Gazprom and the struggle for power

Gazprom is now so powerful that it is capable of freezing much of Europe. Sarah Arnott reports

The Ukrainian gas crisis, which escalated further yesterday and put Europe's energy supplies into greater jeopardy, is a prime illustration of the unusual status of Russia's state-backed energy giant.

According to Gazprom, not only has Ukraine "stolen" 65 million cubic metres (mcm) of gas destined for Europe since New Year's Day, when Ukraine's non-payment of a $615m (£414m) bill saw Russia turn off supply. But, by refusing to exchange the necessary technical information, Naftogaz, the Ukrainian state utility, is now making it impossible for Gazprom to pump much gas into the transit system at all.

Who is to blame depends very much on whom you talk to. Naftogaz says the tap has been turned off at the Russian end of the pipeline, and that it is shoring up European deliveries with more than 10mcm of its own gas. Gazprom is vehement in its condemnation of Ukraine's behaviour. Alexander Medvedev, the deputy chief executive of the company, told a press conference in London yesterday: "We have become a hostage of the irresponsible behaviour of a transit country through which 80 per cent of our export gas to the EU runs."

Not only does the Russian side profess itself "shocked" at Ukraine's behaviour, but it insistently characterises the dispute as purely commercial and rejects the suggestion that representatives from Brussels might help broker a deal. "We don't need intermediaries in commercial negotiations," Mr Medvedev said. "There are certain rules in this business and if the Ukrainian side will come with a professional delegation, not a political one, it would be easy to find a compromise solution. But to do that, it is necessary that Ukraine behave normally, as accepted in an international setting."

For all its protestations, Gazprom is simply not a normal commercial entity. Nor is it as non-political as it claims. Not only is the Kremlin Gazprom's largest shareholder, but both the board and the management committee are peppered with political figures – including the current First Deputy Prime Minister, the Minister for Industry and Energy, and the Minister for Economic Development and Trade. Until recently, Gazprom was chaired by Dmitry Medvedev, the Russian President (and no relation of the deputy chief executive).

Gazprom was privatised from the old Soviet utility group in the 1990s, hit by string of corruption scandals, and then taken back under Kremlin control in 2005 when the government simultaneously bought itself a controlling stake and lifted the restrictions on foreign ownership of shares. It is both Russia's largest company, and the world's biggest gas group, with nearly 29,000 cubic kilometres of reserves, or 16 per cent of the global total. By virtue of its size, and the growing political importance of energy resources, Gazprom is the darling of Russian industry – a vital source of income and the route to a seat at the top geopolitical table. Alex Pravda, from Chatham House, the foreign policy think-tank, said: "Gazprom is a state champion par excellence, and the Russian government makes no secret of that."

Russia says that it is simply behind the curve, that its promotion of Gazprom is no different from the behaviour of Western state corporations in the past. But the country has a major image problem when it comes to energy. The first row with Ukraine followed hot on the heels of the Orange Revolution, which brought in a pro-Western government – prompting the mistrustful to claim Moscow was using energy as a political club to beat down pretensions to freedom in its former satellite states. When Russian oil supplies to the Czech Republic were disrupted within days of the government's agreement to host a US radar station, the chorus grew louder. And last year's conflict with Georgia was viewed by sceptics through the prism of Georgia's role in the Baku-Tbilisi-Ceyhan pipeline which supplies oil to Europe from the Caspian Sea without reference to Russia.

"A matter of degree turns into a matter of kind, and the degree of state involvement in Gazprom is considerable because energy is Russia's major resource," Mr Pravda said. "The Kremlin is trying to balance it – militarily and economically – but it is still largely reliant on energy for its foreign policy."

As far as western Europe is concerned, Gazprom is a reliable supplier. The company's record in former Soviet states is more varied, but its relationship with such states is more complicated. On the one hand Gazprom is a commercial entity, expected to pursue commercial goals. On the other, as a hangover from the USSR's rock-bottom gas prices, it is bound to provide massive discounts to former Soviet states. The repeated arguments with Ukraine, Belarus and Georgia are over the speed at which it can raise prices to nearer the European level. Professor Jonathan Stern, from the Oxford Institute of Energy Studies, said: "Despite the perception, what has not happened is Russia saying that, unless a country do such-and-such political thing, it will cut off the gas."

Neither is all Gazprom's vilification of Naftogaz unearned. Ukraine does steal gas, and its officials are notoriously difficult to deal with, according to experts on the region. "The trouble is when the West puts too much of a Cold War gloss on the situation," Professor Alan Riley at London's City University said.

Bypassing Russia: A Polish alternative

Even before the 2008-9 version of Ukraine's annual battle with Russia over gas, the governments of other former Soviet states were looking for foreign energy companies to helpexploit local resources and avoid reliance on Gazprom.

Aurelian Oil & Gas, which listedon London's Alternative Investment Market and has a former Conservative politician as its chairman, Lord Sainsbury as a shareholder and a Polish billionaire backer, is aiming to capitalise on opportunities in central and eastern Europe.

The company champions the low tax and royalty rates, transparent licensing and minimalpolitical risks for energy companies in the region. There are not only significant new fields to be found, but modern technology also enables existing, uneconomic state-held sites to be brought into production. Aurelian's major field in Posnan in Poland, forexample, could account for as much as 15 per cent of the country's gas demand if it delivers on its promise.

David Prior, Aurelian's chairman, said: "In most Central European economies very littledevelopment has taken placebecause everything was done in Russia. Local governments areextremely supportive – the fiscal regime for the development of gas in Poland, for example, is about as good as it gets anywhere in the world."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste