The Nemtsov White Paper, Part II (Section 3)

This is a the final installment in our serialization of the second part of the White Paper by Boris Nemtsov.  Part II deals exclusively with the Gazprom fuel monopoly. Section 1 was published last Friday, Section 2 on Sunday. This is Section 3, all new material exclusive to La Russophobe which has never before appeared in English. The full version of Part II is available now as a downloadable PDF, click here to view it. We will shortly publish the entire white paper as single HTML page, which can be cut and pasted.  Click “Nemtsov” in our header to read Part I.

Putin: The Bottom Line

Part II, Gazprom

by Boris Nemtsov and Vladimir Frolov

Translated from the Russian by Dave Essel

Pipeline Machinations

In recent year Putin and Gazprom’s management have devoted a great deal of time and effort to a number of gas pipeline projects involving a lot of propaganda ballyhoo as well a serious foreign political gameplay. Many Russians have been led to believe that all these ‘Northern’, ‘Southern’, ‘Bluestream’ and other pipelines are the keystone of Russia’s national interests. Many therefore worry about the fate of these projects and accept that countries which are openly against the pipelines should be painted as enemies.

On closer examination, however, none of these ambitious projects for new export pipelines present anything like and open-and-shut case. In fact, these projects are no less machinations than the asset stripping of Gazprom.

First and foremost, it should be recalled that Russia has already had disappointing results from its machinations surrounding the implementation of large-scale international pipeline projects.

This is firstly the Bluestream gas pipeline running across the bed of the Black Sea from Russia to Turkey. In 1997, before the agreement to build it was concluded with Turkey, Gazprom asserted that this pipeline would be the linchpin of Russia’s strategic interests, the main point of which was to bypass Georgian territory. There is no doubt that such concerns as the need for it and questions of efficiency were swept away as ‘unprofessional’.

Bluestream has now been built. It is running at half its capacity and in its first 4 years ran at one-third capacity (because in 1997 Gazprom, as many experts foresaw – including the authors of this paper – overestimated Turkey’s potential demand for gas). The constructions of Gazprom’s section of the pipeline cost $3 million per kilometre, against a world average of $1-$1.5 million. The project was endowed with over a billion dollar’s worth of tax relief from the state, this at not the best of times – 1998-2002 – from the budget’s point of view.

Today, gas exported down Bluestream continues to enjoy relief from export duty in accordance with intergovernmental agreements ratified in 1999 when Putin was still premier. This is costing the state $600-$700 million a year at today’s gas prices [see note 1].

As soon as Bluestream came online, there was a serious row with Turkey over its use. Turkey demanded – successfully – that the agreed price for the gas and its minimum guaranteed purchase quantities be reduced, thus reducing Gazprom income. Turkey next insisted on being appointed to resell surplus gas which Gazprom wanted to deliver down Bluestream to Europe in order to fill the pipeline. Cruel irony: there were even discussions about a potential branch pipeline through Georgia in order to make better use of capacity, even though, as we have noted, bypassing Georgia was the main ‘strategic’ region for the pipeline in the first place.

The result of all this was a decision to build a new pipeline – South Stream – under the Black Sea but now bypassing Turkey following the refusal announced the year before by president Putin to consider the building of a second phase of Bluestream.

The benefits to the state of another new ‘construction projects of the century’ were, to put it mildly, somewhat dubious.

Now we are being urged to become involved in yet more ‘construction projects of the century’, which it is argued are needed to protect our ‘strategic’ national interests. These are the Nordstream pipeline under the Baltic Sea, South Stream under the Black Sea, and the Altai pipeline to China.

Looking at our experiences with Bluestream, would it not be wise to think through how beneficial these new projects will be for Russia?

It is not at all clear that they will be. Let us take Nordstream first. Despite the fact that Gazprom has for years asserted that the cost of building this pipeline under the Baltic Sea will ‘not exceed’ $5 billion, the officially recognised figure already stands at $11.5 billion (€7.4 billion). We believe the maritime section of the pipeline will end up costing not less than $15 billion.

The alternative to Nordstream, which Gazprom rejected, would have been to add a second parallel pipe to the Yamal-Europe pipeline through Belarus and Poland at a cost of just $2.5 billion. This pipeline would have run parallel to the old one, through places with existing infrastructure and without the complexities of undersea construction. But this was rejected out of hand.

Gas will be transported down Nordstream on a ship or pay basis. This means Gazprom will have to pay the operating company for transport costs for 27.5 billion cubic metres from 2010 onwards regardless of whether it is carried or not and for 55 billion cubic metres from 2012 on the same basis. This ‘enhanced’ tariff, needed to help pay off the investment, will continue until 2032. It seems fair to say that transport costs such as these will certainly not result in any saving from what Belarus and Poland would have charged for transit. Gazprom is having to spend some serious money for the pleasure of bypassing these two countries.

That’s the price of having geopolitical ambitions.

It is furthermore not true to claim that Nordstream will enable Russia to bypass all transit countries. The pipeline will have to cross either Estonian or Finnish seabeds and then the Swedish one. Estonia has refused Russia its permission and both Finland and Sweden have objections to Gazprom’s pipeline plans.

The Nordstream pipeline is therefore nowhere near as clearly good for Russia as it is being made out to be. Nor is the situation with it particularly clear either. Gazprom’s capital and operational costs will be extremely high, the economic benefits are not obvious, the risks serious. Furthermore, despite that fact that the project has been talked up all through Putin’s terms, no start has been made on the construction of the maritime section of the line.

The situation is no better with the other pipeline megaprojects – South Stream and Altai. South Stream, which so far exists only as a concept (no detailed plans have been drawn up), is supposed to help correct the gross errors made on Bluestream and remove dependence on transiting Europe-destined gas via Turkey, which has proven to be a far less cosy partner than Gazprom had expected.

In principle, South Stream is supposed to travel across the Black Sea bed from Russia straight to Bulgaria and then on to other European countries. Not a bad idea. The Black Sea does not give rise to the same ecological problems as the Baltic. Unlike Nordstream, which is supposed to provide new delivery volumes to new markets (one purpose Nordstream does not have is that of bypassing Ukraine, since its intended market is North-West Europe, to which Ukraine does not send gas), South Stream does provide manoeuvring room against the Ukraine as it will supply gas to the South-West European countries currently served down the Ukrainian corridor. The scales differ, however: 130 billion cubic metres a year pass through the Ukraine and the proposed capacity of South Stream is 30 billion. Ukraine will retain its dominant position for many years to come.

On the other hand, there are obvious problems with the plan, namely it high cost and the inevitable need to agree the pipeline routing with either the Ukraine or Turkey as it will have to pass through one or the other country’s exclusive maritime economic zone.

Project costs have been estimated by Energy Minister Sergei Shmatko as running to up to $20 billion [see note 2]. Laying the pipe across the Black Sea bed will give rise to the same problems as Nordstream has in the Baltic. And we will need to get consent to lay the pipe in the exclusive maritime economic zones of either Turkey or the Ukraine, the very countries which the pipeline is being created to bypass!

Would it not work out cheaper to negotiate long-term and stable agreements with the Ukraine? In our view it would be far simpler to reach agreement with the Ukrainians than to spend billions on a pipeline that will reduce our dependence on gas transiting the Ukraine by just 25%. All that is needed to reach such an agreement is the ability to hold negotiations in which one is ready to find compromises and not just bully.

As regards the gas pipeline from Western Siberia to China, it is a case of pure adventurism. Despite Gazprom declaring that it will only cost $4-$5 billion to build, this is hard to believe since it will be 2800 kilometres long, much of that in mountainous regions of which Gazprom has little experience. One can safely assert that the project will cost no less than $10 billion (at $3 million per kilometre). The project represents a threat to the ecology of the Altai region and will involve doing damage to the Ukok high-mountain plateau, a unique wildlife reserve listed by UNESCO as a world heritage site.

However, the main thing to say about this project is that its economic prospects are incredibly dubious. This is because China is not prepared to pay high prices for Russian gas. Coal is the dominant power source in China and it is unlikely that the PRC, for whom energy self-sufficiency is the central aim of its energy policies, will agree to pay top dollar for imported gas if it can use its own coal more cheaply. Unlike oil, China does not now and will not in the future import large quantities of gas. It will prefer its own coal. In fact, the International Energy Agency predicts that China’s net imports of gas in 2015 will not exceed 30 billion cubic metres a year.

So it is that this factor traditionally has predicated that China has always been extremely inflexible in the matter of price when negotiating with Russian gas suppliers. When negotiations with China were held in 1999-2002 about supplying gas to China from the Kovykta gas field, the Chinese insisted that the price at the Russo-Chinese border should not exceed $40 per thousand cubic metres, less than the Ukraine was then being charged!

A Memorandum on the building of a gas pipeline to supply 30 billion cubic metres a year to China was signed by Putin in March 2006 but there have been no advances in the talks since then. It is said that the parties cannot find agreement on a price formula. Evidently, what the Chinese are offering is unacceptable to Gazprom.

What an acceptable level might be for them can be seen from the agreement between China and Turkmenistan for the delivery of 30 billion cubic metres starting 2010 down the newly-built Turkmenistan-China pipeline. As is not the case for the Russian ones, work on this pipeline is proceeding apace. A Memorandum on the building of the pipeline and delivery of 30 billion cubic metres was signed by the Chinese government and Turkmenistan’s former president S. Niyazov in early April 2006, 3 weeks after the Memorandum with Putin was signed. The Russian and Turkmen projects clearly compete with each other because, as stated above, China will not need to import more than 30 billion cubic metres for the foreseeable future and two pipelines are therefore unnecessary.

It would seem therefore that Turkmenistan was able to make China a better offer, one that included access to the gas fields and control over the pipeline. The price level, agreement on which was reached in November 2007, is $192 per 1000 cubic metres. This is lower than Gazprom’s prices – applicable until 2009 – to the Ukraine.

Question: why are we trying to get into the Chinese market, which promises worse deals that our deals with the Ukraine? All the more so since wer are clearly being outdone in the matter by Turkmenistan?

Doesn’t this whole story of pipelines to China reek of another machination?

And another big and even more important question marks hangs over all the pipeline megaprojects: where is Gazprom going to get the gas it proposes to send down these new pipelines? The total extra gas needed for the three projects – Nordstream, South Stream, and Altai, if they are built, is 115 billion cubic metres a year, a volume not available in the current gas accounts. We have already described the difficulties being encountered in the matter of gas extraction as a result of chronic underinvestment over the years. Gazprom has for a long time now been juggling names of new gas fields – Bobanenkovo, Shtokman – which could help fill the void in the gas balance resulting from the exhaustion of current gas fields. However, when it comes to developing new fields, there nothing to boast about.

The conclusion leaps to the eye: either all this hullaballoo about new gas projects is just a machination or we Russian consumers will have to pay for the increase in gas exports through reduced consumption of gas or its replacement by more expensive coal and atomic energy.

Gas conflicts in the CIS

The expanses of the former USSR have been shaken by loud conflicts over gas in recent years as a result of Gazprom pressurising our neighbours to accept higher prices for Russian gas. Everyone remembers the energy wars with the Ukraine and Belarus. Other countries were also severely pressured, in particular Georgia, Armenia, and Azerbaidzhan (which in 2007 actually decided to stop buying Russian gas at the higher prices demanded). We were assured that it was necessary to do this to ‘defend the country’s economic interests’.

There’s no arguing that the post-Soviet countries should not pay higher prices for their gas. The question is how one sets about achieving this and do the benefits from achieving this compensate for the damage done by Gazprom’s crude pressure tactics?

Let’s look at the figures. Gazprom income from gas sales to the CIS, as may be seen in their 2007 Annual Report prepared in accordance with international accounting standards amounted to $10.7 billion. Not bad money – about 11.5% of the total. One should ask, however, how much was gained from pressurising the CIS countries in this way and engendering political scandals and conflicts with the Ukraine, Belarus, Georgia and Azerbaidzhan.

It is worth recalling here that back in 2005, before all the gas wars, gas sales income from the CIS countries amounted to $4.6 billion. In other words, the series of loud gas scandals led in 2 years to an increase of $6 billion in Gazprom’s income. Is that a lot? It’s about 6.5% of its 2007 income.

In principle, that’s not a bad result. Still one should not forget how it was achieved. Crude political pressure, an atmosphere of constant aggravation in the media, harsh statements about neighbouring countries, the demonstrative turning off of the gas taps on 1 January 2006…

Now the whole world talks only about how Russia uses gas deliveries as a ‘political weapon’. Gazprom’s ‘aggressive ways and hostility’ tops the agenda of international seminars on energy security. Around the world, a large number of politicians with anti-Russian inclinations have jumped at the opportunity to use the example of Gazprom’s crude modus operandi with the CIS countries to talk up a picture of Gazprom and Russia as enemies.

The European Commission quite officially in September 2007 tabled a series of laws to reform electricity and gas markets that contained, as it was unofficially called, an ‘anti-Gazprom amendment’ – a proposal to limit the right of companies representing non-EU countries to purchase strategically important parts of Europe’s energy infrastructure. Gazprom’s energy wars with the CIS may end up leading it to a serious loss of investment opportunities in Europe.

And is that worth the $6 billion more extracted from the CIS countries in 2007 as compared to 2005?

It should also be remembered that Gazprom, while freely bandying about the concept of ‘transition to market prices’, for totally obscure reasons sets varying prices for different CIS countries, charging the Baltic countries and Georgia $230 and higher per 1000 cubic metres, Ukraine – $179.50, Moldova – $170, Belarus – $119 in the first half of 2008 and $127.90 in the second, while Armenia pays just $110. The political coincidence in this ‘geography of prices’ is too striking for words.

Of course, gas prices had to rise for our neighbours – but this should have been done through negotiations, compromise, and agreed stages without pressurising and aggression. The results obtained are not worth Gazprom’s loss of image worldwide as a result of how it got its way with the CIS countries.
Notwithstanding all this, Gazprom’s resale of Central Asian gas to the Ukraine (60% of Russia’s gas exports to the CIS countries) may not even make a profit: in 2007, for example, Gazprom bought Turkmen gas at the Turkmen-Uzbek border for $100 per 1000 cubic metres and sold it on to the Ukraine for $130. Transport costs, however, amount to close to $30. In 2008, the situation was much the same: the price agreed with the Ukraine was about $180 per 1000 cubic metres but by then the price to Turkmenistan had risen to $130 for the first half-year and $150 for the second. In 2009 prices are due to rise to $250-$300 per 1000 cubic metres but raising the prices paid by the Ukraine and Belarus will be problematic and no doubt give rise to sharp new political conflicts.

Why does Gazprom participate in profitless operations to resell gas to its CIS neighbours, creating problems for itself and reducing its own profitability?

Why did Gazprom need to create political scandals on the issue of gas deliveries to CIS countries for what amounts to modest improvements in the prices it charges while at the same time doing damage to its political reputation?

The Russian Consumer Pays the Price

Russians should have no illusions about who will end up paying for Gazprom’s inefficiency, underinvestment, and asset stripping.

We all will pay. In fact, we’re already having to – the price paid for gas by Russian consumers has risen sharply in recent years and the government plans to raise them still further and faster. In dollar terms, internal Russian prices have since 2001 risen nearly five-fold and now stand at nearly $64 per 1000 cubic metres (about the same as the gas price at the German border in 1999).

Average Russian consumer gas prices

Average Russian consumer gas prices

But that is not all. On 28 May 2007, the Russian government – it was then the Mikhail Fradkov cabinet – passed Decree №333 approving a programme of staged increases in the internal price of gas based on the ‘principle of equal profitability’ with exported gas. In simple terms, Russian consumers were going to have to pay international prices. According to the government’s official prognostications, by 2011 prices would double to $125 per 1000 cubic metres and might rise still higher since prices were rising rapidly and unpredictably in Europe.

Vladimir Putin’s government confirmed its resolve to keep to the planned rises in internal prices with the aim of achieving parity with European ones.

Higher gas prices are a problem for Russians even if they do not themselves consume gas. This is because gas makes up nearly half of all the fuel used to produce electricity in Russia, and considerable more than that in European Russia. For example, gas is used to produce 95% of the electricity of the Moscow region (Mosenergo’s former territory).

It is no surprise, therefore that the regions inhabitants are already paying 8¢ KWh (~2 roubles) while in the US electricity costs on average 6¢. Muscovites pay more for their electricity generated using Gazprom gas than Americans do for theirs!!!

Yet in 2000-2003, when the Russian government was discussing ways to reform the gas industry and Gazprom, the Central Institute of Economics & Mathematics calculated that if competition were to be engendered by breaking Gazprom up into independent gas producing companies, the price of gas in Russia would not exceed a level of $60-$70 per 1000 cubic metres. This means that rises in the price of gas are not justified and have one main cause – the fact of Gazprom’s monopoly.

We Russians are paying for Gazprom to have a monopoly.

And we’re paying for it not just through higher gas prices but also through the ridiculously low profits that go from Gazprom to the state. The corporation gets immense hidden subsidies from the state in the form of reduced taxation: for example, in 2007 Gazprom paid into the budget just $7.3 per barrel of oil and gas equivalent as compared to the $40 per barrel paid by the large oil companies. In 2007, Gazprom’s taxes amount to only 30% of its income and yet the government keeps putting off to a later date the matter of raising its taxes.

The favours done to government-favourite Gazprom is costing the Russian budget no less than $20 billion a year (a minimum estimate based on Gazprom paying tax at 50%). And it’s not that they pay knock-out dividends into the budget either: in 2007,for example, the corporation paid the state dividends of $1.35 billion, a mere 1.4% of income. Dividends on Gazprom shares in 2005-2007 were just 1% of the average value of shares.

The Alternative

We have deliberately decided to examine Gazprom and its activities during Putin’s term of office in greater detail. Our professional experience means that the subject is one we know and understand as we have both been professionally involved in matters concerning the Russian gas industry and Gazprom.

We are some of the few experts in Russia who are not Gazprom insiders but independent yet who understand the internal peculiarities of this corporation and are prepared to put forward to the public alternative policy suggestions for the gas industry that could help it overcome its looming crises. The following is, in our view, what needs to be done about Gazprom in order to avert a crisis:

1. Russians need to recognise that Gazprom in its present form is a problem for Russia.

2. It needs to be understood that lack of competition in gas extraction is delaying the bringing on line of large new deposits not by years but by decades. If the new deposits, which belong to the state, were to be developed via the licensing of independent private companies, production would have started long ago and competition would have kept Russian gas prices down. For example, independent Russian gas producers outside of Gazprom have increased their production from 47 billion cubic metres a year in 1999 to 105 billion in 2007 (a doubling in less than 8 years), mostly as a result of bringing new deposits on line. Furthermore, if Gazprom’s production figures had not been increased as a result of its takeover of independent companies’ deposits (the Gubkinsk deposit from Itera, the North Urengoi deposit from Nortgaz), Gazprom’s production figures would actually have dropped 4.5% and stand at roughly the 2002 level.

3. We need to create independent gas extraction companies based on the licensing of deposits which Gazprom has up until now failed to develop. Shares in these companies should be sold at auction to private owners. This would enable a new private gas extraction industry to take shape in Russia with the potential for a total output of 300 billion cubic metres by 2015, this in addition to the current independent sector which could increase its production to 150-170 billion cubic metres in the same period.

4. These measures would make it possible to create a very competitive internal market in Russia (without doing away with the existing export monopoly) and thus potentially stabilise internal gas prices for Russian consumers at a level 20-25% lower than Putin’s government and Gazprom plan to achieve by 2011.

5. In order to ensure that independent gas companies enjoy fair access to the gas pipeline network, the same should be done for gas transportation as experience has shown to be the solution for the oil industry: gas transportation should be removed from Gazprom’s remit and made into a single entity independent of gas production. The state should directly control this company, as it does Transneft for the oil industry. Equal access needs to be ensured and a single tariff for gas transportation applied to all pipeline users.

6. Windfall profits from gas exports at today’s high prices should not be allowed into the hands of Gazprom’s managers and steps taken to ensure they are used to overcome the approaching collapse of pension system and pay higher pensions. At today’s European prices, the windfall profits on gas exports amount to $15-$20 billion a year and could be used to create a decent pension system.

7. In order to guarantee long-term export supplies, we need to conclude a number of long-term contracts for the purchase by Gazprom-export (whose name, we believe, should revert to its historical one of Gazexport) of gas for re-export from producers. These contracts should provide for the producers to enjoy equal access to the profits from export sales of gas, less tax and Gazexport’s commission.

8. Gazprom’s remaining assets – operational gas fields, processing plants, distribution pipelines – will enable it to carry out its function of providing the Russian consumer with a reliable gas supply.

9. A review of all the deals done over the last few years to strip assets from Gazprom need to be carried out and measures taken for their legally enforced return. At the same time, Gazprom’s non-gas assets, including shareholdings in oil, electric power generation, petrochemical, and financial companies, should be sold off at open auction. The funds generated should be spent on reducing Gazprom’s accumulated debt to external creditors and investing in gas extraction.

We believe that the ideas we have set out above (and any others that are tabled) should be widely discussed in the free media with a view to elaborating a national programme to pull the gas industry out of the deep crisis into which Putin and his team have mired it. This crisis is heavy with consequences for the national economy and presents a threat to Russia’s energy security.

Conclusions. The Bottom Line

Here is what the activities of Gazprom, the country’s largest energy corporation, have led to during president Putin’s term of office:

1. Against the background of a growing economy (between 2000 and 2008 GDP rose by over 70% and industrial production by 65%) Gazprom’s gas output has risen not at all. In 2007 Gazprom produced practically the same amount of gas as in 1999 – 548 billion cubic metres and 546 billllion cubic metres respectively. The absence of growth in gas production when internal demand is rising and new pipelines are being built has led Russia to have a shortage of gas.

2. Gazprom has burdened itself with immense debts. These have risen from $13.5 billion in late 2000 to $61.6 billion at end 2007, an amount equal to 2/3 of its annual income. Such a level of debt makes it impossible for the corporation to invest enough in gas extraction and puts it at risk of a default and of bankruptcy.

3. Gazprom is the state’s largest corporation yet pays a miserly amount of tax into the budget. While internal gas prices rise and world prices rocket, in 2007 the corporation paid a little over $7 tax per barrel of oil/gas while oil companies paid $40 per barrel.

4. As a result of machinations to strip assets from Gazprom, the corporation has lost control of assets worth over $60 billion (6.4% of its own shares, shareholdings in Gazprombank, Sogaz, Sibur, Gazprom-media, and in Gazfond, the country’s largest non-state pension fund) and cash funds to the tune of $20 billion under the pretext of purchasing shares in Sibneft and schemes with trader Rosukrnergo.

5. Gazprom’s largest ever acquisition – of oil company Sibneft – cost Gazprom $13.7 billion or the equivalent of 3 years investment in gas extraction yet has turned out to be a production failure. Average daily oil output at Sibneft has fallen by 11.5% in the less than three year since it was bought.

6. Gazprom’s management inefficiency is worse than anyone expected. Operating costs have tripled since 2003, going from $4.9 to $14.8 per barrel equivalent.

7. Gas shortages, Gazprom inefficiency, absence of competition in the gas industry, and the total subjugation of the government to Gazprom’s lobbying power has forced the government to take steps increase the rate of gas price rises for Russian consumers to match European prices; the cost of electricity and utilities will therefore rise too.

8. The giant gas pipeline projects – Nordstream, South Stream, and Altai – dreamed up by Gazprom are economically unjustifiable machinations. Their expected costs are beyond all reason. The pipelines, notwithstanding what is said in propaganda, do not solve the problem of transit countries (the throughput of the pipelines passing through the Ukraine and Belarus is about twice that of Nordstream and South Stream combined). Given the deep crisis in which Russia’s gas extraction industry finds itself, where the gas to fill these pipelines will come from is not at all clear.

The reason for Gazprom’s dismal results is the gross lack of professionalism and incompetence of its main ‘protector’, Russia’s second president, who over the last 7 years has to all intents and purposes personally run Gazprom.

Changes are needed in order to get Russia’s gas industry out of its crisis – structural and personnel changes in Gazprom and a cardinal change of approach for the corporation. It is not conceivable that there will be any positive changes in the gas industry if it is not brought out from under the pernicious ‘personal protection’ of Vladimir Putin, whose ‘efforts’ on its behalf have led to the profound crisis in the industry and to Gazprom’s many failures. We will only see a change for the better after Putin’s government has resigned.

About the Authors

Boris Nemtsov and Vladimir Milov are Russian democratic opposition politicians and the co-authors of Putin – The Bottom Line, published by Novaya Gazeta in February 2008.

Putin and Gazprom is a continuation of the February white paper and concentrates in greater detail on how Gazprom, Russia’s largest energy corporation, has performed during Putin’s term of office. B. Nemtsov and V. Milov have both been directly concerned with Gazprom’s problems in their professional capacities.

Boris Nemtsov, as first vice-premier of the Russian government and minister for fuel and energy in 1997 was the author of president Yeltsin’s Order №426 of 28 April 1997 ‘On the main directions of structural reforms of natural monopolies’, which envisaged liberalising the gas market and opening it up to independent producers. In 1997, a proposal of Nemtsov’s led to the establishment of a commission to ensure access to Gazprom’s gas transport system for independent producers. More gas from independent producers was able to flow down Gazprom’s pipelines and independent production more than doubled. Boris Nemtsov’s efforts managed to prevent a 38% government shareholding in Gazprom passing into the hands of the corporation’s previous managers led by Rem Vyakhirev and to restore the government’s direct influence in the corporation’s management through its board of directors.

Vladimir Milov was closely involved during his career in regulating Gazprom’s activities. In 1999-2001, while at the Russian Federal Energy Commission, he drafted the main points of what later became premier Mikhail Kasyanov’s Resolution №1021 of November 2000 for the regulation of prices in the gas industry and introduction of radical measures to ease access to Gazprom’s pipelines for independent producers. Later, in 2002, while he was deputy minister for energy, Milov drafted a concept for the development of the gas market in Russia which was presented to the government by the Ministry for Economic Development and Trade for approval. This approval was not given, however, as it was vetoed by president Putin because acceptance of the proposals would have led to an expansion of the role of independent gas producers on the Russian market and the restructuring of Gazprom, matters that did not accord with president Putin’s ideas about the future of the Russian gas industry.

NOTES:

1. Source: Russian Ministry of Finance, Explanatory Note to draft federal budget for 2008-2010.
2. Vedomosti, A Pipe for $20 Billion, 30 July 2008.

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One response to “The Nemtsov White Paper, Part II (Section 3)

  1. Wow Dave, I dont envy your hobby of translating such large texts and complicating too :) Kudos to you :)

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