Accessibility links

Breaking News

Russia: Dispute Over Gas Delivery Highlights Gazprom's Dilemma

This week's refusal by Russian gas monopoly Gazprom to deliver gas to customers who haven't paid highlights the contradictory pressures the company faces. Sophie Lambroschini in Moscow takes a look at how Gazprom's status as both a commercial enterprise and a partly state-owned structure means the company must often put politics before profit.

Moscow, 13 April 2000 (RFE/RL) -- Gazprom's refusal this week to deliver gas supplies to its main consumer, the electricity monopoly that controls Russia's power plants, edged Russia to the brink of an energy crisis.

The electricity monopoly, Unified Energy Systems or UES, relies on Gazprom for 40 percent of the energy for its power stations. Without those supplies, power stations across Russia would be forced to shut down or reduce output -- leaving many sectors literally sitting in the dark. UES is one of Gazprom's largest debtors.

Although critical power shortages were minimized thanks to a last-minute compromise between the two companies, the conflict did bring to the fore Gazprom's difficulties. Part of Gazprom's problems stem from being 39 percent owned by the Russian state. The gas giant has proved to be a precious -- if costly -- control lever for the government over Russia's regions and even over some former Soviet countries. The company is having trouble combining its different roles -- that of a state tool, that of an independent political actor, and that of a commercial gas producer.

Gazprom's domestic sales are a loss-making proposition. The company is obliged to supply its gas to Russia's regions for below international market prices. Worse, many domestic Gazprom customers, like Unified Energy Systems, can't pay even those reduced prices. But politically, those sales have proved effective for the government. Last year, for example, when Gazprom shut off gas supplies to Tatarstan, the move was seen as a way for Moscow to force the autonomous republic to relinquish more tax revenue to the federal center.

Carnegie Fund analyst Nikolai Petrov goes even further, calling monopolies like Gazprom life-support structures that bind Russia together. Petrov points out that these monopolies maintain a network across Russia despite the fragmentation of the internal market and low funding from Moscow.

The dependence of insolvent clients like Ukraine, Moldova, and Belarus sometimes also proves useful to Russian foreign policy. Gazprom invests in geopolitically important but costly pipeline projects. One of these is the Blue Stream pipe, which aims to link Russia with Turkey via the Black Sea and will cost an estimated $2 billion. Gazprom is also involved in a project to lay a pipeline to China -- Russia's new ally in what it calls its multipolar foreign policy.

The problem, notes Dmitry Avdeev, an oil and gas analyst with the Russian United Financial Group, is that as important as this foreign policy role may be, it does not make economic sense for the company. Gazprom's economic interests, he says, lie in reducing domestic and CIS deliveries while increasing profitable exports to the West. These could, in turn, finance production investment.

Avdeev accuses the state of solving its own problems on the back of foreign and Russian shareholders, by using Gazprom for unprofitable activities. He says that discourages further gas production.

"The state price policy on gas doesn't encourage the production of gas at all, especially production for supplying the domestic market. Because deliveries to the domestic market are direct losses for the company. That's why the heart of the problem lies in the bad regulation of the gas branch by the state."

Avdeev says this is why Gazprom has recently turned to more profitable investments elsewhere. The company acquired a 30 percent stake in NTV, Russia's leading commercial television company, and has also invested in other industries.

Nevertheless, Gazprom's less profit-oriented activities have brought the company a lot of political influence. Its political weight was symbolized by Viktor Chernomyrdin, the sector's former boss, who was Russia's prime minister for five years and remains influential in parliament. Gazprom also helped finance former president Boris Yeltsin's 1996 campaign.

And despite the state's 39 percent share in the company, Gazprom is far from being an obedient tool of the government. Several governments failed to force Gazprom to pay all of its tax arrears. And Gazprom head Rem Vyakhirev could afford to support the Kremlin's number one opponent, Moscow Mayor Yuri Luzhkov, ahead of parliamentary elections last year, outplaying the Kremlin's efforts to oust him from his post last fall.

Now, Gazprom's leadership seems to be seeking some commercial-oriented reforms. In a search for cash, the company announced in February plans to increase foreign owners' stake in Gazprom to 20 percent -- the maximum allowed under Russian law.

The IMF has recommended that the difficult-to-manage gas giant be divided into several entities and shed its unprofitable activities. But President-elect Vladimir Putin has said he is against breaking up the country's monopolies. Avdeev explains why.

"The company's situation is too tense right now, and there are other problems facing it. So deregulation, demonopolization of the market will be possible only with a more stable political state of affairs."

But, as analysts note, as long as Russia's monopolies remain inefficient giants required to fill unprofitable government orders, new crises are bound to follow.