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Russia: New Hope For Gazprom Reform?

Despite a change in management at Russia's Gazprom, a top official has indicated that the monopoly will continue to resist exports by independent producers. As Russia's gas output keeps falling, the government seems unable to open the country's gas sector and implement competitive reforms.

Boston, 20 February 2002 (RFE/RL) -- Hopes for reform in Russia's energy sector rose and fell quickly after Gazprom recently called for steps to open the country's gas market to competition for the first time.

Speaking during State Duma hearings on 11 February, Gazprom's deputy chief executive, Aleksandr Ryazanov, said the monopoly favors a free market that gives independent producers access to its pipeline network.

So far, Russia's privatized oil companies have been largely prevented from selling their gas through Gazprom lines, except to Gazprom-controlled petrochemical plants.

Under the proposal, Gazprom and independent producers would each put up 50 billion cubic meters of gas to be sold on the domestic market through a trading exchange.

Ryazanov said, "That way, 100 billion cubic meters could be sold at unregulated prices, and [the exchange] would give us an idea where the price should be," AP reported.

While independent producers complain about barriers to markets, Gazprom's concern is that the government keeps its domestic tariffs too low. The company, which is 38 percent state-owned, sees the exchange as a way to raise prices over time and attract investment.

Gazprom hopes the new market leads to a doubling of domestic tariffs in four to five years. But even then, rates would still be less than half those in Europe.

Ryazanov argued that some independent producers like the gas trader Itera are already selling some of their gas within Russia at unregulated prices, a privilege that Gazprom does not enjoy. He suggested that Gazprom will continue to oppose access for independent producers to the lucrative export market until it gets the same benefit of unregulated tariffs at home.

Ryazanov said, "When our conditions become equal, it will be possible to speak about gas export by independent producers," the RBC news service reported. The condition is a major catch in Gazprom's plan for reform.

Some commentators saw Gazprom's offer as little more than a ruse. The industry newsletter "Petroleum Argus" portrayed the argument as a sign that Gazprom wants to keep the independents out of the export market for good.

The newsletter quoted unnamed observers as saying, "Gazprom hopes that if prices become more favorable on the domestic market, independent producers will be less interested in the export market." The condition means the independents would only be allowed to sell domestically for a fraction of Gazprom's export revenues, although they would have the same costs.

Gazprom's refusal to open its market fully to competition comes at a time when its output has been falling steadily due to lagging investment. Although the giant monopoly owns one-quarter of the world's gas reserves, it has been unable to raise financing. Production has dropped each year since 1998, in spite of Russia's economic growth.

In 2001, Gazprom still produced eight times more gas than all other Russian petroleum companies combined. But the incentive of export opportunity could spark far greater production among the independents, which would more than make up for Gazprom's decline.

In a recent analytic note, the Moscow-based United Financial Group (UFG) said Ryazanov's statements "probably indicate that management has started to give in to pressure to liberalize the domestic gas market." UFG, which is headed by former Finance Minister Boris Fedorov, represents minority shareholders in Gazprom.

But Ryazanov's position on export access may be more remarkable for how little change it represents.

Ryazanov, who was named to his post in November, is part of the new management team at Gazprom under Chief Executive Aleksei Miller. Huge changes were expected at the monopoly in May, when President Vladimir Putin pushed out long-time Gazprom chief Rem Vyakhirev and put Miller in his place.

But Ryazanov's statements to the Duma suggest that Gazprom's new management may be just as protective of its exclusive export position as the old one was, even if that protection comes at Russia's expense. Although the faces have changed, Russia's biggest taxpayer and heir to the Soviet-era gas ministry still seems to be guarding its empire jealously.

While Russia may lose the incentive to increase gas production, there should theoretically be no question about whether competition will take place. In July, Prime Minister Mikhail Kasyanov signed a decree on gas sector reform that included open access to Gazprom pipelines and the division of the monopoly into production and distribution. That plan has since been virtually ignored.

By contrast, the privatization of Russia's oil industry, while controversial, has at last led to growth in the industry after years decline. Meanwhile, Gazprom seems determined to preserve its power, even if it cannot maintain production. Putin has not even considered privatization as a possibility.

Gazprom's ability to resist an erosion of its power raises three basic questions that seem to have no easy answers. The first is, who runs Gazprom? The second is, who runs Russia? And the third is whether Russia is more than the sum of its resources. In other words, can the government reform powerful monopolies to promote economic growth?

Despite Putin's popularity, he has been either unwilling or unable to change the structure of Gazprom. The real reason is a mystery, but the monopoly may simply be either too large or too strong.

So far, Putin and Miller have made little difference from their predecessors in altering the relations between the government and Gazprom. But there are new hopes for changes in June, when a group of Putin loyalists is expected to be appointed to the Gazprom board.

If change does not come soon after that, it will be even harder to explain.