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Gazprom: rising star of new Kremlin capitalism

By Correspondent of The Christian Science Monitor / January 23, 2007



MOSCOW

A golden skyscraper, soon to thrust 1,300 feet above the crumbling riverside palaces of Russia's ancient czarist capital, St. Petersburg, will announce the rapid emergence of a powerful new Russian company that's acting boldly, growing fast, moving West, and changing whatever it touches: Gazprom.

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As Russia's No. 1 firm, the energy giant can certainly afford to house its new petroleum wing, Gazprom-Neft, in such extravagance. In the first nine months of last year, Gazprom's net profits leapt 80 percent. Roaring past industry behemoths Shell and BP last year, the state-owned natural gas monopoly is now the world's second-largest energy company after Exxon-Mobil.

But critics say the conglomerate, which owns a bank, soccer team, and media wing, is much more than the successful new kid on the global energy block. They describe the company as the Kremlin's flagship – and chief battering ram – in a strategy to restore state control of Russia's booming but petroleum-dependent economy, and use that accumulated power to further Moscow's agenda at home and abroad.

Worries over Gazprom's growing political role were boosted this month when, for the second time in just over a year, energy supplies to Europe were cut off amid a pricing dispute between Russia and one of its post-Soviet neighbors.

Since 2004, state control of Russia's oil industry has jumped from around 7 percent to over 35 percent, and is set to grow further this year, experts say. Gazprom and the state oil company Rosneft, headed by Kremlin-appointed officials, have been the key agents in takeovers of private oil companies such as Yukos, Sibneft, and, late last year, the Shell-run Sakhalin-2 project on Russia's Pacific coast.

Recently, the Kremlin has begun to apply the same business model to other sectors as well. Last year Russia's aircraft producers were deprivatized and merged into a single state-run conglomerate. The world's largest titanium producer, AVISMA, a profitable private company that supplies Airbus and Boeing, was taken over by the state arms monopoly Rosoboronexport. A massive state-run expansion of Russia's nuclear power industry is looming. Experts say the Kremlin has either begun, or is eyeing, forays into diamonds, forestry, telecommunications, automobiles, and banking.

"The Kremlin intends to build big industrial groups, something like South Korea's chaebol system, to stimulate Russia's economic development,"says Alexei Mukhin, director of the Center for Political Information, an independent Moscow think tank, referring to the monopolistic Korean conglomerates that have received government support.

Mr. Mukhin says the process has to be state-led, because Russia's experience in the 1990s showed that private businessmen became power-hungry and tried to buy their way into government. "Free capital is too unruly, and that's why [President Vladimir] Putin prefers to work with state officials whom he can control."

Fueling Russia's energy dominance

Gazprom's name has become a household word in the West, thanks to its recent role in forcing higher gas prices on Moscow's recalcitrant neighbors like Ukraine and Belarus, leading to brief supply disruptions and lasting political jitters in downstream Europe. Such moves have triggered accusations that Gazprom was acting as a political tool of the Kremlin.

"Gazprom is the core of the Russian state, and it expresses the will of the Kremlin," says Lilia Shevtsova, an expert with the Carnegie Center in Moscow. "It is not a normal company," but is closed, nontransparent, and unaccountable to all but its political masters, she says. "It operates like an intelligence agency."

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