the
Russian economy and those SMEs
found there that depend on continu-
ing Gazprom largesse for their
survival, and outwards across the
Russian industrial landscape in the
form of cheap gas effectively sup-
porting a sputtering industrial
economy in a post-industrial era.
While Russia may no longer present
a peer security threat as its predeces-
sor state did during the Cold War,
the RussiaGazprom tandem presents
significant commercial challenges that
easily bleed into the national security
concerns of its neighbours, whether
they be friend or foe. It is as incum-
bent on downstream recipients of the
effects of Russian foreign energy
policy to underscore its genus as much
55
Russia
as it is incumbent on Russian decision-
makers across the power ministries
and Gazprom to understand how and
why they are perceived as they are
abroad.
Clearly Russian state energy di-
plomacy and Gazproms corporate
strategy are as internally consistent
and complementary as much as they
are manipulative and structurally dis-
torted in external free market terms.
The Russian state is intent on main-
taining and enhancing its sphere of
influence through the manipulation
of the internal and external dimen-
sions of neighbouring states political
policies.
Gazprom is intent on protecting the
markets it controls and expanding
into those it does not. Where energy
diplomacy and corporate strategy
56
come together is in the exercise of
availing energy resources to down-
stream customers and in gate-keeping
access to its pipeline network for
transit gas. The only transit gas that
transits Russia is its own. The remain-
der is burned in Russian electricity
generating plants or redirected at
subsidized prices to inefficient Russian
industry in a concerted effort to keep
European energy markets dependent
on Russian gas at high prices. As a
result, as Russian state policy has an
economic dimension so, too, does
Gazproms corporate strategy have a
decided extra-territorial or foreign
policy dimension. Taken together,
the confluence of Russian foreign
and energy policy should be seen
for what it is and not mistaken or
dismissed for what it is not.
GMB Publishing

Notes and references
1 Solana, Javier, Europeans must act collec-
tively on energy strategy, Financial Times,
9 March 2006:8.
2 Putin quoted in Kupchinsky, Roman,
The Shaky Gazprom Empire, RFE/RL
9 December 2004, Volume 4, Number 47.
3 Russian gas giant completes purchase, Asso-
ciated Press, 23 October 2005.
4 Sibneft to Change Name, Move Home,
Moscow Times, 3 April 2006.
5 For an excellent discussion of Khodorkovsky
and his troubles, see Baker and Glasser,
pp. 333353. Peter Baker and Susan Glasser,
Kremlin Rising: Vladimir Putins Russia and the
End of Revolution, New York: Scribner, 2005,
pp. 197206. For a comprehensive view of the
Russian military, see, William Odom, The
Collapse of the Soviet Military, New Haven: Yale
University, 1998.
6 Modern History Sourcebook: the Brezhnev
Doctrine: 1968.
http://www.fordham.edu/halsall/mod/
1968brezhnev.html.
7 For a complete analysis of the Brezhnev doc-
trine see, Ouimet, Mathew J. The Rise and
Fall of the Brezhnev Doctrine in Soviet Foreign
Policy, University of North Carolina Press,
2002.
8 Georgia: Is Georgian Gas Crisis Evidence of
Moscows New Energy Strategy?, see RFE/RL
23 January 2006: http://www.rferl.org/
featuresarticle/2006/01/207cd3c0-56a4-4b43-
bc0b-9f929ca75c79.html.
9 V. Putins address at the National Conference
on the Development of Russias Fuel-Energy
Complex held on 3 March 2000 in Surgut (see
www.president.kremlin.ru).
10 Bond, Andrew,Reflections on Post-Soviet
Geography in Post Soviet Geography, 1992:56.
Quoted in Rosner, Kevin The Russian
Petroleum Industry 19851993 Endogenous
Determinants of Russian Petroleum Policy,
Doctoral Dissertation, Catholic University of
Louvain La Neuve, Belgium, 1999. Printed by
The Petroleum Economist, 1999.
11 It is the 10th largest energy company globally
with market capitalization of $100 billion.
In contrast BPs market capitalization is $250
billion. According to Alexey Miller, Gazprom
seeks to increase its market capitalization be-
yond the $250 billion market over the next
three to five years. Part of this may be
through direct acquisition in Gazprom shares
but another important strategy touted by the
company is an exchange of future access to
upstream reserves in return for immediate
GMB Publishing
Russia
downstream investment, particularly in the
transport sector that Gazprom would con-
tinue to control. See ibid. 5 for more informa-
tion on the capitalization issue. According to
William Browder, manager of the Moscow-
based Heritage fund, Russias single largest
privately-held mutual fund, Gazprom shares
are decidedly underpriced. According to
Browder, Gazprom is the cheapest hydrocar-
bon company in the world. It trades at $1.50
per barrel while BP and Exxon trade at $15
per barrel. Browder goes on to point out that
On an asset basis, Gazprom trades at a 90 per
cent discount to Western oil companies and a
50 per cent discount to Russian oil companies.
I think it so undervalued it will ultimately
eclipse the valuation of Exxon and Royal
Dutch Shell at some point in the future.
Browder quoted in Schwartz, Nelson:
Gazprom stock worth waiting for: Fortune,
6 January 2006.
12 Gazprom Net Up 26%, Moscow Times, 3 April
2006.
13 Gazprom Seeking to Increase Sales, Bloom-
berg News, 30 March 2006.
14 US Energy Information Administration, US
Department of Energy, Russian Country
Analysis, updated January 2006.
15 Independent companies of interest include
Novatek, Northgaz, and Itera. However, the
term independent is being used subjectively
here. For example, Itera is largely considered
a shell company set up by Gazprom principals
in the 1990s to handle gas sales and process-
ing outside of the Russian Federation. Itera
was incorporated in the US State of Florida
and has effectively represented Gazproms
interests where it was largely absent from a
market or where Gazprom chose to be absent.
Gazprom has also taken back market share
from Itera in select markets such as the
Republic of Georgia, where Itera initially han-
dled gas imports but was then squeezed out of
the market by Gazprom itself. Northgaz is
decidedly not an independent company as
it is listed as a Gazprom subsidiary by the
company itself. This is underscored by an
article from 7 March 2007 which attests that,
Nortgaz will supply to its parent company
Gazprom about 4.2 billion cubic metres of net
stripped gas at the price of 450 roubles per
1,000 cubic metres. The shareholders of
Nortgaz have approved the terms and condi-
tions of Additional Agreement N1 to the
Supply Agreement between Gazprom and
Nortgaz in 2006. See Northgaz Approves
Supply Agreement with Gazprom, A&K,
57
Russia
7 March 2006 http://www.akm.ru/eng/news/
2006/march/07/ns1645965.htm for additional
information. Independent companies pro-
duced approximately 14% of the gas con-
sumed on the Russian market in 2004.
16 See Russia Country Analysis, Energy Informa-
tion Administration, US Department of
Energy, updated January 2006: http://
www.eia.doe.gov/emeu/cabs/Russia/
NaturalGas.html for an entire macro report
on the Russian oil and gas industry.
17 See History of the Company at http://
www.gazprom.com/eng/articles/
article8517.shtml.
18 Doman, Frank & Mayr, Walter: Inverview
with Alexey Miller, Der Spiegel, September,
2005.
19 See for example Gazprom: Russias Energetic
Enigma in The Economist, 5 October 2005. In
this article, Vadim Kleiner of Hermitage Cap-
ital, a fund that tries to drive up Gazproms
share price by exposing graft, points out that
Gazprom uses a long chain of intermediaries
and costs are rising fast.
20 Rosner, Kevin The Russian Petroleum
Industry 19871993: Endogenous Determi-
nants of Russian Petroleum Policy, Doctoral
Dissertation, Catholic University Louvain
La Neuve, Belgium, 1999. Printed by The
Petroleum Economist, London, UK, 1999.
21 As a result of the governments renationaliza-
tion of majority ownership over Gazprom,
only now in late 2005 and early 2006 has the
Russian government promised to rescind
limitations on the percentage of Gazprom
shares that can be owned by foreign entities,
including a liberalization in the types of shares
that can be owned and traded by non-Russian
shareholders. The total amount of Gazprom
shares that can be collectively owned by
foreign entities is presently capped at 20 per
cent.
22 Gazexport is to provide pipeline access if
additional capacity is available under the
terms of the Russian law. Difficulty arises with
the opaque nature of Gazexport itself and the
ability to independently verify whether such
capacity exists.
23 Mandelson, Peter Come Together Right
Now Over Gas, Intenational Herald Tribune,
21 March 2006.
24 With the expansion of global LNG the future
may provide a spot market for this trans-
portable commodity.
25 In December 2005, Belarussian Economics
Minister Nikolai Zaichenko announced that
his countrys natural gas pipeline operator,
Beltransgaz, and Russian energy giant,
Gazprom, had resumed negotiations to set
up a joint venture, after almost a year-long
suspension over disagreements on the value
of Beltransgazs assets. Zaichenko said the
sides had agreed to invite an independent
evaluator to assess Beltransgazs actual worth.
58
He also said the Belarusian government was
buying back the 0.103% stake sold to the
companys staff in a privatization campaign.
Commenting in the resumption of discus-
sions, Gazprom CEO Alexey Miller said that
successful completion of the talks would give
Gazprom control over Belarus entire gas
transportation system. The establishment of
a GazpromBeltransgaz JV is envisaged by an
April 2002 intergovernmental agreement.
Beltransgaz and Gazprom Resume Talks on
JV, RAI Novosti, 12 December 2005.
26 See Kupchinsky, Roman: Does Gazprom
have a major pipeline plan? RFE/RL
http://www.rferl.org/reports/rpw/
2006/02/3-060206.asp.
27 Gazprom Facts and Figures Annual Report
2002.
28 For an extended discussion of the gas cartel
issue, see Cohen, Ariel: Kazakhstans Energy
Co-operation with Russia, GMB Publishing,
January 2006: 2628.
29 The Russian labour force in 2005 was esti-
mated at some 74.22 million persons. CIA
Factbook.
30 Ibid.4.
31 See The World Energy Outlook 2005 from the
Energy Information Agency, US Department
of Energy, for a complete global energy anal-
ysis of energy demand by source and content.
32 See Yegoroy, Igor: Gazprom Projects in
Northwest Russia, 2005 Update, BISNIS
Representative in Northwest Russia, January
2005. www.bisnis.doc.gov/bisnis/bisdoc/0501
NWRusGazpromProj.
33 Stephen Blank is the author of the GMB
Report on Russian-Chinese relations and
was quoted on 2 March 2006 at a Heritage
Foundation event entitled: Russian Energy
Policy: Moscows Newfound Clout. See http://
www.heritage.org/Press/Events/archive.cfm
for the video link of this conference.
34 This was pointed out by Hisashi Yamamoto of
the International Organization of Maritime
Universities at the NATO Forum on Energy
Security which took place in Prague, Czech
Republic, 2224 February 2006.
35 Notes courtesy of Sweet, David NATO Forum
on Energy Security presentation Prague,
Czech Republic, 2224 February 2006.
36 Referenced in Kupchinsky, Roman: Team
RFE/RL. 9 February 2006.
37 Russias Summit Diplomacy with the West,
China, Prime Tass, 5 July 2005.
38 OAO Rosneftegaz was founded as a special
purpose company to consolidate the states
controlling interest in Gazprom. Initially,
the state intended an asset-swap deal with
Rosneft, the state oil company, to consolidate
its oil and gas holdings into a single giant.
However, Rosneft raised its value by buying
OAO Yuganksneftegaz, Yukoss largest oil
unit. The state had seized and sold the unit to
cover the tax claims against Yukos. Because of
GMB Publishing

this the GazpromRosneft deal was nullified
for a number of reasons. First, having gone
ahead with this would have subjected the
Russian state to the embarrassing position of
having to defend the sale of Yuganksneftegaz
in a US court where its acquisition by Rosneft
is being challenged by Yukos management. A
second consideration is that Rosneftgaz, after
its Gazprom share acquisition, is relatively
cash poor. The Russian government report-
edly will sell shares of Rosneftgaz to the public
to raise capital to retire the loan capital
borrowed from the private sector for the
Gazprom share acquisition. Effectively bur-
dening Gazprom with a debt not entirely its
own, through a Rosneft-Gazprom merger,
would have weakened Gazproms cash posi-
tion (at least initially by diluting its share
capital acquired through its sale of its shares),
which in turn would have inhibited its ability
to make strategic investments in other Russian
oil and energy concerns such as in Surgut-
neftgaz, Sibneft or even in Rosneft itself as
advised by Deutsche Bank. Over the longer
term, a conclusive merger of the Russian
states oil and gas interests is expected as these
peripheral issues are resolved.
39 Gazprom likely to buy Rosneft stake, 10 June
2005 Financial Express online: http://
www.financialexpress.com/fe_full_story.php?
content_id=93483.
40 Citigroup provides fairness opinion on
Gazprom 10.74% Stake Sale to Rosneftegaz
Transaction, Gazproom Media, 2 August
2005.
41 Gazprom in Questions and Answers 2005: 8.
42 For more detail see, State finds way to
consolidate Gazprom controlling stake, RIA-
Novosti, 1 August 2005.
43 The author is indebted to the painstaking
work of Roman Kupchinsky at RFE/RL for his
important insights bundled together in his
article Team RFE/RL, 9 February 2006.
44 In fact, former Warsaw Pact allies of the Soviet
Union did not consistently pay lower than
market prices and on a number of occasions,
the energy price issue became a contentious
issue within that Alliance.
45 Meyer, Henry, Russian state to get Gazprom
stake Associated Press, 16 June 2005. The two
companies being Gazprom and Rosneft, each
with their own power structures and interests.
46 Evidence of this is the presidents appoint-
ment of Igor Sechin, a man with ties to the
former KGB, who is currently the deputy
head of Putins administration as well as the
Chairman of the Board of Directors at the
state-owned oil company Rosneft. Ibid.9.
Another carefully placed appointee is Anatoli
Chubais, one of the principle architects of
the countrys early voucher privatization pro-
gramme. Chubais was one of early privatiza-
tions young Turks, an economist with
St Petersburg roots who while he has often
been at odds with the Russian President has
GMB Publishing
Russia
managed to maintain good standing as the
head of Russias electricity monopoly RAO
UES. Chubais is also the self-proclaimed
author of Russias theory of liberal empire,
which seeks to regain Russian domination
over the former Soviet Unions electricity grid
and thereby expand Russian influence across
the CIS and CEE through downstream
merger and acquisition activities. Next to
Alexey Miller, he is a dominant personality,
and through position, an individual to be
reckoned with in any dealings with Russias
energy complex across the board. Another
man with reported considerable influence
over Russian energy policy in general is
Ivanov, another deputy head of the presiden-
tial administration. Ivanov has a colourful his-
tory. A graduate of the Leningrad Bonch-
Bruyevich Electrical Technical University,
Ivanov worked as an engineer before report-
edly joining the KGB in 1977 and fighting
with Soviet forces in Afghanistan. Upon his
return, he rose to the head of the anti-contra-
band department of the Leningrad Oblast
KGB. He retired from service in 1994 with the
rank of colonel and was appointed by Putin to
head the administrative departments of St Pe-
tersburg city hall. Again see ibid.9.
47 Illianov quoted in Baev, Pavel, Gazproms
Crisis of Overgrowth, 31 January 2005.
48 Khristenko: the world energy market
must follow transparent and clear-cut
rules, Speech to the Asian Energy Summit,
November 2005.
49 Former KGB-FSB personnel are said now to
control enterprises that collectively generate
70% of Russias GDP. While under the Yeltsin
regime, security service personnel in high
administration positions occupied only 11%
of the administration total, this figure is re-
ported to have tripled under Putin. Addition-
ally, and not to be discounted, is the transfer
of wealth from Russias billionaires (oli-
garchs) to millionaires (silivoki) who now
seek to manage and control the main compo-
nents of the nascent Russian private sector
based on self-interest coupled with a belief in
re-establishing the Russian states great
power status.
50 Ibid 8.
51 The other major shareholder in RosUrken-
ergo is Centragas Holding, an affiliate of
Raiffeisen Bank. Raiffeisen Bank has refused
to disclose the names of its specific sharehold-
ers in RosUrkEnergo, citing the wish of these
shareholders not to have their names dis-
closed. It should be pointed out as well that
Raiffeisen Bank is one of the fastest expanding
banks in Russia, emerging from a decidedly
non-competitive market as one of that
markets leaders.
52 For more information on the ministrations of
RosUrkenergo in Ukraine see Socor,
Vladimir, Kyiv Reopening the Door to
RosUrkEnergo Jamestown Foundation,
59
Russia
16 March 2006. Socor quotes Ukraine
Foreign Minister Minister Borys Tarasyuk as
having declared in Washington that the gas
deal will be implemented for lack of other
options, despite its being far from transpar-
ent and other flaws (Action Ukraine Report,
March 12). Socor outlines four points that
illustrate how Russia, in this case through
RosUrkEnergo, further penetrated the
Ukraine market. These were a) RosUkrEn-
ergo would operate within Ukraine as well,
through the UkrGazEnergo joint company set
up by RosUkrEnergo with Naftohaz Ukrainy,
sharing Ukraines internal distribution mar-
ket; b) a few key Ukrainian government offi-
cials worked with the Russian side to insert
RosUkrEnergo into these deals; c) official
Kyiv prefers to plead ignorance or agnosti-
cism about RosUkrEnergo and other shadowy
aspects of the gas deals, ever since the presi-
dency last September quashed the National
Security Services investigation into the mat-
ter; and d) Kyiv is not addressing the high
probability (widely reported by the Ukrainian
press) that influential Ukrainian individuals
with official connections may be involved with
RosUkrEnergo and Gazprom. These points
underscore one of the working hypothesis as
laid out in this studys introduction, which is
that Gazprom is largely successful in markets
with (1) a weak rule of law where (2) relation-
ships between red directors and Russian
companies are well established historically
and (3) where the opaque nature of Russian
downstream subsidiaries allows for these com-
panies to act with impunity outside of Russia
itself. In this particular case, it would further
appear that the choice of RosUrkEnergo was
one taken in Russia itself allowing for little
recourse by Ukraine authorities for an alter-
native solution.
53 76% of the worlds oil remains in the hands
of National Oil Companies, so privatization
should be viewed in relative terms.
54 United Nations Conference on Trade and
Development, World Investment Report
2000: Cross-border Mergers and Acquisitions
and Development: 146.
55 See Vatansever, Adnan, Russias Involve-
ment in Eastern Europes Petroleum Indus-
60
try, GMB Marketing, 2006, for a complete
discussion of the competition between Yukos
and Lukoil over this Bulgarian asset.
56 ibid 10.
57 Please see additional tables detailing Gazprom
downstream investments in to this mono-
graph.
58 Ibid.4: Kupchinsky further explains that
Gazprom insisted on a small diameter pipe
installation between the IranianArmenian
interconnector in order to prevent re-export
of gas from Iran to Georgia, which would by
implication reduce Georgian gas import
dependence on Gazprom.
59 See Gazprom Business Strategy: http://
www.gazprom.ru/eng/articles/
article8523.shtml.
60 Russian Energy Survey 2002, International
Energy Agency, 2002:120.
61 ibid.
62 RosBusinessConsulting Moscow, 16 June 2005
Press Release (http://www.rbcnews.com/).
63 This 90% equates to 132 bcm of the 153 bcm
Russia exported to the EU in 2005. The
remaining 9.93% is exported via the Yamal
I pipeline via Belarus and Poland. See Gas
Dispute Disrupts Fradkovs Trip to Kiev, FSU
Oil and Gas Monitor 23 November 2005:11.
The writer is also indebted to Theodore
Tsakiris, a research fellow at the Hellenic Cen-
tre for European Studies for this thoughtful
insights.
64 Industry analysts calculate that construc-
tion of Yamal II would be approximately
$900 million versus the anticipated cost of
the Northern-European Gas Pipeline at $9
billion. This is yet again a case where politics
has taken precedence over commercial utility.
Construction of the NEGPs only rationale is
that it obviates the Ukraine and Poland as
transit states for the export of Russian gas.
While pipeline diversification is prudent from
a supplier standpoint, it is entirely unjustified
on a cost basis.
65 Ibid 64: Theodore Tsakiris comments.
GMB Publishing
 Russia

About the series:

Russian foreign energy policy reports

T
his series of reports establishes for the first time the confluence of Russian
foreign policy with the acquisition of foreign energy assets by Russian entities.
Nine specific country profiles focus on the oil, gas, electricity and nuclear
power industries. Each report, written by an author of international standing,
explains how Russian foreign energy downstream mergers and acquisitions are
transpiring to consolidate the new Russian empire.
These unique studies address many questions of substance for energy industry
professionals, investors, policy experts, and decision makers who seek to make sense
of the dynamic changes that have overcome the Russian energy complex and
altered the balance of global energy geopolitics.
Series Editor
Kevin Rosner Ph.D., is a specialist in Russian oil and gas, security of critical energy
infrastructure, and international energy-security policy. He is an external expert to
the NATO and presently serves as the Director, NATO Forum on Energy Security.
He is a Senior Fellow both at the UK Defence Academy and at the Institute for the
Analysis of Global Security (IAGS) in Washington, DC. Posts held include Senior
Security Advisor to the Baku-Tbilisi-Ceyhan pipeline company, Project Director
with the Program on Cooperation with the Russian Federation at the OECD, and
Project Manager with the UNESCO Science Division in Paris. Dr. Rosner is the
founder of The Rosner Group serving leading members of the global oil and gas
community with energy and security analytical products.

Russian Involvement in Eastern Europes oil,

Petroleum Industry: The Case of Bulgaria
Adnan Vatansever

T
his report answers questions such as: as one of the largest foreign acquisitions
by a Russian company occurred in Bulgaria, what lessons are applicable to
charting future Russian downstream takeovers? Why have Eastern Europe
and Western FSU countries been the primary focus of Russian acquisitions? What
drives LUKoil (and other Russian oil companies) to pursue acquisition of assets in
these regions? Finally, what is the stance of the Russian government in terms of
promoting such acquisitions abroad?
Adnan Vatansever is a freelance energy consultant and the author of a number
of reports for Cambridge Energy Research Associates. He is currently in the process
of completing his Ph.D. dissertation on Russias energy sector at the Paul Nitze
School of Advanced International Studies, Johns Hopkins University. He holds a
B.A. in International Relations from the Middle East Technical University in

GMB Publishing 61
Russia

Ankara, M.A. in Russian and East European Studies from Georgetown Universitys
School of Foreign Service.
Hardcopy ISBN 1-905050-40-2
E-report ISBN 1-90505080-1

Kazakhstan: Energy Cooperation with

Russia Oil, Gas and Beyond
Dr Ariel Cohen

T
his important study explains how Russia, with its private sector and policy
makers working in tandem, has exerted a significant amount of control over
Kazakhstans vast natural resources and its economic freedom. It looks at
the way Russia and Kazakhstan agreed to divide the Caspian Sea shelf and how
Kazakhstan has managed to maintain good relations with Moscow overall, despite
its insistence on exporting energy resources to China and Europe directly and its
hopes to export through Iran.
Ariel Cohen, L.L.B., Ph.D., is an international expert in international security/
terrorism; Russian, Eurasian, European and Middle Eastern foreign, security, eco-
nomic and business policy. He is Senior Research Fellow in Russian and Eurasian
Studies and International Energy Security at the Davis International Studies
Institute at the Heritage Foundation. Dr. Cohen has conducted conferences and
briefings for the US Government departments and agencies. He appears on major
US and foreign TV networks. Dr. Cohen also has extensive experience consulting
for the private sector, international organizations, and technical assistance projects
in the Central and Eastern Europe and CIS regions.
Hardcopy ISBN 1-905050-41-0
E-report ISBN 1-905050-81-X

Georgia: Russian Foreign Energy Policy and

Implications for Georgias Energy Security
Liana Jervalidze

T
his report shows that as Georgia has restructured its energy sector, the new
Russian and Georgian political elites exerted their influence, particularly
through the participation of Russian gas company Itera in privatizations of
Georgian gas enterprises. And how, over the past few years, Russian-Georgian
business groups with their offshore capital have been working to monopolise the
Georgian economy and Russias gas industry has been consolidating its hold over
the CIS pipeline infrastructure, particularly through the expansion of Gazprom.
However, Gazprom failed to take control of Georgias pipeline infrastructure and
Georgia is insistent on developing its pipeline potential in order to boost its role as
a transit route to Europe, Turkey and Iran.
Liana Jervalidze has worked with several government and research institutions
working on Caspian region energy policy and development. She has advised private

62 GMB Publishing
 Russia

sector companies in on the development of east-west energy corridor and Georgias

potential role in regional integration. Since 2003, Ms.Jervalidze has been working
on the development of Georgias gas market. She has spoken on regional energy
policy at international conferences in the CIS, Europe and the US. Her analyses
have been published in both Georgian and English.
Hardcopy ISBN 1-905050-35-6
E-report ISBN 1-905050-84-4

Russias Energy Interests in Azerbaijan

Fariz Ismailzade

I
n 2003-2004, an increased number of senior Russian officials and major energy
companies, such as Itera, Gazprom and RAO UES visited Baku in the hopes
of participating in energy projects in Azerbaijan. While maintaining diplo-
matic relations with Moscow, Azerbaijan is more hesitant when it comes to close
cooperation with Russian energy companies. Baku fears that if Russia gains more
assets in Azerbaijan, control of these assets will be used for political purposes. This
unique study looks at the confluence of Russian private and public sector interest
Azerbaijans energy sector.
Fariz Ismailzade works with the International Republican Institute in Baku
and is a part-time lecturer at the department of political science at the Western
University in Baku. He holds an MA in Social and Economic Development from
Washington University, St. Louis, and a BA in Political Science from Western
University, Baku.
Hardcopy ISBN 1-905050-42-9
E-report ISBN 1-905050-87-9

Ukraine: Post-revolution Energy Policy and

Relations with Russia
Olena Viter

T
his report looks at how the new Ukrainian government plans to decrease
Russian influence over Ukraines energy sector. President Viktor
Yushchenko has declared goals which include the diversification of oil and
gas supply sources, the reform of the domestic market, and the creation of a strate-
gic oil stock. Ukraines search for more partners in the energy sphere has affected
the relationship between Ukraine and Russia; from a brotherly relationship to
one of pragmatic interest.
Olena Viter is a Senior Adviser to the Operational Department of the Secretariat
of the President of Ukraine. She is Coordinator of Energy Programs at the School
of Policy Analysis, National University of Kyiv-Mohyla Academy, and a member
of the non-governmental Expert Council on Energy Security. In 2002, she was an

GMB Publishing 63
Russia

intern at the Hudson Institute, and in 2003 she participated in drafting Ukraines
Energy Strategy.
Hardcopy ISBN 1-905050-31-3
E-report ISBN 1-90505077-1

Turkmenistan-Russian Energy Relations

Gregory Gleason

T
urkmenistan has large gas reserves, but as its immediate neighbours
have little import demand, Russia holds the key to its gas transport. In
April 2003 Turkmenistan and Russia concluded a 25 year transport and
marketing agreement for Turkmen natural gas. The new arrangements permit
Turkmenistans gas production to reach 100,000 million cm per year in 2007. This
unique study details the background and looks at the prospects for Turkmenistans
gas production and export in the context of Russian strategy, and at Turkmenistans
role in the new energy strategies throughout Eurasia and the Middle East.
Gregory Gleason, Ph.D., is an internationally recognized expert in energy policy
and international relations. A professor of political science and public administra-
tion at the University of New Mexico, Dr. Gleason has extensive field experience
in Turkmenistan and the other countries of Eurasia and Central Asia. He has served
as a consultant to Lawrence Livermore National Laboratory, Sandia National
Laboratories, the Asian Development Bank, and the US Agency for International
Development. His research has been sponsored by the National Science Foun-
dation and the National Academy of Sciences as well as other public and private
foundations.
Hardcopy ISBN 1-905050-33-X
E-report ISBN 1-905050-82-8

Belarus: Oil, Gas, Transit Pipelines and

Russian Foreign Energy Policy
Dr Margarita M Balmaceda

B
elarus relies on Russia for about 85% of its total energy needs, while Russia
needs Belarus oil and gas pipelines to export its supplies to Western Europe.
How will energy exports from Russia and Belarus transit capabilities impact
Western Europe if this interdependent relationship ends, either through political
changes in Belarus or if Russia ends its energy subsidies to Belarus? This report
looks at transit, infrastructure and investment issues and analyzes both the state of
the current infrastructure, as well as the possibilities this transit opens to Western
investors, particularly as the Yamal Pipeline nears completion. In addition, it looks
at the current conflict between Belarus and Russian investors for control of the
countrys gas transit system and oil refineries.
Margarita M. Balmaceda is Associate Professor at the John C. Whitehead School
of Diplomacy and International Relations, Seton Hall University, New Jersey, and
an Associate of Harvard Universitys Davis Center for Russian and Eurasian Studies

64 GMB Publishing
 Russia

and the Harvard Ukrainian Research Institute. She received a Ph.D. in Politics from
Princeton University (1996), and Post-Doctoral training at Harvard University. She
has published widely on Russian, post-Soviet and East European energy and foreign
policies.
Hardcopy ISBN 1-905050-34-8
E-report ISBN 1-905050-83-6

Gazprom and the Russian State

Dr Kevin Rosner

G
azprom is the worlds single largest producer of natural gas, long acknowl-
edged as a state-within-a-state. In 2005 it reached a turning point in its
history when the Russian government reasserted its majority stakeholder
position, whilst also continuing its own push to gain control over an increasing share
of Russias energy complex overall. This timely report provides answers to questions
such as: what do these movements mean for the future of the Russian energy sector?
What will be the impact of state control over Gazprom on domestic and foreign
shareholders? And what do these changes portend for the future of natural gas
exploitation, production, distribution and the ultimate export of Russian gas to
downstream consumers? And what will these changes mean to world?
Hardcopy ISBN 1-905050-30-5
E-report ISBN 1-905050-85-2

Baltic Independence and Russian Foreign Energy Policy

Dr Harold Elletson

E
stonia, Lithuania and Latvia are uniquely dependent on the Russian Feder-
ation for energy supplies. The security of energy supplies are national security
issues in the three ex-Soviet republics, which are now part of the EU.
Increasingly dependent on Russian gas imports and with negligible sources of
domestic energy supply, the Baltic countries have been the target of aggressive
Russian commercial activity and a sustained attempt to lock them into a long-term
reliance on Russia.
Now, as Baltic political leaders, energy specialists and intelligence analysts
consider their options, the implications for the security and independence of the
three Baltic States are a matter of concern well beyond the Baltic. This important
report will be essential reading for anyone with an interest in the future energy
supplies of both the Baltic States and eastern Europe.
Dr Harold Elletson leads The New Security Programme, which conducts
research into the implications of the new security environment. He was previously
Director of the NATO Forum on Business and Security. A former Member of
the UK Parliament, he served as Parliamentary Private Secretary to the Secretary
of State for Northern Ireland and as a member of the Select Committee on
Environment. An INTERNATIONAL public affairs consultant and a fluent Russian

GMB Publishing 65
Russia

speaker, he has advised many leading companies on aspects of their business in the
former Soviet Union, including BP in Azerbaijan and Alstom in Siberia.
Hardcopy ISBN 1-905050-36-4
E-report ISBN 1-905050-89-5

Russo-Chinese Energy Relations: Politics in Command

Dr. Stephen Blank

T
his report makes the point that in both Russia and China it is politics and
not market or commercial considerations that largely drive energy
relationships with each other and the outside world. For both countries,
energy and energy security are regarded as strategic assets and/or objectives that
are at risk from outside forces. Moreover, both countries are taking a statist
approach to energy issues. Therefore cooperation between Russia and China will
be difficult even though Russia wants to sell and China wants to buy.
Russia has blocked Chinese efforts to realize its version of energy security, yet it
has not been able to come up either with the resources or means for a coherent
policy of supplying China with reliable quantities of energy that would lead China
away from Middle Eastern and other producers. Given the political dimension in
both countries, the under-fulfilment of the potential for Russia to supply energy to
China will continue and remain a source of strain in their relationship.
Stephen Blank is Professor of Russian National Security Studies at the Strategic
Studies Institute of the U.S. Army War College. Dr. Blank has been an Associate
Professor of National Security Affairs at the Strategic Studies Institute since 1989.
In 1998-2001 he was Douglas MacArthur Professor of Research at the War College.
Prior to this appointment Dr. Blank was Associate Professor for Soviet Studies
at the Center for Aerospace Doctrine, Research, and Education of Air University
at Maxwell AFB. Dr. Blank's M.A. and Ph.D. are in Russian History from the
University of Chicago.

66 GMB Publishing