Gazprom, a Russian giant

Gazprom may be the biggest company you've never heard of. Gazprom is the world's largest producer of natural gas. And it is controlled by the Russian government. According to this page:

Gazprom is also Russia’s largest earner of hard currency, and the company’s tax payments account for around 25% of federal tax revenues.

Russia has, by far, the largest known reserves of natural gas. (This table is from Infoplease.)

Greatest Natural Gas Reserves by Country, 2005

Rank	Country	Proved reserves (trillion cu ft)
1.	Russia	1,680.0
2.	Iran	940.0
3.	Qatar	910.0
4.	Saudi Arabia	235.0
5.	United Arab Emirates	212.1
6.	United States	189.0
7.	Nigeria	176.0
8.	Algeria	160.5
9.	Venezuela	151.0
10.	Iraq	110.0

Source:Oil & Gas Journal, Vol. 102, No. 47 (Dec. 10, 2004). From: U.S. Energy Information Administration. http://www.eia.doe.gov/emeu/international/petroleu.html .

At the end of June 2005, Gazprom and the Russian government reached an agreement whereby the state would secure a 50% plus one share stake in Gazprom. The stake was to be acquired through Rosneft, a Russian gas company 100% controlled by the Russian government.

However, a merger between Gazprom and Rosneft ultimately fell apart for complicated reasons. The deal was completed by other means.

This deal was part of the larger power struggle in the Kremlin between Putin and Russia's powerful oligarch's. As I'll touch on in a moment, Putin is deliberately trying to nationalize Russia's oil and gas industry in order to use Russia's natural resources as a tool of foreign policy. There are wealthy oligarchs, however, who would like to use their wealth to influence Russian politics.

Part of the Rosneft story involves Yukos, the oil company whose CEO Mikhail Khodorkovsky was arrested in October 2003. This arrest was a bold move by Putin to send a warning to those who would oppose Putin's policies. Khodorkovsky had ideas on things like how foreign investment in Russia's oil and gas industries should be handled, and he sought to influence the Russian Duma, even to the point of limiting the power of the Russian presidency. The arrest of Khodorkovsky would further Putin's goal of increasing the state control Russia's oil and gas industry and creating a compliant Duma that would work with Putin.

(For a very informative look at Russian oil politics, see the paper entitled Vladimir Putin And The Geopolitics Of Oil by Dr. Martha Brill Olcott, available here in PDF).

Olcott's paper reveals that in the 1990s Putin wrote a dissertion at St. Petersburg's State Mining Institute entitled "Mineral Raw Materials in the Strategy for Development of the Russian Economy". Even back then, Putin was laying out the strategy he is following today for making the state the dominant controller of the national enery resources. Putin believes this is the most effective way to improve Russia's standard of living in a fairly short period of time.

Putin also believes foreign investment is necessary, but always in a way that leaves the state in control. This was a goal of achieving state control of Gazprom, and just last Friday, the Duma passed a law increasing the amount of foreign investment allowed in Gazprom. From Forbes:

Russia's State Duma, the lower chamber, gave a final nod Friday to amendments allowing direct foreign ownership of shares in Gazprom. The change will relax restrictions on how much of the globe's largest natural gas producer can be owned by foreigners, and should herald billions of dollars being plowed into the energy behemoth from outside Russia.

If you doubt Putin's desire to control Gazprom, look at who is running Gazprom. Both the CEO of Gazprom and the chairman of Gazprom's Board of Director's are part of Putin's "St. Petersburg clan".

The CEO of Gazprom is Alexey Miller. Miller is Putin's man. They both worked for the Mayor of St. Petersburg. Putin was the chairman of the committee for external relations from 1994-1996, and Miller worked on that committee from 1991 to 1996. Miller was made CEO in 2001 in a move seen as a bid to bring in a loyalist.

The Chairman of Gazprom's board is Dmitry Medvedev. He, too, once worked in that committee for external relations. In October 2003 he became Putin's chief of staff, and just last month he was named First Deputy Prime Minister. Medvedev may be a candidate to replace Putin as president in 2008.

Having nationalized Gazprom, with loyalists running Gazprom, and with Gazprom now open to more foreign investment dollars, Putin is in a position to increase Russia's ability to influence its neighbors by virtue of the gas it supplies to them. As I mentioned before, the ability to cut off gas to a nation, or to make them pay more for their gas, tends to get a country's attention.

I've written about the pipeline from Russia to Germany which is now being constructed. I've written about Russia's gas deals with Ukraine, Georgia and Europe. Just to name a few more, last month Russia inaugurated a gas pipeline to Turkey. From PINR:

On November 17, the Blue Stream gas pipeline between Turkey and Russia was officially inaugurated. Its construction, undertaken by Russia, Turkey and Italy -- involving a joint venture between Russia's gas giant Gazprom and Italy's energy major ENI -- began in 1997. At that time, it was sharply criticized as technically flawed (it runs at a record depth of 2,150 meters below the sea) and politically inopportune (since it was said to increase dangerously Turkey's dependence on Russia's gas supply).

Blue Stream's implementation confirms that Russia is using its vast oil and gas reserves as a geopolitical wildcard. For instance, on Blue Stream's inauguration day, Russian President Vladimir Putin already proposed the construction of new Russian-Turkish oil and gas pipelines.

Stratfor had this on a deal just last month between Gazprom and Kazakhstan's biggest natural gas company, KazMunaiGas:

Similarly, both men's fingerprints -- but particularly Medvedev's -- are all over the Gazprom-KazMunaiGas accord. All natural gas produced in the former Soviet Union comes from Gazprom, Kazakhstan, Uzbekistan or Turkmenistan, with any natural gas originating in a country ending in "stan" having to transit through Kazakhstan and Russia on its way to any market. The KazMunaiGas deal means that Gazprom -- and by extension, the Kremlin -- now owns all of that gas. Any state wanting to use Central Asian gas in order to get energy independence from Russia is now out of luck.

This paper (PDF) discusses how Russia is using its natural gas supply to influence Belarus. An excerpt:

It would be erroneous to suggest that Russian–Belarusian gas relations have been governed entirely by politics, or politics by gas. Crippling the economy of Belarus clearly would not be in the interests of Russia, whose own economy is so tightly intertwined with the rest of the CIS.

Nonetheless, the preceding analysis suggests that the Russian government has been prepared to use the gas weapon as necessary, particularly in realizing security and military goals. Natural gas has helped it to receive military concessions and political loyalty at a time when most CIS states were engaged in asserting their independence. It is also a vehicle for integration on Russian terms.

(See this paper (PDF) for a few more details on other countries such as India, China and Japan. I may take another post to discuss Russia's gas deals with East Asia.)

Russia is pursuing a deliberate strategy to use its natural resources as tools of foreign policy. Putin has manipulated Russian politics to implement his vision of state-run energy industries. His suppression of national media and of rivals like Yukos' Mikhail Khodorkovsky show how determined he is. It still remains to be seen what exactly Putin will do when he reaches the end of his term. The Constitution prevents him from running a third time, but he has said "I will not allow any destabilization in Russia, in the interests of the ... peoples of the Russian Federation".

Countries all around Russia are becoming increasingly tied to Russian oil and gas. The implications for international relations could be significant.

Previous posts

Russia's gas weapon
Georgian-Russian relations continue to deteriorate
Update on the Russian-German pipeline
More on Russia's gas