Europe worries over Russian Gazprom's influence

Politically the phrase "Soviet satellite" would seem to be plucked from the ashcan of history, but political theory does not always govern economic reality.
Much to the consternation of the European Union, which now numbers several former Soviet block nations among its members, Russia through its natural-gas monopoly, Gazprom, has spun a web of control over energy supplies extending from Estonia on the Baltic Sea to Bulgaria on the Black Sea.

Russia holds the world's largest natural gas reserves, with 1,680 tcf, more than twice the reserves in the next-largest country, Iran, according to the Energy Information Agency of the US Department of Energy.
Not surprisingly it is the world's largest natural gas producer and exporter, giving Moscow considerable economic leverage over the countries that are dependent on Russian gas, and the leverage is not limited to the former satellites. Over 44 % of the European Union's gas imports come from Russia, mostly from Gazprom.

Late September, a delegation from global-minded Gazprom visited Washington at the invitation of Commerce Secretary Donald Evans and met with government officials and executives of American energy companies, including David O'Reilly, chairman of ChevronTexaco.
Through joint ventures with offshore trading companies, in which Gazprom has invested $ 2.6 bn, the Russian energy giant now controls the supply, sale and distribution of natural gas through much of Europe. In September, Gazprom became a major oil producer as well by acquiring Rosneft, Russia's No.5 oil company. The combination could give Russia even more bargaining power in global energy circles.

Gazprom is the sole gas supplier to Estonia, Latvia, Lithuania and Slovakia, and provides 89 % of Hungary's gas, 86 % of Poland's and nearly three-quarters of the Czech Republic's. In May all three nations joined the European Union, which has called on members to diversify their sources of energy supplies. In addition, according to the Energy Information Agency, Gazprom supplies 36 % of Germany's gas, 27 % of Italy's, 25 % of France's, 67 % of Turkey's, 65 % of Austria's and 100 % of Finland's.
"Russia wants to sustain its market position in the whole of Europe and especially in the ex-Soviet block countries," said Agata Loskot, a Russian expert at the Centre for Eastern Studies. "Of course, its activities in the new EU member states can be helpful in the expansion into western Europe."

According to the European Commission, the executive arm of the European Union, Russia now supplies 44 % of the natural gas and 18 % of the crude oil imported by the 25 member states.
Gazprom has a big economic interest in increasing its sales to western European markets because prices on the world market are considerably higher than in Russia, where they are capped. Although only a third of Russia's gas sales in terms of volume go to Europe, they account for 70 % of the revenues from natural gas.

Claudia Kemfert, energy expert at the DIW economics research institute in Berlin, said, "On the one hand, these countries do feel more secure now that they are inside the EU." But, she continued, "The entry of these countries into the EU has not led to more competition or diversification of energy supplies.”
"How can these countries diversify?" Kemfert added. "Gas and oil comes from Russia. The point is that it is hugely costly to modernize these energy sectors. So if they can continue to get the gas and oil from Russia, maybe in the long term it is cheaper for them."

Emmanuel Bergasse, administrator for Central and Eastern Europe at the International Energy Agency, an intergovernmental body based in Paris, said, "Gazprom gains control through direct investments and subsidiaries."
Indeed, under the stewardship of Alexei Miller, whom President Vladimir V. Putin of Russia named CEO in 2001, Gazprom has expanded at home and abroad. The acquisition of Rosneft, previously a state-owned company, gives the Kremlin a controlling interest in Gazprom, just over 50 % from 38 % previously. But the remaining shares are publicly traded, and foreigners may buy them.

Gazprom holds nearly a third of the world's natural gas reserves and produces 90 % of Russia's natural gas. The company's tax payments make up nearly a quarter of the national government's tax revenues. Last year, according to the company's annual report, it had revenues of 780.6 bn roubles, or $ 26.7 bn, and net profits of 142 bn roubles -- a rise of 270 % over the previous year.
Gazprom also operates the country's natural gas pipeline grid, giving it immense power over competitors, and in the East European and Baltic region, Gazprom now has at least 23 big joint ventures and offshore companies, many of them involved in gas distribution and transportation. Its interests extend to other energy sectors. In Lithuania, for example, Gazprom has a 51 % stake in the Kaunas electric power plant.

According to a report by Ewa Paszyc for the Centre of Eastern Studies in Warsaw, Poland, Gazprom has used these offshoots to maintain control of distribution in the post-Soviet era.
"Gazprom establishes a holding or a joint venture with a local gas-pipeline operation, creating a transit monopoly for Russian gas," Paszyc writes. Then through both contracts and informal means like personal connections and lobbying, it gains control, she added. In 1998, for example, Gazprom, took over the shares of Topenergy, a Bulgarian company dealing with commercial distribution of gas in Bulgaria. Until then, Bulgargaz, the state-owned gas company, had owned Topenergy. Gazprom finally clinched the deal only after promising to take over Topenergy's debts.

The monopoly's deals are worrisome to Westerners, who want to see more competition among companies.
"This is not how business is done inside the EU," said Bergasse of the International Energy Agency. "There is the issue of security of supply. If you buy gas from an offshore trading company, it could disappear. Who will then take over the supply and the obligations that go with it?"
Furthermore, he said, Gazprom's network of joint ventures across eastern Europe is interfering with the European Commission's aim of diversifying energy supplies to European Union countries.
"Gazprom's stated aim is to extend its dominant position," Bergasse added.

But even as Westerners worry about Gazprom's expansion, some Russians involved in the energy sector are sceptical about the financial value of the joint ventures. A report issued by Hermitage Capital Management, Russia's largest equity-investment fund, with assets of $ 1.5 bn, including shares in Gazprom, said Gazprom did "not seem to be receiving significant profit from its investments in these joint ventures."
"I have raised the same question about the role of these joint ventures in eastern Europe," said Vadim Kleiner, director of research at Hermitage. "Are there any economic returns from these investments for Gazprom, and if not, what is the business rationale for spending such money?"

Asked about the profitability of its investments in the area, a spokeswoman for Gazprom, Olga Moreva, said only, "Gazprom is satisfied with the financial performance of its joint ventures in the European region."