Russia: Gazprom Stares Down The West

by Roman Kupchinsky

The Myldzhinsky gas condensate storage facility, which belongs to Vostokgazprom, a subsidiary of Gazprom (file photo) (ITAR-TASS)

Several events occurred in In April that again showed the increasingly important role that energy security is playing in the uneasy relationship between Russia and the West.

On April 18, a week prior to the opening of the ninth annual Russian Economic Forum in London, Gazprom CEO Aleksei Miller addressed a Moscow gathering of 25 EU ambassadors. After Miller's speech, Gazprom distributed a statement that not only underscored ongoing tensions between the European Union and Russia, but exacerbated them.

Relations With EU

"It is necessary to note," the statement read, "that attempts to limit Gazprom's activities in the European market and to politicize questions of gas supply, which in fact are of an entirely economic nature, will not lead to good results."

"It should not be forgotten that we are actively familiarizing ourselves with new markets, such as North America and China," the statement continued. "Gas producers in Central Asia are also paying attention to the Chinese market. This is not by chance: competition for energy resources is growing."

The statement appeared to be an attempt to play off potential U.S. buyers of Gazprom's liquefied natural gas (LNG) against European clients, while at the same time threatening to make cash-rich but energy-poor China Russia's exclusive and limitless market for gas and oil if the Europeans refuse to play according to Russian rules.

'We Have Other Alternatives'

Sergei Kupriyanov, a Gazprom spokesman, was explicit in his interpretation of the statement. He told the U.K.-based "Financial Times" on April 20: "We just want European countries to understand that we have other alternatives in terms of gas sales. We have a fast-growing Chinese market, and a market for liquefied natural gas in the US. If the European Union wants our gas, it has to consider our interests as well."

The concept outlined in the Gazprom statement is not a new one. According to "The Moscow Times," Gazprom's management presented a strategy paper to its state-dominated board of directors in March. On March 30, the newspaper described the paper as a plan to boost Gazprom's share of the European gas market to 30 percent from 25 percent "by buying into gas storage, gas marketing, and power firms."

Centrica Link

Media reports have also linked the Gazprom statement to the EU to rumors of attempts by the Russian gas monopoly to buy into the largest British utility company, Centrica. British countermeasures to prevent this by changing the laws on foreign ownership of strategically important British companies apparently angered the Kremlin and it responded with the warning statement.

The United Kingdom is not the only country Gazprom is setting its sights on. During a meeting in Sochi on August 29, 2005, Putin asked Italian Prime Minister Silvio Berlusconi to allow Gazprom to invest more heavily in his country, saying: "It is in our interest that our companies, including Gazprom, be allowed to invest extra money in Italy's energy sector, including in gas-distribution networks," RIA Novosti reported.

A Questionable Middleman

There was more controversy on April 21 when "The Wall Street Journal Europe" reported that the U.S. Department of Justice's organized-crime unit had begun an investigation into the activities of the Swiss- and Austrian-based gas-trading company RosUkrEnergo.

Gazprom CEO Aleksei Miller (right) with Naftogaz Ukrainy head Oleksiy Ivchenko in Moscow during gas-price negotiations in January (epa)

RosUkrEnergo was created in July 2004 during a meeting in Yalta between Putin and former Ukrainian President Leonid Kuchma. It took over the function of being the middleman for gas deliveries from Turkmenistan to Ukraine from Eural Trans Gas, a company formed in Hungary in December 2002.

When the new Ukrainian government of Yuliya Tymoshenko took power in early 2005, one of the first investigations begun by the Security Service of Ukraine (SBU) was the case of RosUkrEnergo. The investigation looked into the hidden beneficiaries of the company, who were protected by Austrian law from disclosure. RosUkrEnergo officials refused to name its beneficiaries, while Gazprom officials claimed that they had no information about them.

After the Tymoshenko government was fired by Ukrainian President Viktor Yushchenko in late summer 2005, the SBU investigation of RosUkrEnergo was reportedly dropped.

In January this year, RosUkrEnergo, allegedly at the insistence of the Russian government, was designated as the middleman for the new gas agreement between Ukraine's Naftohaz Ukrayina and Gazprom.

The company stood to make more than $2 billion from the deal and this further incensed Tymoshenko's followers, who insisted that Yushchenko renew the investigation and renegotiate the deal with Gazprom in such a way as to keep RosUkrEnergo out of the picture.

The Human Rights Connection

Soon after news of the U.S. investigation of RosUkrEnergo broke, Global Witness, a U.K.-based nongovernmental organization that works to expose the link between natural-resource exploitation and human-rights abuses, released a major report on the activities of Eural Trans Gas and RosUkrEnergo.

The report, titled "It's A Gas -- Funny Business In The Turkmen-Ukraine Gas Trade," claims that offshore companies hide the real beneficiaries of Eural Trans Gas and says there are inconsistencies in statements by Gazprom and Naftohaz Ukrayina officials about RosUkrEnergo and its role in the gas business. The report also claims that Turkmen President Saparmurat Niyazov has allegedly used a German bank to hide billions of dollars earned from the gas trade.

As tension increases between Western countries and Gazprom, the Russian gas monopoly's shares traded on Western exchanges in ADRs (American Depositary Receipts) continue to climb in price. Whatever happens, Western investors are likely to still be attracted to Gazprom and other Russian energy stocks as global oil prices soar over $70 a barrel.