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Russia: Trade And Economic Development Minister Pledges To Reform Gas Sector

Russian Trade and Economic Development Minister German Gref says the government intends to reform the natural-gas sector this year, despite complaints about foot-dragging at Gazprom. The surprise statement comes after the firing of top managers and an ambitious new plan for greater economic growth.

Boston, 25 February 2003 (RFE/RL) -- Just when the Russian government was expected to shun risks in the run-up to national elections, it seems to have decided that it will tackle the task of restructuring the Gazprom gas monopoly, after all.

On 20 February, Trade and Economic Development Minister German Gref announced that the government "will reform the country's gas sector this year," the official RIA-Novosti news agency reported. Gref said the move is the result of "an agreement previously reached with the Gazprom concern."

Gref's surprise declaration came less than a week after Energy Minister Igor Yusufov complained openly that Gazprom's management "actively hinders" the government's plans to open up the gas sector. Most reports had pronounced the liberalization plan dead after President Vladimir Putin assured Gazprom managers at the company's 10th anniversary party that the government "does not support splitting up" the mighty monopoly.

But that was four days before Putin loyalist and Gazprom chief executive Aleksei Miller fired three top managers who were said to be resisting change at the firm. Putin and Miller then installed Sergei Ushakov of the Federal Protection Service as acting deputy chairman for administration. The moves made it appear that Putin had lulled the officials into a false sense of security in the previous week before snapping the trap shut. Gazprom is at least 38 percent state-owned.

Gref said his plan would follow the proposals that have been developed and delayed repeatedly over the past three years, calling for "dividing the gas branch into transportation, extraction, and distribution sections," according to RIA-Novosti. The outline roughly mirrors the restructuring of the Unified Energy Systems (EES) electricity monopoly that passed the State Duma in the second and third readings last week.

As with all earlier attempts, the Gazprom reform plan could be dragged down once again, drowning hopes of investors and independent oil companies, which have long sought markets for their associated gas. But there are several reasons to think that Gref may not have raised false hopes with this latest announcement. Despite the election, the government seems to have launched a series of radical initiatives that all touch on changes in the vital but change-averse gas sector in some way.

The first is the EES restructuring, which may have little chance of success without companion changes in the gas sector, since two-thirds of Russia's power is generated from gas.

The second is the government's plan to diversify and reorient the economy toward industries with higher added value like manufacturing. The strategy would de-emphasize reliance on oil and raw-material exports.

Last week, Gref and Prime Minister Mikhail Kasyanov sketched plans to raise Russia's gross domestic product growth from the 4 percent range last year to between 7-8 percent by 2007-08. Under a new draft program for social and economic development, Russia would commit to reaching and sustaining growth rates similar to those of China as necessary for advancement. Kasyanov warned that further dependence on oil exports could mean far slower growth if prices fall.

Kasyanov said: "We are doomed to such rates of economic growth with the current structure of the economy. It is impossible to solve global objectives with such growth rates," Interfax reported.

The plan means lowering taxes on value-added sectors and raising them on energy exports to pay for it, a proposal unlikely to sit well with oil producers before an election. One way to mollify them would be to open up the gas sector by restructuring Gazprom, meeting two goals at the same time.

Even without diversification, Gazprom's own forecasts offer little hope for more gas production from the heavily indebted monopoly unless independent producers get incentives and access to Gazprom pipelines.

A third reason for overhauling Gazprom emerged in Moscow over the weekend with the declaration by the presidents of Russia, Ukraine, Belarus, and Kazakhstan on creating an agreement for a "common economic space" by September. Although similar proposals made little headway in the 1990s, this one may enjoy more credibility, given the new strength of Russia's ruble and its relative economic health.

Although the extent of the proposed integration remains vague, a "high-ranking" Kremlin source told RIA-Novosti, "The agreement to harmonize legislation, carry out a common tariff policy and joint regulation in the natural-monopolies sphere is of special importance."

The proposed space would marry two energy exporters, Russia and Kazakhstan, with two heavily dependent importers, Belarus and Ukraine. An unreconstructed Gazprom might be seen as less of an asset to Russia's partners in such a union and more of a threat. Whatever the outcome, the Russian government may be showing that it is more willing to take bigger risks to achieve bigger goals.