Russia's Gazprom Struggles Against the Current

Gazprom profits are an important foundation of Putin's system of government. But Gazprom is confronting difficult challenges -- both outside of Russia and inside of Russia itself. No one knows how long the company can continue playing its current role of propping up the Putin regime, which is facing significant opposition on many fronts.

Russian President Vladimir Putin, who faces the biggest protests of his 12-year rule, could lose power overnight if the oil price sinks and he fails to reduce corruption... "The regime may fall apart overnight, and in a way that we don't know. It may be in a peaceful way, it may be in a bloody way," _India Times

[Gazprom] is large and sprawling and, with a seemingly eternal income stream, had no need to be innovative or especially adept at what it did. ... Unlike oil, natural gas until recently was difficult to ship except in pipelines; this gave Gazprom a guaranteed, if partial, monopoly as a gas supplier to Europe.

...But that era is passing. Gazprom executives have been very slow to recognize the competition. ... The advent of shale gas in the United States has increased supplies and driven down spot prices worldwide, and Europe can now buy liquefied natural gas from the Middle East at a relatively attractive price. It is also exploring its own shale-gas potential. Customers have been renegotiating contracts, as the Russian giant comes under more pressure.

At the same time, though, Putin is shaking up the gas business at home. A beneficiary has been a domestic competitor called Nova­tek, which recently snapped up a Gazprom subsidiary known as Sibur for way under market value. Novatek may, reportedly, get permission to start exporting gas, as well, breaking Gazprom’s monopoly.

“The favoritism toward Nova­tek is pretty striking,” Gaddy said. The company is half owned by Gennady Tymchenko — a former judo instructor who knew Putin when they belonged to the same martial arts club in St. Petersburg. He also runs a Swiss company called Gunvor that has become extremely profitable as a middleman in exports of Russian oil. His partner is Leonid Mikhelson, who rose to second-richest man in Russia on the Bloomberg billionaire index thanks to the Sibur deal — the index valuing Sibur at its actual value, not what Novatek paid for it.

The government has also announced that it is reversing its policy and once more placing its own people on the Gazprom board. That is unlikely to substantially change the way the board — already a rubber stamp — runs its business. It is probably a sign of “a fight under the rug” between Prime Minister Dmitry Medvedev and Igor Sechin, a close associate of Putin and head of the Rosneft oil company, Krutikhin said.

One thing remains unchanged, no matter who wins that inside struggle, Milov said: “Putin is the central figure who makes the major decisions.”

Is he preparing for Gazprom’s decline? “I would hope they’re thinking about that,” said Greene, at the New Economic School. But it’s difficult to imagine, he said, how you could remove Gazprom from the political and economic system in Russia and still have the system. _WaPo

Russia itself is a nation in slow motion decline. Its best young people choose to emigrate to the west. Capital flight continues to plague efforts to create an economy separate from energy, mining, and logging. The public health situation is horrendous, and the core ethnic population is slowly being replaced by Muslim immigrants -- both in civilian and military populations. And in the far East, Chinese influence continues to expand rapidly.

Russia's leaders and ruling classes have never been known for thinking on their feet, or being able to quickly adjust to changing circumstances. The next 2 decades are likely to be a time when they may wish to increase their flexibility more than just a bit.