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Russia: Government Again Delays Gazprom Reforms

Russia has reportedly put off discussion of reforming its gas monopoly Gazprom until the end of the year, marking the latest of many delays. President Vladimir Putin is also said to be seeking to replace the company's board, although there are signs that he already exercises effective control.

Boston, 5 February 2002 (RFE/RL) -- With little public notice, the Russian government has delayed a reform plan at gas monopoly Gazprom for the rest of 2002 while extending a huge gas subsidy to neighboring Belarus.

The Prime-TASS news agency recently reported that the government's work plan calls for considering the reform of Russia's gas industry in December, more than a year after the last scheduled date.

Prime-TASS said: "The decision means a further delay in restructuring the gas sector, which was originally planned to be discussed in November 2001."

Actually, the delay in restructuring the world's biggest gas company has lasted much longer, as a review of past headlines on the initiative shows. In fact, both the plans to reform Gazprom and the postponements have been hallmarks of President Putin since he took office nearly two years ago.

In June 2000, Economic Development and Trade Minister German Gref first outlined Putin's plan to create competition for Russia's "natural monopolies," including Gazprom, the Unified Energy Systems, and the Railways Ministry.

The news was hailed because of years of suspected asset-stripping at Gazprom, while investment and production have declined. Although the giant company controls one-fourth of the world's gas reserves, it is valued at only a fraction of Western oil companies' worth because of doubts about its assets and financial controls.

The plan for a three-stage reform included a division of Gazprom into production and distribution entities. But resistance was so stiff that the government dropped the breakup idea when it unveiled its second restructuring program in December 2000.

In explaining the decision, Gref said at the time, "Radical measures are not required for the reform of Gazprom as they are for other natural monopolies like Unified Energy Systems and the Railways Ministry," the business newspaper "Vedomosti" reported.

The new plan still generated enthusiasm because it called for reorganizing Gazprom and spurring competition, in part by allowing independent oil producers to gain access to its export pipelines.

Six months later, reform hopes were raised again when Putin replaced Gazprom's longtime chief executive, Rem Vyakhirev, with Deputy Energy Minister Aleksei Miller. Although the government owns 38 percent of Gazprom, it took Putin over a year to gain majority control of its board.

But even with that control, the government has repeatedly stalled consideration of its own plans. Last June, Prime Minister Mikhail Kasyanov issued conflicting comments on postponing deliberations either until last fall or the first half of 2002. In one evasive statement quoted by the Reuters news agency in June, Kasyanov said, "I cannot confirm today that we shall discuss restructuring the gas sector in the autumn." Kasyanov added, "We shall analyze the problem [then]."

In the meantime, Gazprom's performance and that of the entire industry has continued to slide. In 2001, Gazprom's production fell for the third year in a row, but its share of Russia's gas output rose from 93 percent to nearly 98 percent as it blocked other companies from using its export pipelines.

The question for the government is how much control it really needs at Gazprom before it feels ready to act on its own reform plans. The "Petroleum Argus" newsletter recently reported that the government has assembled a list of candidates in an effort to replace the entire 11-member board of the company in June.

But on one level, the question of power at Gazprom has never seemed to be in doubt. Although its vast assets have been routinely diverted, it has responded to the government's political dictates, much as it did over a decade ago, when it functioned as the Soviet gas ministry.

In a stunning example of the government's control, Belarus Prime Minister Henadz Navitski announced recently on state television that Kasyanov has agreed to sell gas to his country at Russian domestic rates. The deal will reduce Belarus' cost of gas by about one-third, according to the "Kommersant-Daily" and RBC news. Tariffs for Belarus were already one-third of those in Poland next door.

Although Gazprom confirmed the report, the concession appeared to come from the Russian government as part of its union plan with Belarus. Gazprom seems to have little choice but to bear the cost. Since Gazprom has already agreed to supply Belarus with 16.5 billion cubic meters of gas in 2002, the country stands to save over $160 million, even though it already owes $200 million to Gazprom.

The episode raises unanswerable questions about what Putin is trying to achieve. It would appear that he already has enough power to make the monopoly do what he wants.

While much has been made of the resistance from Gazprom's old guard, it is the government that has controlled the pace of reform by failing even to consider its own plans. Once the old guard is gone, it may be even harder to explain why the government has failed to act.