Daily Archives: July 11, 2007

July 11, 2007 — Contents

WEDNESDAY JULY 11 CONTENTS


(1) Norilsk Nickel: The End of Private Property in Russia

(2) Gazprom and the Investment Illusion

(3) Gazprom and Toxic Pollution

NOTE: Today we feature posts about Russian business, its inherently corrupt nature and the increasing level of nationalization that underlies it. As Robert Amsterdam notes, this even extends to a move by Gazprom to take over the Russian version of YouTube. In neo-Soviet Russia, the government uses business as a smokescreen to do exactly what the Soviet government did openly. The failure that results from this secrecy will be even more spectacular.

NOTE: Check out LR’s latest installment on Publius Pundit, where she exposes Russia’s rank, neo-Soviet hypocrisy after receiving the Sochi games.

The End of Private Property in Neo-Soviet Russia


The International Herald Tribune reports on the disappearance of the concept of private property in today’s Russia, just as in Soviet times, as puppetmaster Putin pulls the strings:

Last January, Mikhail Prokhorov, a 42-year-old Russian mining entrepreneur and a multibillionaire, celebrated the holidays in singular style: with dozens of business associates and an entourage of young Russian women at the exclusive ski resort of Courchevel in the French Alps. Prokhorov – often called Russia’s most eligible bachelor – usually unwound at such blowout parties, which he once told an interviewer embody his philosophy of life. In Courchevel, the French police detained him for four days on suspicion of making prostitutes available to his guests. The police released Prokhorov without filing any charges, but they identified him as a witness in their prostitution investigation.

In one of the more bizarre cases of an apparently forced sale of Russian assets, Prokhorov’s festivities in Courchevel led to his agreement to sell his 26 percent stake in Norilsk Nickel, the world’s largest nickel producer. The buyer was Vladimir Potanin, his longtime business partner and a favorite of the Kremlin. Prokhorov and Potanin bought a controlling stake in Norilsk, named for the Siberian city where it is located, for a scant $250 million during the hotly contested privatization of state-owned companies in the mid-1990s.

Today, Norilsk produces one-fifth of the world’s nickel, a key alloy in stainless steel, and has a market capitalization of $31.9 billion; its profits doubled last year, to $6 billion, buoyed by high demand for steel in China. Awash in cash, Norilsk in late June closed a deal to buy the Canadian mining company LionOre for $6.4 billion and already owns a controlling interest in Clearwater Mining in Montana.

In an interview on state television, Potanin said he ended his partnership with Prokhorov, who Forbes magazine estimates has a net worth of $13.5 billion, because of the embarrassing arrest. They have yet to complete the deal, but the partners said they would unwind their businesses before the end of the year, leaving Potanin in control of Norilsk. And who, ask some analysts in Moscow, controls Potanin?

“In Russia today, no serious deal can be made without approval from the Kremlin,” said Irina Yasina, a researcher at the Institute for the Economy in Transition, a research group led by a former prime minister, Yegor Gaidar. “A person like Potanin, without the agreement of the Kremlin, can do nothing.”

Under President Vladimir Putin, the Russian government is establishing vast state-owned holding companies in automobile and aircraft manufacturing, shipbuilding, nuclear power, diamonds, titanium and other industries. His economic model is sometimes compared with the state-owned “national champion” industries in France under Charles de Gaulle in the 1950s. The policy of forcing owners of strategic assets to sell their holdings has also been compared to recent nationalizations in Venezuela and other Latin American nations. Rather than expropriating assets outright, the government of Putin has exploited minor legal infractions at the target companies to force sales. Either government-controlled companies, or companies run by men seen as loyal to the Kremlin, are the beneficiaries.

In 2003, for example, prosecutors went after Mikhail Khodorkovsky, chairman of Yukos Oil, then Russia’s largest private company, on accusations of tax evasion. Khodorkovsky was sent to a Siberian prison, and Yukos went bankrupt. The state company Rosneft later acquired most of the Yukos assets. Last fall, it was environmental infractions in pipeline construction that forced Royal Dutch Shell and Japanese partners to sell a controlling stake in their $22 billion Sakhalin II oil and gas development to Gazprom, the state gas monopoly.

Then, this June, BP’s local joint venture, TNK-BP, sold its share of a huge gas development after regulators threatened to revoke the license because the field was developed too slowly, which was a technical violation of the terms of TNK-BP’s license. Gazprom, again, was the beneficiary.

Coincidentally, Prokhorov and Potanin own a minority stake in that same BP gas field. Their 26 percent stake was not touched, perhaps because of Potanin’s close ties to Putin. But in the case of Norilsk, Prokhorov’s arrest, analysts say, seems to have been a fortuitous accident that gave the Kremlin cover for exerting more control over this strategic metals company. Prokhorov and Potanin both declined to be interviewed. But the end of their partnership is yet another milestone in how the Kremlin and a class of ambitious, enormously wealthy Russian businessmen known as oligarchs do business together.

“Property rights are very conditional in Russia, to this day,” said Olga Kryshtanovskaya, a sociologist at the Institute of Sociology of the Russian Academy of Sciences who studies Russia’s business and political elite. The government lets big industrialists “exist only under conditions it considers acceptable,” she said, adding: “When the Kremlin considers a capitalist such as Prokhorov no longer acceptable, he is deprived of his property, by one means or another. Private business exists only by the grace of the state.”

Both Prokhorov and his Norilsk co-owner, Potanin, grew up in well-connected Moscow families. The Prokhorovs were academics – his father directed a laboratory, his mother was dean of a university chemistry faculty – and as a young man he followed their footsteps into one of the Soviet Union’s most prestigious colleges, the Moscow Financial Institute. He graduated in 1989 with a degree in finance. Characteristically for the Russian oligarchs, Prokhorov became wealthy in his 20s, after passing through a phase of selling jeans in Moscow in the late 1980s. In 1993, he parlayed jobs at state banks into the chairmanship of the board, at 28, of a new private bank, Unexim Bank – which went on to buy Norilsk Nickel three years later during the government of Boris Yeltsin. It was at Unexim Bank that Prokhorov met Potanin, who was one of the bank’s directors. Potanin, a one-time deputy prime minister and the son of a former Soviet foreign trade official, has a reputation as an upstanding family man and a sponsor of the Russian Olympic team. He handled the pair’s relations with the Kremlin – and was often vilified by critics who said he used his political connections to buy Norilsk for a fraction of the value.

However fortuitous their rise as industrial titans, the two men did convert an inefficient Soviet behemoth into a modern corporation. After gaining control of Norilsk Nickel, they spun off noncore assets and streamlined one of the mining industry’s most complex logistics operations. Analysts credit Prokhorov with spinning off the company’s gold assets to form Polyus Gold, now the largest Russian gold producer. It trades on the London Stock Exchange and has a market capitalization of about $8.5 billion. “Norilsk management has actually done quite a good job,” says Michael Kavanagh, a senior metals analyst at UralSib in Moscow. Norilsk stock routinely outperforms the world’s largest mining companies: BHP Billiton, Rio Tinto and Anglo American. Prokhorov took a hands-on role in Norilsk. At the copper factory, one of three smelters in town, the work force was reduced to about 2,250 by moving about 1,950 employees into contract jobs, a move that angered many people in the city. Prokhorov also invested $100 million in pollution controls at the copper factory.

Back in Moscow, Potanin proved his loyalty to Putin. In 2004, at a crucial juncture in modern Russian political history, Potanin aided the Kremlin’s campaign to restrict freedom of speech by firing the editor of Izvestia, a newspaper that he controlled, after it published accurate accounts of the Beslan school hostage crisis. Potanin subsequently sold Izvestia to Gazprom, the state gas company. Last summer, government officials approached Prokhorov and Potanin to discuss a possible sale of Norilsk to the government, said a metals industry adviser who has close ties to the government and requested anonymity because he had not been authorized to discuss the partners’ business with the media.

Prokhorov, a free-market enthusiast who once said that the Norilsk factory had no obligation to the city around it other than to pay taxes, objected to a sale, according to the adviser. Potanin favored opening talks. “Naturally, if they gave up, he would be the first to do so,” the industry adviser, who knows both men, said. “He is closer to the authorities.” In Moscow, much speculation has swirled over whether the Courchevel police raid that precipitated Prokhorov’s sale to his partner was a setup, somehow orchestrated to push Prokhorov out of Norilsk. LR: This is exactly how Putin got rid of the pesky prosecutory Yuri Skuratov. The French police said the detentions were linked to a wider, continuing investigation into Russian prostitution at ski resorts in the Alps that had begun the previous year. During the four days of Prokhorov’s incarceration in France, stock in Norilsk Nickel and Polyus Gold dropped sharply amid the uncertainty over his fate; Norilsk’s market capitalization dropped by $2.3 billion and Polyus Gold’s by $800 million.

In that stock slide, Prokhorov personally lost about $820 million on paper, based on his publicly disclosed holdings in the companies, though the share prices have since rebounded. A Norilsk spokesman called the arrest a “regrettable misunderstanding.” Vedemosti, a Russian business newspaper, reported that Potanin might pay Prokhorov, in part, in shares in Polyus Gold. Prokhorov said recently at a Moscow news conference that he now planned to start an investment fund focused on electricity and alternative energy, particularly hydrogen fuel cells. He works out of a Moscow office; aides declined to say whether he might emigrate, as other out-of-favor oligarchs have done. Potanin, in an interview on state television in February, said the partners had discussed the sale before the Courchevel event, but that “the scandalous situation accelerated the announcement.”

Neither commented publicly about the reputed disagreement over a sale to the government. Prokhorov, however, said in an interview with the newspaper Kommersant that there was only one buyer for a majority stake in Norilsk Nickel – the government – and that this hobbled the company’s ability to expand internationally. As majority owners, he said, he and Potanin were unable to use their shares as currency in the mergers and acquisitions sweeping the global metals business because the government would be unlikely to approve any transfer of a large stake to foreigners.

GAZPROM, Quite Literally, Stinks

The Moscow Times reports on the Putin adminstration’s laughably hypocritical environmental policy. Only foreigners, it seems, can be polluted. How neo-Soviet can you get?

For several months last year, Shell fought off daily accusations that its construction of the giant Sakhalin-2 oil and gas project was causing unspeakable damage to the land and animals of the far eastern island. Then, at a Dec. 21 Kremlin ceremony, welcoming Gazprom as a majority shareholder into the foreign-owned project, President Vladimir Putin declared that all of the island’s environmental problems had been resolved. Yet with the summer thaw allowing for increased inspection of the project’s work sites, environmentalists are now warning that Gazprom has done nothing to ease the damage and have renewed calls for project operator Sakhalin Energy to halt its construction work.

“I cannot say that anything is OK. Everything is probably worse than it was before,” said Dmitry Lisitsyn, the head of Sakhalin Environment Watch, an environmental group based on the island.

The construction of an 800-kilometer pipeline that runs the length of the island is nearly completed, and Sakhalin Energy announced Thursday that it had inaugurated a third offshore drilling platform. It is the project’s later stages that will see subcontractors confronted with the island’s most difficult and sensitive terrain, including steep mountain slopes prone to landslides and mudflows in the face of intense construction work, environmentalists say. “It’s like pupils who are doing their homework and leave the most difficult lesson for the end,” Lisitsyn said by telephone from Yuzhno-Sakhalinsk, the island’s capital.

The Natural Resources Ministry’s prolonged campaign against Shell and its Japanese partners, Mitsui and Mitsubishi, was widely seen as a means of putting pressure on the firms to sell a majority stake in the project to Gazprom. After the sale of a stake of 50 percent plus one share in Sakhalin Energy was finalized April 18, the state’s charges of environmental damage — led by Oleg Mitvol, the deputy head of the ministry’s environmental watchdog, appeared to simply melt away. The environmental campaign against Sakhalin Energy prompted sharp criticism from Western diplomats and analysts, who said the state had failed to act transparently as it began its moves to bring all major oil and gas projects under majority state control.

“Unfortunately, immediately after Gazprom entered the project, the activity of [the environmental watchdog] was significantly diminished,” said one environmentalist involved in the campaign, who asked not to be identified. “It was just a show, to scare the companies and put pressure on them,” the activist said. “It was very clear to me that it was a short-term but very noisy campaign against Shell. But we had no choice but to cooperate with them, and they knew it,” the activist said. “It would have been wrong if we had stayed out of it.”

Environmentalists have long been trying to draw attention to the problems on and around Sakhalin, a mountainous island whose rivers are home to spawning salmon and whose surrounding waters provide the only feeding ground for the region’s endangered gray whale. This summer, the whales began arriving June 20, the day after the winter’s last ice melted from the nearby Sea of Okhotsk. Environmentalists still cannot say for certain where the creatures, who reach an average of 22 meters in length, spend the winter months, but they flock to the sea each summer to feed on its crustaceans.

Activists with the World Wildlife Fund and the International Fund for Animal Welfare, both of which maintain observers on the island, say the noise of recent construction work has begun to scare the whales away. “The company made a commitment they would keep the noise under a certain level to prevent the impact on whales,” but it hasn’t, said Grigory Tsidulko, a marine mammal campaigner with IFAW. “This summer we started to hear lots of noise in the area — this means there is even more noise underwater,” he said. So far this summer, nine whales at most have been observed in the area, Tsidulko said. “Usually at this time of year we can count 12 to 16, but this summer was unusual in that the ice disappeared later than usual. We hope there will be more,” he said. Sakhalin Energy spokesman Ivan Chernyakhovsky said the company was committed to protecting the island’s environment. “Environmental responsibility is one of our top priorities,” Chernyakhovsky said. “Nothing in our approach has changed” since Gazprom’s entry into the consortium, he added. “We are still committed to minimizing any negative impact that might possibly be there.” On Thursday, Sakhalin Energy said it had completed the installation of its third production platform at the site. “With this milestone, construction operations are nearing completion,” the company said in a statement.

“The entire operation was executed to the highest safety standards and within the established noise levels, without any impact on the Western Gray Whale population,” it said. A Gazprom spokesman declined to comment, referring all questions to Sakhalin Energy. The $20 billion project is due to begin exporting liquefied natural gas in 2008, sending key energy resources to markets in Asia and North America. Gazprom’s entry into the world’s largest integrated oil and gas project was seen as a strong symbol of the state’s desire to reassert its control over energy resources, and signaled the company’s desire to enter the lucrative LNG market. Yevgeny Shvarts, the head of WWF Russia, said Gazprom was ill equipped to deal with the environmental problems on the island. “It looks like Gazprom has some internal managerial problems — getting actual and serious answers to anything is difficult, sometimes impossible,” he said.

Another environmental activist involved in the campaign to save the gray whale agreed. “Gazprom has told us, ‘We haven’t yet communicated because we still don’t know how to deal with Sakhalin Energy,'” said the activist, who also asked not to be identified. Several environmentalists interviewed for this article requested that they not be identified, citing the political sensitivity of the matter. Shvarts said Mitvol’s agency was continuing to take an interest in the environmental situation on Sakhalin. “Oleg Mitvol has expressed the same worries as we have. At the same time we don’t like to look like the hands of [the environmental watchdog],” he said. “Our goal is to protect the whales, and we don’t like that it can be used for other purposes, like dishonest competition,” he said.

Mitvol, who has championed his role as the country’s leading environmental crusader, insisted that he would continue to be involved. “Our inspectors on Sakhalin are working with WWF and IFAW, particularly regarding the problems with whales,” he said. “Of course we deal with Gazprom,” he said, when asked how the new shareholder was responding to the problems there. “They’ve explained that the noise has been at the level that was agreed with the project.” On Friday, members of IFAW and WWF met with Sakhalin Energy and Gazprom representatives to discuss the issue of the endangered gray whale. One participant said Gazprom had invited members of the environmental group Vernadsky Fund to the meeting and had encouraged them to take a leading role on the environmentalists’ side. The fund, established in 1995, counts Gazprom among its founding members. No one at the fund could be reached for comment Friday.

Meanwhile, the activists continue to push Western banks to avoid funding the project. The European Bank for Reconstruction and Development dropped talks on providing loans for the project in January, just three weeks after Gazprom’s entry into the project. “There’s a question if this damage is permanent,” said Lisitsyn, speaking in particular of the damage the mudflows have caused to the islands’ hundreds of rivers and streams. “Unique environmental conditions demand unique construction solutions, and the company is not doing this,” he said, warning of the possibility that the pipeline could rupture once the oil begins to flow. Nikolai Kazakov, the deputy director of the Far East Geological Institute on Sakhalin, also warned of the potential for pipeline ruptures. “There are very big problems with the protection of the pipeline’s construction,” Kazakov said by telephone from the island. “The company’s policies in relation to this will lead to catastrophe.”

GAZPROM’s Investment Illusion

A reader refers us to the following from Radio Free Europe, exposing the fundamentally illusory nature of GAZPROM’s ability to provide for Russia’s energy needs. All it can really do is line the Kremlin’s pockets.

The chairman of the board of Russia’s state-controlled gas monopoly Gazprom, First Deputy Prime Minister Dmitry Medvedev, says the company plans by 2030 to invest $420 billion in exploration and new gas-production facilities — all with the aim of ensuring Russia will have enough gas to meet its domestic and export obligations. Medvedev told the Russian newspaper “Vedomosti” in an interview published July 5 that joint ventures and asset swaps with foreign partners will also help Gazprom meet future demand. He named Germany’s E.ON and Britain’s BP as possible partners in future swap deals. The Gazprom board chairman rejected criticism the company has squandered funds on secondary projects while neglecting investment in production, saying fears of a gas deficit on the domestic market are “groundless.” The only gas shortage on the horizon, he added, are “for those who want to buy it on the cheap.” Gazprom reported in late June that its profits more than doubled in 2006, to $24.6 billion. The climb is attributed to higher gas prices at home and for its CIS customers.

Gazprom’s Critics

Western critics have long claimed that Gazprom’s investment policies are unrealistic, and that the gas monopoly has overextended itself by delving into what many believe to be “political” pipeline projects meant to promote Russian foreign policy goals and murky money-diversion schemes. One particularly vocal critic of Gazprom’s corporate governance is Hermitage Capital Management, which with $4 billion invested is Russia’s largest foreign institutional investor. In November 2006, Russian authorities banned Hermitage CEO William Browder, a U.S. citizen, from entering Russia, and accused him of constituting a “danger” to Russian national security. Numerous analysts have pointed to Gazprom’s reliance on cheap gas imports from Central Asia to meet its rising domestic demand. Some suggest this practice will end soon, as Central Asian leaders increasingly turn toward lucrative markets in China and India, and raise gas prices to world levels accordingly.

Gazprom’s agreement with Italy’s Eni to build a second major gas pipeline under the Black Sea, known as South Stream, is expected to cost $13.5 billion and will be owned and financed by a 50-50 joint venture between the two companies. There has been much Russian and Italian hype over South Stream. But many energy analysts have questioned the commercial value of the project.

Gazprom is also committed to building the Nord Stream pipeline under the Baltic Sea. The estimated cost of Nord Stream is reportedly $6 billion. In the meantime, existing Gazprom pipelines to Europe are not operating at full capacity — the Blue Stream to Turkey is transporting only a fraction of the gas it was expected to, the Ukrainian main pipeline is underused, and the Ukrainian energy Ministry has begged Russia to send more gas through its system to Europe. Kyiv’s offer, however, was rejected by Valery Golubev, Gazprom’s deputy CEO, who improbably stated, “there is no demand in Europe for more Russian gas.”

Plans, meanwhile, for a pipeline from Novopskov on the Russian-Ukrainian border to Uzhhorod on the Hungarian-Ukrainian border, designed to transport an additional 16 billion cubic meters of Russian gas to Europe remains dormant. At a cost of $2.5 billion, it would have been a much cheaper route than South Stream, but because it would go through Ukraine, the Kremlin vetoed the route.

Meeting Demand

Russia’s growing demand for gas has also called into question where gas from the giant Kovykta gas field will be sold now that the British-Russian venture BP-TNK was forced to sell its license to Gazprom. Earlier, an internal Gazprom study indicated that Kovykta gas would be used solely to meet domestic demand. BP-TNK wanted to sell this gas to China, but Gazprom would not allow them to use its pipelines for this purpose. If Kovykta gas is sold on the Russian domestic market below world market prices, it will lower Gazprom’s income projections.

Russia’s marked increase in domestic gas consumption — which jumped by 17 billion cubic meters between January 2004 and December 2005 — is a major factor haunting the Kremlin. Gazprom’s Research Institute for the Economics of the Gas Industry, NIIGazekonomika, determined in a report in late 2005 that domestic consumption of natural gas is increasing at a faster pace than projected in Russia’s Energy Strategy, the official guidelines for the energy sector adopted in May 2003.

The new study noted that the projections of the Russian Energy Strategy are based on data from the 1980s, which the study’s authors claim are not reliable. “Taking into account the objective results, in the future one cannot discount the growing internal demand for gas,” the NIIGazekonomika study states. “The fulfillment of any of the scenarios presented can potentially lead to an inability by Russian Federation producers to meet demand for gas in both domestic and foreign markets. This situation in turn can prevent double-digit Russian GDP growth and can disrupt gas export obligations.”

Medvedev’s hopes that Russian-Western joint ventures will help solve Gazprom’s production problems is a risky gamble. Many Western companies are wary of doing business with Gazprom after seeing Russian heavy-handedness in Sakhalin-2, Kovykta, and the giant Shtockman gas field, where these companies were forbidden from participating as full partners. Senior managers of Western energy firms might well ask what, if any, guarantees exist that Gazprom’s behavior will change now that it needs Western capital and technical expertise to meet its obligations?

GAZPROM’s Investment Illusion

A reader refers us to the following from Radio Free Europe, exposing the fundamentally illusory nature of GAZPROM’s ability to provide for Russia’s energy needs. All it can really do is line the Kremlin’s pockets.

The chairman of the board of Russia’s state-controlled gas monopoly Gazprom, First Deputy Prime Minister Dmitry Medvedev, says the company plans by 2030 to invest $420 billion in exploration and new gas-production facilities — all with the aim of ensuring Russia will have enough gas to meet its domestic and export obligations. Medvedev told the Russian newspaper “Vedomosti” in an interview published July 5 that joint ventures and asset swaps with foreign partners will also help Gazprom meet future demand. He named Germany’s E.ON and Britain’s BP as possible partners in future swap deals. The Gazprom board chairman rejected criticism the company has squandered funds on secondary projects while neglecting investment in production, saying fears of a gas deficit on the domestic market are “groundless.” The only gas shortage on the horizon, he added, are “for those who want to buy it on the cheap.” Gazprom reported in late June that its profits more than doubled in 2006, to $24.6 billion. The climb is attributed to higher gas prices at home and for its CIS customers.

Gazprom’s Critics

Western critics have long claimed that Gazprom’s investment policies are unrealistic, and that the gas monopoly has overextended itself by delving into what many believe to be “political” pipeline projects meant to promote Russian foreign policy goals and murky money-diversion schemes. One particularly vocal critic of Gazprom’s corporate governance is Hermitage Capital Management, which with $4 billion invested is Russia’s largest foreign institutional investor. In November 2006, Russian authorities banned Hermitage CEO William Browder, a U.S. citizen, from entering Russia, and accused him of constituting a “danger” to Russian national security. Numerous analysts have pointed to Gazprom’s reliance on cheap gas imports from Central Asia to meet its rising domestic demand. Some suggest this practice will end soon, as Central Asian leaders increasingly turn toward lucrative markets in China and India, and raise gas prices to world levels accordingly.

Gazprom’s agreement with Italy’s Eni to build a second major gas pipeline under the Black Sea, known as South Stream, is expected to cost $13.5 billion and will be owned and financed by a 50-50 joint venture between the two companies. There has been much Russian and Italian hype over South Stream. But many energy analysts have questioned the commercial value of the project.

Gazprom is also committed to building the Nord Stream pipeline under the Baltic Sea. The estimated cost of Nord Stream is reportedly $6 billion. In the meantime, existing Gazprom pipelines to Europe are not operating at full capacity — the Blue Stream to Turkey is transporting only a fraction of the gas it was expected to, the Ukrainian main pipeline is underused, and the Ukrainian energy Ministry has begged Russia to send more gas through its system to Europe. Kyiv’s offer, however, was rejected by Valery Golubev, Gazprom’s deputy CEO, who improbably stated, “there is no demand in Europe for more Russian gas.”

Plans, meanwhile, for a pipeline from Novopskov on the Russian-Ukrainian border to Uzhhorod on the Hungarian-Ukrainian border, designed to transport an additional 16 billion cubic meters of Russian gas to Europe remains dormant. At a cost of $2.5 billion, it would have been a much cheaper route than South Stream, but because it would go through Ukraine, the Kremlin vetoed the route.

Meeting Demand

Russia’s growing demand for gas has also called into question where gas from the giant Kovykta gas field will be sold now that the British-Russian venture BP-TNK was forced to sell its license to Gazprom. Earlier, an internal Gazprom study indicated that Kovykta gas would be used solely to meet domestic demand. BP-TNK wanted to sell this gas to China, but Gazprom would not allow them to use its pipelines for this purpose. If Kovykta gas is sold on the Russian domestic market below world market prices, it will lower Gazprom’s income projections.

Russia’s marked increase in domestic gas consumption — which jumped by 17 billion cubic meters between January 2004 and December 2005 — is a major factor haunting the Kremlin. Gazprom’s Research Institute for the Economics of the Gas Industry, NIIGazekonomika, determined in a report in late 2005 that domestic consumption of natural gas is increasing at a faster pace than projected in Russia’s Energy Strategy, the official guidelines for the energy sector adopted in May 2003.

The new study noted that the projections of the Russian Energy Strategy are based on data from the 1980s, which the study’s authors claim are not reliable. “Taking into account the objective results, in the future one cannot discount the growing internal demand for gas,” the NIIGazekonomika study states. “The fulfillment of any of the scenarios presented can potentially lead to an inability by Russian Federation producers to meet demand for gas in both domestic and foreign markets. This situation in turn can prevent double-digit Russian GDP growth and can disrupt gas export obligations.”

Medvedev’s hopes that Russian-Western joint ventures will help solve Gazprom’s production problems is a risky gamble. Many Western companies are wary of doing business with Gazprom after seeing Russian heavy-handedness in Sakhalin-2, Kovykta, and the giant Shtockman gas field, where these companies were forbidden from participating as full partners. Senior managers of Western energy firms might well ask what, if any, guarantees exist that Gazprom’s behavior will change now that it needs Western capital and technical expertise to meet its obligations?

GAZPROM’s Investment Illusion

A reader refers us to the following from Radio Free Europe, exposing the fundamentally illusory nature of GAZPROM’s ability to provide for Russia’s energy needs. All it can really do is line the Kremlin’s pockets.

The chairman of the board of Russia’s state-controlled gas monopoly Gazprom, First Deputy Prime Minister Dmitry Medvedev, says the company plans by 2030 to invest $420 billion in exploration and new gas-production facilities — all with the aim of ensuring Russia will have enough gas to meet its domestic and export obligations. Medvedev told the Russian newspaper “Vedomosti” in an interview published July 5 that joint ventures and asset swaps with foreign partners will also help Gazprom meet future demand. He named Germany’s E.ON and Britain’s BP as possible partners in future swap deals. The Gazprom board chairman rejected criticism the company has squandered funds on secondary projects while neglecting investment in production, saying fears of a gas deficit on the domestic market are “groundless.” The only gas shortage on the horizon, he added, are “for those who want to buy it on the cheap.” Gazprom reported in late June that its profits more than doubled in 2006, to $24.6 billion. The climb is attributed to higher gas prices at home and for its CIS customers.

Gazprom’s Critics

Western critics have long claimed that Gazprom’s investment policies are unrealistic, and that the gas monopoly has overextended itself by delving into what many believe to be “political” pipeline projects meant to promote Russian foreign policy goals and murky money-diversion schemes. One particularly vocal critic of Gazprom’s corporate governance is Hermitage Capital Management, which with $4 billion invested is Russia’s largest foreign institutional investor. In November 2006, Russian authorities banned Hermitage CEO William Browder, a U.S. citizen, from entering Russia, and accused him of constituting a “danger” to Russian national security. Numerous analysts have pointed to Gazprom’s reliance on cheap gas imports from Central Asia to meet its rising domestic demand. Some suggest this practice will end soon, as Central Asian leaders increasingly turn toward lucrative markets in China and India, and raise gas prices to world levels accordingly.

Gazprom’s agreement with Italy’s Eni to build a second major gas pipeline under the Black Sea, known as South Stream, is expected to cost $13.5 billion and will be owned and financed by a 50-50 joint venture between the two companies. There has been much Russian and Italian hype over South Stream. But many energy analysts have questioned the commercial value of the project.

Gazprom is also committed to building the Nord Stream pipeline under the Baltic Sea. The estimated cost of Nord Stream is reportedly $6 billion. In the meantime, existing Gazprom pipelines to Europe are not operating at full capacity — the Blue Stream to Turkey is transporting only a fraction of the gas it was expected to, the Ukrainian main pipeline is underused, and the Ukrainian energy Ministry has begged Russia to send more gas through its system to Europe. Kyiv’s offer, however, was rejected by Valery Golubev, Gazprom’s deputy CEO, who improbably stated, “there is no demand in Europe for more Russian gas.”

Plans, meanwhile, for a pipeline from Novopskov on the Russian-Ukrainian border to Uzhhorod on the Hungarian-Ukrainian border, designed to transport an additional 16 billion cubic meters of Russian gas to Europe remains dormant. At a cost of $2.5 billion, it would have been a much cheaper route than South Stream, but because it would go through Ukraine, the Kremlin vetoed the route.

Meeting Demand

Russia’s growing demand for gas has also called into question where gas from the giant Kovykta gas field will be sold now that the British-Russian venture BP-TNK was forced to sell its license to Gazprom. Earlier, an internal Gazprom study indicated that Kovykta gas would be used solely to meet domestic demand. BP-TNK wanted to sell this gas to China, but Gazprom would not allow them to use its pipelines for this purpose. If Kovykta gas is sold on the Russian domestic market below world market prices, it will lower Gazprom’s income projections.

Russia’s marked increase in domestic gas consumption — which jumped by 17 billion cubic meters between January 2004 and December 2005 — is a major factor haunting the Kremlin. Gazprom’s Research Institute for the Economics of the Gas Industry, NIIGazekonomika, determined in a report in late 2005 that domestic consumption of natural gas is increasing at a faster pace than projected in Russia’s Energy Strategy, the official guidelines for the energy sector adopted in May 2003.

The new study noted that the projections of the Russian Energy Strategy are based on data from the 1980s, which the study’s authors claim are not reliable. “Taking into account the objective results, in the future one cannot discount the growing internal demand for gas,” the NIIGazekonomika study states. “The fulfillment of any of the scenarios presented can potentially lead to an inability by Russian Federation producers to meet demand for gas in both domestic and foreign markets. This situation in turn can prevent double-digit Russian GDP growth and can disrupt gas export obligations.”

Medvedev’s hopes that Russian-Western joint ventures will help solve Gazprom’s production problems is a risky gamble. Many Western companies are wary of doing business with Gazprom after seeing Russian heavy-handedness in Sakhalin-2, Kovykta, and the giant Shtockman gas field, where these companies were forbidden from participating as full partners. Senior managers of Western energy firms might well ask what, if any, guarantees exist that Gazprom’s behavior will change now that it needs Western capital and technical expertise to meet its obligations?

GAZPROM’s Investment Illusion

A reader refers us to the following from Radio Free Europe, exposing the fundamentally illusory nature of GAZPROM’s ability to provide for Russia’s energy needs. All it can really do is line the Kremlin’s pockets.

The chairman of the board of Russia’s state-controlled gas monopoly Gazprom, First Deputy Prime Minister Dmitry Medvedev, says the company plans by 2030 to invest $420 billion in exploration and new gas-production facilities — all with the aim of ensuring Russia will have enough gas to meet its domestic and export obligations. Medvedev told the Russian newspaper “Vedomosti” in an interview published July 5 that joint ventures and asset swaps with foreign partners will also help Gazprom meet future demand. He named Germany’s E.ON and Britain’s BP as possible partners in future swap deals. The Gazprom board chairman rejected criticism the company has squandered funds on secondary projects while neglecting investment in production, saying fears of a gas deficit on the domestic market are “groundless.” The only gas shortage on the horizon, he added, are “for those who want to buy it on the cheap.” Gazprom reported in late June that its profits more than doubled in 2006, to $24.6 billion. The climb is attributed to higher gas prices at home and for its CIS customers.

Gazprom’s Critics

Western critics have long claimed that Gazprom’s investment policies are unrealistic, and that the gas monopoly has overextended itself by delving into what many believe to be “political” pipeline projects meant to promote Russian foreign policy goals and murky money-diversion schemes. One particularly vocal critic of Gazprom’s corporate governance is Hermitage Capital Management, which with $4 billion invested is Russia’s largest foreign institutional investor. In November 2006, Russian authorities banned Hermitage CEO William Browder, a U.S. citizen, from entering Russia, and accused him of constituting a “danger” to Russian national security. Numerous analysts have pointed to Gazprom’s reliance on cheap gas imports from Central Asia to meet its rising domestic demand. Some suggest this practice will end soon, as Central Asian leaders increasingly turn toward lucrative markets in China and India, and raise gas prices to world levels accordingly.

Gazprom’s agreement with Italy’s Eni to build a second major gas pipeline under the Black Sea, known as South Stream, is expected to cost $13.5 billion and will be owned and financed by a 50-50 joint venture between the two companies. There has been much Russian and Italian hype over South Stream. But many energy analysts have questioned the commercial value of the project.

Gazprom is also committed to building the Nord Stream pipeline under the Baltic Sea. The estimated cost of Nord Stream is reportedly $6 billion. In the meantime, existing Gazprom pipelines to Europe are not operating at full capacity — the Blue Stream to Turkey is transporting only a fraction of the gas it was expected to, the Ukrainian main pipeline is underused, and the Ukrainian energy Ministry has begged Russia to send more gas through its system to Europe. Kyiv’s offer, however, was rejected by Valery Golubev, Gazprom’s deputy CEO, who improbably stated, “there is no demand in Europe for more Russian gas.”

Plans, meanwhile, for a pipeline from Novopskov on the Russian-Ukrainian border to Uzhhorod on the Hungarian-Ukrainian border, designed to transport an additional 16 billion cubic meters of Russian gas to Europe remains dormant. At a cost of $2.5 billion, it would have been a much cheaper route than South Stream, but because it would go through Ukraine, the Kremlin vetoed the route.

Meeting Demand

Russia’s growing demand for gas has also called into question where gas from the giant Kovykta gas field will be sold now that the British-Russian venture BP-TNK was forced to sell its license to Gazprom. Earlier, an internal Gazprom study indicated that Kovykta gas would be used solely to meet domestic demand. BP-TNK wanted to sell this gas to China, but Gazprom would not allow them to use its pipelines for this purpose. If Kovykta gas is sold on the Russian domestic market below world market prices, it will lower Gazprom’s income projections.

Russia’s marked increase in domestic gas consumption — which jumped by 17 billion cubic meters between January 2004 and December 2005 — is a major factor haunting the Kremlin. Gazprom’s Research Institute for the Economics of the Gas Industry, NIIGazekonomika, determined in a report in late 2005 that domestic consumption of natural gas is increasing at a faster pace than projected in Russia’s Energy Strategy, the official guidelines for the energy sector adopted in May 2003.

The new study noted that the projections of the Russian Energy Strategy are based on data from the 1980s, which the study’s authors claim are not reliable. “Taking into account the objective results, in the future one cannot discount the growing internal demand for gas,” the NIIGazekonomika study states. “The fulfillment of any of the scenarios presented can potentially lead to an inability by Russian Federation producers to meet demand for gas in both domestic and foreign markets. This situation in turn can prevent double-digit Russian GDP growth and can disrupt gas export obligations.”

Medvedev’s hopes that Russian-Western joint ventures will help solve Gazprom’s production problems is a risky gamble. Many Western companies are wary of doing business with Gazprom after seeing Russian heavy-handedness in Sakhalin-2, Kovykta, and the giant Shtockman gas field, where these companies were forbidden from participating as full partners. Senior managers of Western energy firms might well ask what, if any, guarantees exist that Gazprom’s behavior will change now that it needs Western capital and technical expertise to meet its obligations?

GAZPROM’s Investment Illusion

A reader refers us to the following from Radio Free Europe, exposing the fundamentally illusory nature of GAZPROM’s ability to provide for Russia’s energy needs. All it can really do is line the Kremlin’s pockets.

The chairman of the board of Russia’s state-controlled gas monopoly Gazprom, First Deputy Prime Minister Dmitry Medvedev, says the company plans by 2030 to invest $420 billion in exploration and new gas-production facilities — all with the aim of ensuring Russia will have enough gas to meet its domestic and export obligations. Medvedev told the Russian newspaper “Vedomosti” in an interview published July 5 that joint ventures and asset swaps with foreign partners will also help Gazprom meet future demand. He named Germany’s E.ON and Britain’s BP as possible partners in future swap deals. The Gazprom board chairman rejected criticism the company has squandered funds on secondary projects while neglecting investment in production, saying fears of a gas deficit on the domestic market are “groundless.” The only gas shortage on the horizon, he added, are “for those who want to buy it on the cheap.” Gazprom reported in late June that its profits more than doubled in 2006, to $24.6 billion. The climb is attributed to higher gas prices at home and for its CIS customers.

Gazprom’s Critics

Western critics have long claimed that Gazprom’s investment policies are unrealistic, and that the gas monopoly has overextended itself by delving into what many believe to be “political” pipeline projects meant to promote Russian foreign policy goals and murky money-diversion schemes. One particularly vocal critic of Gazprom’s corporate governance is Hermitage Capital Management, which with $4 billion invested is Russia’s largest foreign institutional investor. In November 2006, Russian authorities banned Hermitage CEO William Browder, a U.S. citizen, from entering Russia, and accused him of constituting a “danger” to Russian national security. Numerous analysts have pointed to Gazprom’s reliance on cheap gas imports from Central Asia to meet its rising domestic demand. Some suggest this practice will end soon, as Central Asian leaders increasingly turn toward lucrative markets in China and India, and raise gas prices to world levels accordingly.

Gazprom’s agreement with Italy’s Eni to build a second major gas pipeline under the Black Sea, known as South Stream, is expected to cost $13.5 billion and will be owned and financed by a 50-50 joint venture between the two companies. There has been much Russian and Italian hype over South Stream. But many energy analysts have questioned the commercial value of the project.

Gazprom is also committed to building the Nord Stream pipeline under the Baltic Sea. The estimated cost of Nord Stream is reportedly $6 billion. In the meantime, existing Gazprom pipelines to Europe are not operating at full capacity — the Blue Stream to Turkey is transporting only a fraction of the gas it was expected to, the Ukrainian main pipeline is underused, and the Ukrainian energy Ministry has begged Russia to send more gas through its system to Europe. Kyiv’s offer, however, was rejected by Valery Golubev, Gazprom’s deputy CEO, who improbably stated, “there is no demand in Europe for more Russian gas.”

Plans, meanwhile, for a pipeline from Novopskov on the Russian-Ukrainian border to Uzhhorod on the Hungarian-Ukrainian border, designed to transport an additional 16 billion cubic meters of Russian gas to Europe remains dormant. At a cost of $2.5 billion, it would have been a much cheaper route than South Stream, but because it would go through Ukraine, the Kremlin vetoed the route.

Meeting Demand

Russia’s growing demand for gas has also called into question where gas from the giant Kovykta gas field will be sold now that the British-Russian venture BP-TNK was forced to sell its license to Gazprom. Earlier, an internal Gazprom study indicated that Kovykta gas would be used solely to meet domestic demand. BP-TNK wanted to sell this gas to China, but Gazprom would not allow them to use its pipelines for this purpose. If Kovykta gas is sold on the Russian domestic market below world market prices, it will lower Gazprom’s income projections.

Russia’s marked increase in domestic gas consumption — which jumped by 17 billion cubic meters between January 2004 and December 2005 — is a major factor haunting the Kremlin. Gazprom’s Research Institute for the Economics of the Gas Industry, NIIGazekonomika, determined in a report in late 2005 that domestic consumption of natural gas is increasing at a faster pace than projected in Russia’s Energy Strategy, the official guidelines for the energy sector adopted in May 2003.

The new study noted that the projections of the Russian Energy Strategy are based on data from the 1980s, which the study’s authors claim are not reliable. “Taking into account the objective results, in the future one cannot discount the growing internal demand for gas,” the NIIGazekonomika study states. “The fulfillment of any of the scenarios presented can potentially lead to an inability by Russian Federation producers to meet demand for gas in both domestic and foreign markets. This situation in turn can prevent double-digit Russian GDP growth and can disrupt gas export obligations.”

Medvedev’s hopes that Russian-Western joint ventures will help solve Gazprom’s production problems is a risky gamble. Many Western companies are wary of doing business with Gazprom after seeing Russian heavy-handedness in Sakhalin-2, Kovykta, and the giant Shtockman gas field, where these companies were forbidden from participating as full partners. Senior managers of Western energy firms might well ask what, if any, guarantees exist that Gazprom’s behavior will change now that it needs Western capital and technical expertise to meet its obligations?

July 10, 2007 — Contents

TUESDAY JULY 10 CONTENTS


(1) Annals of Sochi: Geographical Notes from All Over

(2) Annals of “Pacified” Chechnya

(3)
Russia’s Vaporous Case against the Bank of New York

(4) The Nexus Between Intolerance and Failure

(5) Annals of Russian Crybabies

NOTE: La Russophobe does not know if she has readers who are interested in South American politics, but she is pleased to announce that Robert Mayer, creator of Publius Pundit and a major force in the foreign policy blogosphere, has formed a new website called Sorry, Columbia! about U.S. policy towards Columbia. It actually has some considerable relevance to Russia, since the U.S. is doing to Columbia what it should be doing to Russia, and vice versa. The people of Columbia are valiantly marching in the streets to oppose tyranny in their country, and the U.S. is sanctioning them. The people of Russia are cravenly hiding in the shadows, and George Bush is feeding lobster to Vladimir Putin. It’s through-the-looking-glass stuff, and hopefully Robert’s new movement can help to put it right. It’s an opportunity to get involved in an important issue, help people, show the power of the blogosphere and change the world a bit.