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Russia: Splitting Gazprom Offers Partial Reform

A plan to break Russia's Gazprom into separate pipeline and production divisions has been hailed as a step toward reining in monopolies. But it remains to be seen whether the reorganization will also lead to reform. Our correspondent Michael Lelyveld reports.

Boston, 17 July 2001 (RFE/RL) -- Russia's government has promised to divide the giant natural gas monopoly Gazprom, but it is unclear that the move will bring about meaningful reform.

Speaking last week, Prime Minister Mikhail Kasyanov said the company would be split into separate production and transportation divisions. The idea is supposed to be a model for restructuring Russia's monopolies.

Kasyanov told the Reuters news agency, "Once we have full information and conduct an analysis, we can come up with a draft restructuring plan, and we shall use the same approach as for other monopolies, that is, to divide transportation from production."

"The target is to make it more transparent and effective, and to create proper access to any producer of associated gas to the gas transportation system," Kasyanov said.

In theory, the approach would address one of Russia's major problems. Gas is the country's second-largest source of hard currency, exceeded only by oil. Gazprom owns Russia's export pipelines to Europe, making it the country's biggest taxpayer. Gazprom, in turn, is 38 percent state-owned.

But production has been dropping because Gazprom's gas fields in Siberia are old, and because Russia's independent oil companies have no incentive to produce gas since they have no access to the lines for export.

Gazprom has grudgingly agreed, only recently, to open up its pipeline network to the independent companies. But it still wants to force them to supply only the domestic market, where prices are kept low.

Russia needs more gas than Gazprom can provide to keep its exports growing. Despite Gazprom's objections, the European Union has also issued a directive calling on its members to diversify their supplies.

Splitting off Gazprom's pipelines into a separate entity sounds like it could be a solution. But there seem to be many reasons to doubt that it will lead to reform.

First, the measure falls far short of a breakup of Gazprom, and it does nothing to ensure the efficient use of assets in its many activities.

If the government splits production from transportation, what will happen to Gazprom's unrelated holdings outside its core business, such as its bank, its media arm, and its helicopter company? Will the production unit retain Gazprom's foreign businesses in the near abroad and Eastern Europe? If so, will it continue to act as a virtual agent of the government? So far, the plan has provided no answers.

Secondly, it is unclear how the government will keep the transportation unit from becoming another monopoly. Russia's oil pipelines are already controlled by the monopoly Transneft, which has proved resistant to change.

Creating the equivalent of a Transneft for gas can hardly be seen as a step toward reform. The question is whether the government is ready to allow competition in transit and exports. So far, it is only talking about greater access to a system that it ultimately controls.

Kasyanov's statement about "access to any producer of associated gas" suggests that the system will only be open to companies that find gas as a by-product of oil development. It is not clear that companies will also be encouraged to pursue gas projects that would compete with Gazprom.

Thirdly, Kasyanov's announcement seems to raise issues of process and corporate governance. The plan to divide Gazprom was simply issued by the government. It does not appear to have followed a decision by Gazprom's directors, a court order, or a legislative act.

Although the government recently gained majority control of the company's board, it has never lacked power over Gazprom. In May, the Kremlin installed Deputy Energy Minister Alexei Miller as the new chief executive at the company by a unanimous board vote, even though it then held only a minority of the seats.

Form might have required an announcement of the reorganization plan by Gazprom. But the government seems instead to have ordered the split, as if Gazprom were still the government ministry that it was in Soviet times.

While the plan may be well-intended, it may give little confidence that reforms will go far enough, particularly following last week's finding by the State Duma's Audit Chamber that there has been no asset stripping at Gazprom involving the gas trader Itera. The report has failed to end suspicions of illicit links.

As a first step, the government's plan may help to promote gas production, but it seems to be only a partial cure for the problems of Gazprom.