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Russia: Putin's Decision May Lead To Gazprom's Restructuring

  • Michael Lelyveld

More than a year after taking office, Russian President Vladimir Putin has announced measures that could lead to restructuring of giant Gazprom. But it is still unclear how far Putin will go and who will benefit from the change. Our correspondent Michael Lelyveld reports.

Boston, 17 April 2001 (RFE/RL) -- Shares in the Russian gas monopoly Gazprom soared to a new high on the Moscow Stock Exchange last week after President Vladimir Putin ordered a major market reform.

On 9 April, Putin called for formation of a working group to ease limits on trading in Gazprom's shares. The move could break down the infamous "ring fence" around Gazprom that has been the subject of widespread complaints.

The ring fence protects the company by barring foreigners from buying Gazprom stock that is traded inside Russia. Instead, foreign investors are only allowed to buy a special class of Gazprom shares on the London exchange at a much higher price.

The investors say that the system is unfair. It also keeps the price of all shares in Gazprom artificially low, so that the company is undervalued and unable to raise funds that would help it produce more gas.

On the other hand, the ring fence has helped to shield the mighty monopoly from investor questions about how it conducts its affairs. The issue is critical because of suspicions that insiders have been stripping Gazprom's assets and hiding profits abroad.

The first beneficiary of Putin's announcement was the government itself, since the state owns 38 percent of Gazprom. When shares rose, the market valuation of the company jumped from $7 billion to $8.8 billion, giving the government a quick profit on paper of nearly $700 million.

Putin's move was remarkable in several respects.

First, he appeared to be bowing to international pressure by allowing market forces to work on Gazprom. That could mean that Putin is finally ready to give equal protections to foreign investors and Gazprom, a step that could boost the Russian economy.

But secondly, Putin acted more than a year after taking power, despite his government's goal of reforming Russia's "natural monopolies" as one of its first tasks. Last week, Finance Minister Alexei Kudrin promised "a long process" of restructuring, perhaps signaling that the government will continue to take a go-slow approach.

Thirdly, it remains unclear whether Putin plans to order a complete reform of the giant company that would include replacing its chief executive, Rem Vyakhirev, whose contract expires next month. It appears that Anatolii Chubais, the chief executive of the UES electricity monopoly, has already survived an ouster threat with Putin's support.

But Putin at least seems to have abandoned the fiction that the state does not control Gazprom simply because it owns less than a majority of its shares. Clearly, Putin has had the power to make changes all along, despite claims that Gazprom has acted on its own in the takeover of the independent media outlet NTV.

The government has also kept quiet while Gazprom and its trading partner Itera have exerted influence over CIS nations. Periodic gas shutoffs to Ukraine, Georgia, and Azerbaijan have encouraged Russia's neighbors to follow its policies. Gazprom played much the same role in Soviet times when it operated as a state ministry. As a company, it has continued to enjoy benefits by acting as an agent of the state.

But the biggest question for Gazprom's future remains to be addressed. How will the Russian people be served by reforming the world's largest gas company?

Although Gazprom owns 25 percent of the world's gas reserves, there is little sense that the partially privatized company should act in the public interest, even though its resources were obtained from the government.

Foreign investors have seemed obsessed with the ring fence issue, leaving the impression that the only reason for reform is personal gain. By contrast, Vyakhirev has voiced concern about the inability of citizens to pay rising gas tariffs. Last month, he told the Interfax news agency that he would ensure that restructuring would reduce gas rates for Russian citizens.

Vyakhirev hinted at continuing subsidies, saying that Gazprom would "sell gas cheaper to Russian consumers and more expensive to foreign ones."

The problem with Vyakhirev's approach is that Gazprom's production has been dropping steadily due to lack of investment. And Vyakhirev certainly knows that neither Russian nor foreign companies will invest in developing gas for the domestic market if they are forced to sell fuel at a loss.

Last year, Gazprom exported about one-fourth of the gas it produced. But its production dropped by more than 4 percent. If the trend continues, Russian gas prices are likely to rise further rather than fall as fuel supplies become scarce.

Under those circumstances, Vyakhirev's promise to protect consumers from the market may become impossible to keep. So far, the delays in reform have only succeeded in protecting Gazprom.