Gazprom and Rosneft: Putin's Balancing Act

Mikhail Krutikhin: Inevitable reforms

Russian and international media often assert that Vladimir Putin is doing his best to preserve a balance between warring factions of people who surround him. The relations of Gazprom and Rosneft are quoted as an example of this balancing act.

Indeed, it might seem that the president is keeping away from each other two centers of influence in the gas industry: one is Gazprom, and the other one a temporary alliance of Rosneft boss Igor Sechin with the principal owners of Novatek, Gennady Timchenko and Leonid Mikhelson. The opponents of the gas monopoly are trying to get access to export markets, starting with LNG, and in a longer term, to establish independence of the national gas transportation network from Gazprom. So far, they have only been successful in obtaining Putin’s somewhat foggy promise to consider liberalization of LNG exports where it does not hurt Gazprom’s marketing plans.

The ‘balance’ pattern is wrong. Putin himself is the sole decision maker for Gazprom. In many senses he is Gazprom. This mammoth is not a commercial company at all. No commercial company would spend billions of dollars on politicized megaprojects with no hope for payback. No business entity would destroy its largest market abroad, as Gazprom does in Ukraine, by politicking.

The opposite party does pursue the goals described above, but would not dream about really challenging Gazprom while Putin is its top manager. They are courting the president softly and gently hoping to make him aware of the monster’s commercial inefficiency and the failure of the company as a political tool.  

Will they succeed? The poor shape of Gazprom may enhance their chances. The effect of engaging in politicized megaprojects is disastrous. The volume of natural gas export is not growing, and Putin’s attempt to save the company from losing money by higher domestic tariffs can backfire in social instability. After long years of disregarding LNG, Gazprom sees market windows for this commodity closing down before a new LNG train can be built in the Far East. The capitalization of Gazprom, earlier proclaimed to be able to reach $1 trillion, is today less than $100 billion, and the price of its shares keeps shrinking. Easy-to-recover gas reserves the company inherited from the Soviet era are ageing quickly, and production costs are rising. In addition, Gazprom has to finance such prestigious projects as the 2014 Olympic Games and luxurious vagaries of its management.

The Rosneft-Novatek alliance wants to erode the dominance of Gazprom and to promote their gas business. However, every player in this game, including Putin, understands that it is impossible to start with small changes. Any partial limitation of Gazprom’s role will immediately cause a chain reaction, which will lead to the financial collapse of the giant. It has to be a comprehensive reform of the whole gas industry in Russia along market economy rules.

The country will have to do it someday, but the timeframe is far from obvious

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.