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Analysis: A 'Privatization' Deal To Create A New State Oil Giant

Gazprom CEO Aleksei Miller (left) speaks with journalists after meeting Russian President Vladimir Putin President Vladimir Putin appeared in a carefully staged, televised meeting with Prime Minister Mikhail Fradkov and Gazprom CEO Aleksei Miller at his residence outside of Moscow on 14 September. The president listened intently as Fradkov presented "his" idea for solving several problems at once, the most important of which he said was the problem of the dual stock system at the gas giant caused by the formal ban on foreign ownership of Gazprom stock. For years, foreign investors have complained that the ban is unfair and is hindering investment in Gazprom and in Russia generally, while the government has been unwilling to drop the ban because it does not have a majority stake in the strategically important company.

"Fradkov's" idea was to allow Gazprom to privatize state-controlled Rosneft, paying for Russia's last state-held oil company with a 10-15 percent block of its own shares. This would give the government a majority share of Gazprom, theoretically leaving it free to drop the ban on the sale of company shares to foreigners. At the same time, the plan has the beauty of keeping Rosneft under state control even as it is "privatized." The announcement that Rosneft President Sergei Bogdanchikov will continue to head the new company, to be called Gazpromneft, and widespread speculation that deputy presidential administration head Igor Sechin, who was named chairman of Rosneft's board in July, will become chairman of the new company left no doubt that continued state domination of Rosneft is a key part of the new plan. Presidential administration head Dmitrii Medvedev is chairman of Gazprom.

Despite the stage-managed meeting with Putin, no one seriously believes that this initiative sprang from Fradkov's office or the government. Such decisions are made within the presidential administration, and rumors of a move of this sort have been circulating actively for months. About a year ago, Defense Minister and Putin confidant Sergei Ivanov told "Kommersant-Daily" that the state must "retake the commanding heights" of the economy, paying particular attention to the oil sector. When Sechin took over Rosneft's board in July, the daily commented that the appointment is the first step in the creation of a state energy company that "in the future will define the rules of the game for Russia's most important market."

Kremlin-connected political analyst Stanislav Belkovskii told "Kommersant-Daily" in July that the Kremlin intends to create "a large energy-holding company based on Rosneft and Gazprom." He further predicted that the new company will eventually acquire up to one-half of the production assets of embattled oil giant Yukos (see "RFE/RL Russian Political Weekly," 15 July 2004). "Izvestiya" in July even speculated that the new company might be called Nefteprom.

During the staged meeting between Fradkov and Putin, the problem of eliminating Gazprom's two-tiered share system was presented as the driving motive behind the Rosneft deal. "I am convinced that the dual system should be ended as quickly as possible," Putin said, according to "The Moscow Times" on 15 September. "The sooner it is done, the better." The move was interpreted as an attempt to assuage investors who are understandably jittery in the wake of the Yukos affair and this summer's mysterious banking crisis. Industry and Energy Minister Viktor Khristenko on 15 September actually began throwing cold water on expectations that foreign investors would get a level playing field. Liberalization of the Gazprom share policy will "not mean the complete removal of all restrictions for residents and nonresidents," Khristenko said, according to

However, the real driving force behind the rush might well be the fact that the production subsidiaries of embattled Yukos are expected to come up for sale before the end of the year. A decision on the tender for the most lucrative of these assets, Yuganskneftegaz, is expected some time this month. Miller told Interfax on 15 September that Gazprom is not considering the purchase of any Yukos assets, but that assurance did not seem convincing, given statements by administration officials that the government should control at least 20 percent of the country's oil market. "The Moscow Times" noted that 16 percent of Gazprom's shares are controlled by Gazprom subsidiaries, and that this stake would be used to purchase Rosneft. If the company gives up around 10-12 percent for Rosneft, the paper speculated, enough would remain to allow it to put in a credible offer for Yuganskneftegaz, especially if it was known among market players that the Kremlin wants such a bid to succeed.

The day after the Gazprom news broke, Natural Resources Minister Yurii Tretnev gave a press conference in which he noted that 23 percent of current energy-resource-development licenses are inactive. He warned that the state will initiate proceedings to revoke and redistribute those inactive licenses, saying that it is important for the country to increase efficiency in the sector. Tretnev paid particular attention to the Salym group of deposits in Khanty-Mansiisk Autonomous Okrug, which is controlled by a subsidiary of Royal Dutch/Shell. The redistribution of development licenses could become an efficient mechanism for quickly boosting Gazpromneft's share of the sector to the desired level.

On 16 September, "Vedomosti" reported that the merger of Rosneft and Gazprom might not be quite as easy as Putin's meeting with Fradkov made it seem. Lawyer and sector analyst Viktor Topadze told the daily that Gazprom could be facing a profit-tax bill of about $1 billion if it tries to transfer shares controlled by subsidiaries to the government. "When the issue of swallowing up Rosneft was discussed, no one thought seriously about the tax issues," an unnamed source told the daily. The daily also said that Rosneft creditors, including ABN AMRO bank, might be unwilling to have their debts transferred to Gazprom. Such creditors would have the right to demand immediately repayment before the merger could take place. Analysts will watch with interest how the government handles these issues in order to push the deal through quickly.

The expanded Gazprom will certainly play a major role in the Russian economy, but experts are not entirely convinced that it would be able to cope with the responsibility. Institute of Globalization head Mikhail Delyagin, who was economics adviser to former Prime Minister Mikhail Kasyanov, told Radio Mayak on 14 September that Gazprom is already an unwieldy structure whose management has aroused considerable controversy for years. He said that a political decision has been made to create "a major state-owned oil company" that "in my view will include, in addition to the shreds of Yukos, some of Slavneft's assets and perhaps some other oil assets belonging to some oligarchs."

Delyagin added that "the problem is that in the Russian state of today, there is no hope that this state company will be run efficiently." "The bringing of part of the Russian oil industry under state control could be interpreted as a sign of a return to normality," he said. "However, the low quality of management in Russia today obliterates this positive aspect."

It seems certain that the future management of Gazpromneft will have fully internalized the lessons of the Yukos affair: Political reliability is a greater indicator of future success in Putin's Russia than management efficiency.

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