Gazprom: a state within a state?

The Russian energy company Gazprom is now one of the world's largest quoted companies with a market capitalisation of close to EUR 166 billion and more than 300,000 employees.

It holds licences to fields holding around 55% of Russia's reserves and accounts for 90% of Russia's total gas production. It also controls the nation's domestic and international pipeline network.

Russia accounts for about one-third of the world's proven natural gas reserves.

The Organization for Economic Co-operation and Development (OECD) says that "it is difficult to exaggerate the significance of Russia's natural gas industry both nationally and internationally". It supplies, at heavily subsidised prices, half of the nation's energy needs and more than half the energy consumed by the electricity sector.

It is not just Russia which is dependent on Gazprom. More than a third of the EU's gas supplies come from the company. This over-dependence, and the fear that Russia might, at some point in the future, use gas supplies to put political pressure on the EU, have triggered the search for an integrated EU energy policy.

The OECD says that the Russian market "is not really a market at all but a rationing system", in which who gets what supplies is "wholly opaque".

One of President Vladimir Putin's early moves when he came to office was to assert his control over the company. In 2001 he handpicked a new chairman, Dimitri Medvedev, and chief executive, Alexei Miller, men who were seen as, above all, Putin loyalists.

The Russian state last year raised its shareholding to 50% and Russian experts have long seen the company as "a state within a state".

When Putin wanted to tighten his grip on the media in 2001 he turned to Gazprom to buy a television channel and several publications. Gazprom also has significant financial sector interests.

Late last year as the Kremlin moved to strengthen further the state's role in the oil sector, Gazprom paid $13bn (EUR 10.8bn) for control of the Sibneft oil company, bought from Chelsea Football Club owner Roman Abramovich.

But foreign investors are wary of making big commitments in what might become politically sensitive segments of the economy. In the economy as a whole, foreign direct investment is running at around one-tenth of the levels that China has seen in recent years.

But without increased foreign investment the pace of Russia's economic modernisation and its ability in particular to exploit more efficiently its vast natural resources base, will be slowed.

Gazprom is seen to be technically competent when it comes to finding and exploiting its resource base, but burdened with a vast and decaying Soviet-era pipeline network.

Earlier this month (March), Russian President Vladimir Putin, signed an agreement with China for Gazprom to build two pipelines to China. Claude Mandil, executive director of the International Energy Agency, warned that Gazprom, "would be unable to meet its obligations to European consumers if it did not focus its investment spending on infrastructure in Russia".

The inability of the Russian government to address the need to reform Gazprom, to introduce competition into its markets, particularly to separate production and distribution and break up its distribution monopoly, are a powerful symbol of Putin's ambiguous attitude to economic reforms.

The moves to centralise state control over Russia's energy resources and use them to project Russian power abroad, coupled with the inadequate domestic economic reforms, are hindering not helping Russia achieve the rapid, hi-tech, industrialisation which Putin professes to want and which China, at least up to now, seems better at achieving.

Russia and its oil reserves

Russian oil is another facet of the EU's energy dependency. Around one-third of EU supplies come from Russia, which is the second largest producer of oil after Saudi Arabia.

But, according to BP's Statistical Review of World Energy, Russia's proven reserves are only around 72 billion barrels, compared with more than 262 billion for Saudi Arabia and over 100 billion each for Iraq and Iran. So, unless and until new reserves are discovered, perhaps in largely unexplored Eastern Siberia, its long-term impact on the world economy as an oil producer is going to be much less than its role in global gas markets.

In an economy in which energy production accounts for around 40% of gross domestic product, oil's role is suffering from under-investment in extraction and exploration. Industry experts say that oil companies have been exploiting reserves that are easy and cheap to extract. Foreign investors remain wary. Since allowing the United Kingdom's BP to buy a 50% stake in TNK three years ago, the state seems to have been discouraging foreign oil companies from playing a bigger role.

The dismemberment of Mikhail Khodorkovsky's private Yukos oil group and the political witch-hunt that has left him languishing in gaol, have also had a chilling effect on foreign direct investment (FDI) and not only in the Russian oil sector.

Article takes a look at Russian energy company Gazprom, which supplies more than a third of European Union gas imports, and its relations with the Russian state. Additional information about Russia and its oil reserves.
Article is part of a European Voice Special Report, 'A Common EU Energy Policy'