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Russia: Gazprom Leaves Doubts On Further Reforms

Russian reformers have hailed a move by the gas monopoly Gazprom to buy back shares in a subsidiary that it sold for a pittance in 1999. But other deals involving Gazprom and its trading partner Itera in the past week may raise more questions about the commitment to change.

Boston, 19 December 2001 (RFE/RL) -- Russia's gas monopoly Gazprom took a small reform step this week to recover resources that it lost two years ago, but it left doubts about how much further it will go to clean up its business practices.

On 17 December, Gazprom's board voted to buy back a 32 percent stake in Purgaz, an arctic subsidiary that it sold to its trading partner Itera for next to nothing in 1999. The repurchase will cost Gazprom 5.7 billion rubles ($188 million), due almost entirely to the assumption of the company's debt, "The Moscow Times" said.

The move came as a mild surprise because the board meeting was only called to discuss matters such as investment plans for next year. But under terms of its 1999 agreement with Itera, Gazprom had only until January to exercise its option on the Purgaz shares.

The matter was unlikely to pass unnoticed between now and the end of the year. The 1999 sale of the shares to Itera for 32,000 rubles, or about $1,300, was a major issue in an audit conducted earlier this year by PricewaterhouseCoopers, Gazprom's Western accounting firm.

Ultimately, Gazprom is responsible to the Russian government, which owns 38 percent of the company and controls a majority of its board.

The latest shift of the Purgaz shares may address only a small part of the questions about Gazprom, but they still represent a major asset. Purgaz controls the Gubkinskoye gas field in the Yamal-Nenetsk Autonomous District, where Itera produced 14 billion cubic meters of gas last year, the Interfax news agency said.

To put the volume in perspective, the amount is equal to all the gas consumed last year by Turkey, a major market for Gazprom. With the repurchase, Gazprom will again hold the majority of Purgaz, while Itera will retain 49 percent.

The buyback was seen as a test for Gazprom's reform plans and was hailed by the former finance minister, Boris Fedorov, who represents minority shareholders on the board.

Fedorov said, "We were given one small Christmas gift from Gazprom with this Purgaz solution." He added, "At least something is happening, and we should keep our optimism despite the discussions about weakness of the management."

The comment reflects disappointment with the small measures taken since last May, when President Vladimir Putin installed Deputy Energy Minister Alexei Miller as the chief executive of Gazprom, replacing longtime head Rem Vyakhirev. Since then, Miller has changed some of the company's top officials, but little else.

Despite reforms announced months ago by Putin, foreign investors continue to grumble about the notorious "ring-fence" that keeps them from trading on the Russian market and getting more value for their separate class of shares.

Aside from that narrow interest, Gazprom has also been stalling on a government promise to open its pipelines to Russia's independent oil producers. The step could allow them to export their neglected gas resources at a time when Gazprom production is flat.

But instead, Gazprom is only willing to let them sell on the domestic market, where prices are a small fraction of those in Europe. So far, the policy has been the same under Miller as under Vyakhirev.

The Purgaz maneuver could actually help to take Gazprom management off the hook by relieving the pressure for action on its mysterious dealings with Itera, a private company with offices in Florida.

Nine years since Itera started handling Gazprom's trade with CIS countries, there has still been no satisfactory explanation of why Gazprom deals through an intermediary in the "near abroad" while operating its own export arm for foreign countries next door.

The arrangement has opened the door for profits at Itera that could otherwise be retained by Gazprom and its biggest shareholder, the Russian state. One possible example this month involves dealings with Georgia and Turkmenistan.

On 10 December, Russia and Turkmenistan signed a 10-year agreement for cooperation in the gas sector to boost production and exports. The Russian side was represented by Gazprom. But within days, it became apparent that Gazprom would be represented by Itera instead.

On 13 December, Itera signed a framework agreement for development of resources in Turkmenistan and agreed to buy 10 billion cubic meters of Turkmen gas next year for CIS distribution. The price was $43 per thousand cubic meters, an increase of $3 over the rate for this year.

On 17 December, Itera announced that it would raise its gas price for sales to Georgia on January $1 to $60 per thousand cubic meters, an increase of $4 over the rate this year. In other words, Itera will make an immediate $1 profit per thousand cubic meters on the increase in Turkmen gas costs, on top of its profit for handling the gas.

For all the talk of reform at Gazprom, it is still unclear why the company continues to give away such a profit opportunity in markets that it essentially controls. At the same time, it keeps independent oil producers from using its pipelines for gas exports.

In that light, the decision on Purgaz may look less like a step toward reform and more like another sidestep on the reform agenda at Gazprom.