Gas: Russia's secret agenda Energy supply is a 'political weapon'

Last week's confrontation between Ukraine and Russia has fuelled suspicions that Moscow intends to use its dominant position in the European gas market to exert political control.

The decision by the state-controlled Gazprom to quadruple the price of its gas overnight looked suspiciously like revenge for last year's Orange revolution, which took Ukraine away from the Kremlin's sphere of influence. That the tyrannical, pro-Russian regime in Belarus continues to pay Gazprom a mere $47 per thousand cubic metres, compared with the proposed new tariff of $230 per thousand cubic metres for Ukraine, suggests that toeing the line with President Vladimir Putin keeps your gas bill down.

The dividing line between Gazprom, the world's biggest gas producer and Russia's largest company, and the Kremlin has never been more blurred. Tom James, principal of the energy markets team at accountants Deloitte, says: "Many within the European energy markets doubt the political independence of Russian gas suppliers."

Both have been flexing their already considerable muscles of late. Last year, Gazprom, which has a market value of over £60bn and supplies a fifth of Europe's gas, paid £7.5bn to buy Sibneft, the oil company controlled by the Chelsea football club owner Roman Abramovich. It even planned to merge with the state-owned oil company Rosneft, which snapped up the rump of the once-mighty Yukos after it fell foul of the Russian tax authorities. But this plan fell through.

Gazprom isn't just incredibly powerful because of its gas (it produces a fifth of the world's supplies and owns just under a fifth of global reserves). It also has a monopoly on Russia's gas pipeline network, which means it can control who gets it and when - as demonstrated last week.

The complex deal that was later agreed with Ukraine to resolve the dispute appears to have reinforced Gazprom's dominance. Ukraine will not buy Russia's gas at the new price of $230 per thousand cubic metres from Gazprom directly, but via one of its intermediary companies, RosUkr-Energo, at the lower rate of $95 per thousand cubic metres. The catch is that Ukraine must buy cheaper gas from Central Asian countries such as Turkmeni-stan at a higher rate - from Ros-UkrEnergo. This means that Gazprom, indirectly, now also controls much of the Central Asian gas coming into Europe.

Last month, restrictions on foreign ownership of the company were lifted, meaning that up to 49 per cent of its shares - in the form of American depository receipts - can now be sold to foreign institutions (the Russian government owns the rest). But any Western fund managers hoping that this openness heralds a new era of touchy-feely corporate governance would be mistaken. Mr Putin will continue to run Gazprom, and anyone who wishes to join the ride by buying shares is welcome. However, they must accept Russian rules - which aren't always fair, particularly to the minority shareholder.

At the same time as Gazprom expands, Mr Putin has been bolstering his power base. Last year, he ended the popular election of provincial governors. He is also cracking down on the independent media and on human rights and democracy groups, both domestic and foreign.

The increasingly autocratic President is looking ahead to what happens after the 2008 elections. Under the Russian constitution, he cannot stand for a third consecutive term. Some political analysts say that when he steps down, he will take the helm of Gazprom.

If Europe's dependence on Russian gas continues - and there is no real alternative in the short term - Mr Putin may, as Gaz- prom's chief, wield more political clout with the West than he does now. One Russian PR man based in London was asked if he was still "looking after" Gazprom as a client. He replied dryly: "No, Mr Putin is looking after Gazprom." It looks as if this will be the case for some time.