#10 - JRL 6586
Russia: Moscow Pondering Energy-Restructuring Move
By Michael Lelyveld

Russia's gas giant Gazprom faces critical decisions this month as the government considers plans for restructuring and higher tariffs. The results are likely to have broad implications for the economy and the pace of President Vladimir Putin's reforms.

Boston, 3 December 2002 (RFE/RL) -- December could be a month of major steps for the Russian natural-gas monopoly Gazprom as the government decides whether it will take the next leap toward reform.

The world's biggest gas company, accounting for 8 percent of the Russian economy, faces at least two crucial government meetings this month on restructuring and dramatically raising gas tariffs.

Both decisions could shape the course of the country's economy, since cheap subsidized gas represents 45 percent of Russia's energy usage and 65 percent of industry's fuel, according to U.S. Department of Energy estimates. Gazprom is also Russia's top taxpayer and second source of earnings after oil. The company, which supplies one-fourth of Europe's gas, is 38 percent state-owned. But the biggest questions on the company's future remain unresolved.

Government officials have been gearing up for a 19 December meeting to approve a plan for selling up to 5 percent of Russia's gas in domestic auctions. The move could open the door to market pricing and start weaning the country off gas that costs about one-fifth of European rates. Gazprom has continually complained that it loses money on its domestic sales.

But the plan of the Federal Energy Commission (FEK) is complicated. It would keep control over prices for households but make them pay the same gas-transport costs as those for the new open market. The result would be that Gazprom could stop underwriting domestic sales with its exports, freeing it to develop export projects, "Hart's European Offshore Petroleum Newsletter" said.

Gazprom is happy about plans that could bring it more revenue but less enthusiastic about those that could erode its vast powers. At this month's meeting, the government may consider a restructuring that would break the monopoly's production from its pipeline operations. The split could spark investment and allow independent oil companies to export their own gas for the first time.

But last month, Gazprom's deputy chief executive, Aleksandr Ryazanov, told the Federation Council that the company opposes the breakup. He was backed by the chairman of the Committee for Natural Monopolies, Mikhail Odintsov, who argued that rapid reform would send gas prices soaring, making the Russian population "the loser," RBC News reported. Last week, State Duma Speaker Gennadii Seleznev said the government is likely to put the whole issue off until next year.

A delay would be no surprise. The government has pushed back the reform plans at least twice since President Vladimir Putin took office nearly three years ago. But postponement would also amount to a decision, signaling that Putin will not challenge either Gazprom or the economy to a faster pace of reforms.

So far, the government seems to be far from making a total commitment to restructuring. Last month, Western investors again raised hopes that Gazprom would lower the infamous "ring fence" that bars them from trading in the company's domestic shares.

Before that takes place, the government should increase its stake in the company to 51 percent, a Gazprom management source told Interfax last month. In October, the daily "Vedomosti" reported that the Federal Securities Commission backs that idea. In September, Deputy Prime Minister Aleksei Kudrin said the government wants to keep control of Gazprom during any restructuring, adding that there are no plans to sell shares next year.

But even before the meeting on liberalizing the gas market, the government is scheduled to consider higher tariffs on 11 December. Theoretically, these have already been set in the 2003 budget, which has passed the State Duma in its third reading with one more to go. Gazprom and the FEK want to push the rates higher than the 20 percent hike allowed in the budget, assuming inflation of perhaps 12 percent. Various proposals would raise next year's tariffs for industry by 40 or 50 percent.

The outcome will affect both Russia's consumers and its chances for joining the World Trade Organization, since the European Union has demanded an end to gas subsidies as a condition of membership. Russia has resisted, fearing inflation and hardship for its citizens, but Gazprom's tariff demands and those of the EU could soon converge.

The government has pushed Gazprom to cut costs before it grants higher tariffs. That demand seems to be behind some recent reports that Gazprom has been putting its house in order. Last week, Gazprom CEO Aleksei Miller told the London-based "Financial Times" that the company has succeeded in taking back assets that were transferred to insiders under the monopoly's previous management. Miller claimed, "We have returned to Gazprom absolutely all the core assets."

Commentators have been split between those who argue that Miller has cleaned up Gazprom since his appointment last year and those who see little real progress. Miller's public appearances have been rare.

Last month, Gazprom also publicized a temporary cut in supplies to the independent gas trader Itera for nonpayment of transit and storage costs to several CIS countries. It is unclear whether the measure represented real discipline or a response to criticism that Itera has enriched itself from its ties to Gazprom.

Whatever the government decides, the course for Gazprom and the Russian economy is likely to become clearer by the end of the month.