Accessibility links

Breaking News

Russia: Gazprom Mounts Investment Push

While Russia's gas monopoly Gazprom is struggling to raise cash at home, it has joined in a winning bid to control Slovakia's gas network for an estimated $3 billion. The step, taken with Gazprom's European partners, appears to be a sign of the importance that Moscow attaches to securing export routes.

Boston, 5 March 2002 (RFE/RL) -- Russia's Gazprom is mounting a major investment push into Europe at a time when its ability to fund its operations at home remains subject to doubt.

On 1 March, the Russian gas monopoly and its partners from Germany and France emerged as the sole bidder for a 49 percent stake in Slovakia's state-owned gas company, Slovensky Plynarensky Priemysel (SPP).

The development surprised Slovak officials and the international press, which had predicted competition for the SPP network only a day before the tender deadline.

Although some bidders from the United States and Germany had previously pulled out, the London-based "Financial Times" had quoted Credit Suisse First Boston director Michal Susak as saying, "We still see quite a lot of competition." The financial group is advising the government of Slovakia on the sale.

In the end, there was no competition, as a bid from the French oil giant TotalFinaElf failed to materialize. The withdrawals left a clear field for the consortium composed of Gazprom, Germany's Ruhrgas, and Gaz de France. Gazprom has long-term supply contracts with the European companies.

The outcome is worth watching on several counts. The first is that the 49 percent stake will give the group control of the transit pipelines across Slovakia, which are estimated to carry 70 percent of Russia's gas exports to Europe. Russia supplies one-fourth of the continent's gas.

Control makes SPP one of the pearls in the pipeline necklace that Gazprom wants to string together from its Siberian gas fields to high-paying European customers. The purchase may be particularly precious if Poland agrees to cooperate in a plan to bypass Ukraine with a link to Slovakia. After the Soviet breakup, Ukraine inherited the vital section of the huge "Progress" export pipeline system on which Russia depends.

Kyiv and Moscow have ostensibly settled their long feud over Ukrainian transit and the country's $1.4 billion gas debt. But Gazprom has held up a bond sale to finance the debt for weeks, citing paperwork problems. The company and its partners may now be poised to control Ukraine's gas transit from both sides. Gazprom has taken over the pipelines in Belarus and Moldova, as well.

The sale may also be worth watching for the trouble it could cause to Slovakia's coalition government, which is facing elections. The plan to offer management control of SPP was designed to attract more bidders. It apparently failed, leaving the asset to fall into Gazprom's and its partners' hands. The proceeds of nearly $3 billion are intended to pay down Slovakia's debt and fund its pension system.

The Reuters news agency quoted Robert Fico, an independent deputy and member of a steering committee for the sale, as blasting the outcome, saying: "All I can say is that there was only one bid. The price is scandalous."

Sale adviser Michal Susak insisted that the bid was a fair price. But gas prices for consumers may now rise to finance the purchase and end subsidies from transit. The result could be political pressure at a sensitive time.

It is also unclear what the lack of competition will do for the European Union's demands to liberalize the gas sector in member nations, and presumably, candidates for membership. The involvement of Russian, French, and German companies can hardly be expected to enhance competition, if they are all allied.

But perhaps most interesting is Gazprom's choice to invest in Slovakia at a time when the Russian government has reined in its spending plans at home due to tariff limits and revenue concerns. So far, Gazprom has not said what share it will pay of the $3 billion bid, but the contrast with the company's belt-tightening in Russia is stark.

In January, the government ordered Gazprom to cut 16 billion rubles ($516 million) out of its 161 billion-ruble investment plan for this year. The government, which holds 38 percent of Gazprom, told it to sell non-core assets to raise more funds.

Although it controls one-quarter of the world's gas reserves, Gazprom's output has dropped steadily due to lagging investment. In December, Deputy Minister of Economic Development and Trade Andrei Sharonov said the company had approved a budget with a deficit of 92 billion rubles, or nearly $3 billion, the pro-government website reported.

On 4 March, Gazprom said the government had approved a balanced budget for the monopoly, but the spending plan appeared to rely on reduced investment, a cost-cutting program, and loans of at least $300 million from foreign banks.

The government has backtracked on planned tariff increases for this year because of rising inflation. The trouble has raised concerns about both the financial plans and production at Gazprom. A final budget is expected to be approved this month.

But the pinch has not put a crimp in the plans to take over export routes in Europe, showing the importance of the strategy to the company and the government.