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Gazprom: In Perspective

by Simon Lewis

On April 18, OAO Gazprom, the Russian state-owned gas monolith, gained the controlling stake in Sakhalin Energy Investment Company Ltd. (50% + 1 share) that it had been promised in December after the internationally publicised ‘scandal’ surrounding the allegations made against the company by the Federal Service for the Supervision of Natural Resources (“Rosprirodnadzor”), the Russian government’s environmental watchdog.

The predominant strand of Western commentary, which maintains that Gazprom is an instrument of state-sponsored bullying, has been steadfast in its resilience since September when the affair became public. In the meantime, Anna Politkovskaya was murdered outside her Moscow apartment (October 7), Aleksandr Litvinenko was poisoned to death in London (November), Belarus was dealt a repeat of the gas cut-off suffered by Ukraine (January), and Russia and its ‘crumbling’ democracy has been a regular focus of the mainstream media. With the passing of Boris Yeltsin on April 23, many foreign commentators, both politicians and journalists, could not resist the temptation to at least make sidelong implications hinting at the current president’s ‘regressiveness’, compared with Mr. Yeltsin’s legacy as a ‘defender of democracy’ and the ‘conqueror of Communism’.

There is hardly a need to recount the allegations brought against Putin’s Russia. They are, by now, very familiar and verging on monotony. Europeans are concerned for their energy security, investors are weary, democracy pundits are up in arms, whilst the US government seems to seriously believe that the “defensive” anti-missile shield being developed in Poland and the Czech Republic is not an affront against Russia’s international perspective.

It would be na?ve and foolish to suggest that democracy in Russia is not in grave danger. Presidential appointment, rather than popular election, has become the normative vehicle for accession to governmental and judiciary positions. Political opposition is on its last legs, with popular protest restricted and liberal candidates being struck off electoral ballots for allegedly collecting forged signatures. The perceived freedom of the press is diminishing rapidly with every mysterious journalist death, while Gazprom and friends buy up more and more of the main media outlets.

But is Gazprom’s state-sponsored strategy really world domination? Is the company just a foreign policy tool with the expressed aim of re-establishing a second post-Soviet Moscow-centric empire, this time through economic means? Has the Kremlin succeeded in embracing and manipulating capitalism to reignite the old flame of its expansionist ambitions?

The answer is, inevitably perhaps, both yes and no. Yes because the company is owned by the state, and, like all commercial enterprises, its strategy includes expansion and increased profits; because the board of directors is composed of Putin allies and government ministers (including supposed presidential hopeful and First Deputy Premier Dmitriy Medvedev); because imperialist and nationalist sentiments are growing in Russia, fuelled by war, politics, media, literature, and theatre; because Russia has interests, either directly or indirectly, in a number of geopolitical disputes, from Kosovo through Transdniestr, Nagorno-Karabakh, Abkhazia and South Ossetia, the Kuril Islands north of Japan, and of course Chechnya, and is too reluctant to cede any ground to allow for any other foreign influences, especially those of the USA.

However, some degree of perspective is needed before condemning Russia and Gazprom too hastily – and not just because the arguments raised against them might be equally applicable to our own governments and corporations.

It is universally agreed that Russia’s ability to be seen as a threat has been brought about during President Putin’s tenure through unprecedented economic growth, the driving force of which is mineral exports – mainly oil and gas. Widespread wealth is a virgin concept to Russia, and the Moscow of today is a vastly different landscape to that of even five years ago, and the fruits of the county’s newfound prosperity have begun flowering also in the regions.

But the country is far from developed by any non-GDP-measured standards: healthcare is lagging behind drastically, social safety nets are still non-existent, housing is sub-standard, child poverty is rife, and a million people are homeless. The reported crime rate has been on the rise since the lost years of the late 90s. Hundreds of thousands of abandoned and orphaned children live in state institutions, the majority of which will never be integrated into mainstream society. Outside Moscow and a few of the very biggest cities, infrastructure is limited. It is indicative that, in the country with the largest gas resources in the world, only 54% of the population is directly supplied with domestic gas – this figure falls to 34% in rural areas.

The problem with the typical western analysis of Gazprom’s strategy, therefore, is that it does not take into account the domestic front on which it operates. In a country still very much in transition to market principles and economic stability, both the government and Gazprom have an entire system to overhaul and bring in line with the global regime. By doing so, they not only stabilise Russia’s economy, but by proxy, they significantly contribute to the overall energy security of Europe and the world at large.

The domestic gas market in Russia is, in truth, not a market at all. Staggering differences in prices and incomes between Russia at the collapse of the Soviet Union and the West meant that domestic gas has been heavily subsidized by Gazprom and the government until now, as it was in communist times. Meanwhile, demand only grows both at home and abroad, while (Western-influenced) geopolitical concerns in the Middle East and Nigeria, as well as US antagonism with a number of South American regimes, maintain energy security in a state of tension and global prices remain high. The result is that Russia is increasingly called upon, from both East and West, to supply export fuel.

Gazprom currently makes a loss on its domestic gas sales, which limits the investiture it can embark on in order to exploit more of its abundant subsoil resources. The company is therefore straining to ensure that it can continue to meet rising demand and honour long-term supply contracts it has signed with a number of destination countries in Europe, whilst also trying to build relations with Asian markets such as India, China, Japan and South Korea. This is, of course, a worry for Gazprom itself and for all governments and citizens who rely on fossil fuel resources for their energy needs (and whilst the Green Revolution remains confined to a few OSCE countries, and alternative energy development is hardly revolutionary in its progress, this is essentially everyone) because it is the purses of the ordinary consumer which will be hardest hit by any prospective crisis in energy supply. The strategy laid out by the government is to gradually raise gas prices through its tariff system, gradually introducing long-term supply contracts market pricing with an aim of having a fully market-based and sustainable system by 2011.

Contrary to Western opinion, Gazprom and the Federal Government are not two mirror-image manifestations of Soviet-style hegemony conspiring to conquer Russia, the former Soviet Union, and eventually the rest of the world. As with any pluriform political system, there are ideological divisions and tensions permeating the administration at every level: President Putin has, after all, preferred variety and continuity as to be a defining feature of his cadre, unlike Mr. Yeltsin who dispatched a seemingly endless string of ministers as soon as their opinion started to differ from his own. Internal talks regarding market liberalization, export policy, taxation, and so on, have stalled repeatedly due to relativistic differences (the government, for example, is proposing a sixfold increase in gas extraction tax, which Gazprom is vehemently opposing). The presence of disagreement and debate is, of course, perfectly typical of any legitimate democratic institution, and accusations of resurgent totalitarian authority are revealed to be, if not totally misplaced (debate is a fairly exclusive feature of the upper echelons after all, with only limited details reaching the eyes and ears of the press), then certainly a hysterical overreaction.

While Mr. Putin’s favoured doctrine of “sovereign” or “controlled” democracy comes under frequent attack on this side of the divide, where Politkovskaya, Kasparov, Berezovsky and other militant Putin-haters are given a practical monopoly of editorial exposure, the predominant, and undoubtedly not enforced perspective (the legacy of Russian dissidence is far too strong for that) in Russia itself is both more balanced and varied. It is recognized and conceded that statist reforms are a necessary counterweight to the rampant kleptocracy pervaded by the self-serving pro-business bratva of the Yeltsin-era, that the oligarchs had to be brought in check (and for all the injustices committed against Mikhail Khodorkovsky, insofaras as he was singled out and packaged as a universal warning, let us not forget that he was legitimately found guilty of tax evasion and fraud), and that enforced counter-insurgent pacification was the only way to stop the bloodshed in Chechnya.

The case of Sakhalin Energy is no different. The original Production Sharing Agreement (PSA) was signed in 1994, when Russia was a still fragile capitalistic embryo desperate for foreign investment and willing to accept almost any conditions. Multinational energy corporations are hardly known for their compromising nature, while the Russian authorities of the time were far from reaching any recognized apex of accountability. The recent action can therefore be interpreted as a Russified reverse model of the successful attempt of the British and American governments in overthrowing the Iranian Shah in 1953 for threatening to nationalize oil interests there. Furthermore, there is no reason to suppose that Sakhalin Energy was not in violation of environmental protocols (although, equally, there is no evidence to suggest that the newly Russian-controlled enterprise is making any attempt to rectify any infringement).

Mr. Putin’s speech at the Munich conference on Security Policy in February and the subsequent reactions signified the start of a new era of US-Russian tension, and talk of a new cold war has abounded. Conflicts of interest exist in almost every sphere of political activity: the new “space race” being waged over the control of global satellite surveillance (the US’s GPS vs. Europe’s Galileo vs. Russia’s GLONASS), the struggle for influence in Middle Eastern affairs (with Russia increasing its stake in the Palestinian conflict, renewing speculation on the possible formation of a new OPEC-style gas cartel, cooperating with Iran over nuclear power, etc.), Russia’s renewed friendliness with Japan, a traditionally staunch US-ally, and its increasing diplomatic and strategic cooperation with Europe (especially Germany) are all cause for concern for Republicans and Democrats alike.

One key area in which the US has been striving to increase its holding is Central Asia, doggedly supporting the colour-revolutions (recently revealed to be a false dawn in Ukraine) and rapidly expanding its energy interests in Kazakhstan, Azerbaijan and other resource-rich countries. Meanwhile, it has been vociferous in the assault against Gazprom for forcibly raising gas prices in Ukraine, Georgia and Belarus. There is a fatal contradiction at play here which is plain to see for anyone who cares to look: if the West is so stridently in favour of market liberalism and democracy, and principally against a “repressive” and “anti-democratic” Russia re-establishing its sphere of influence over its new sovereign neighbours, why on earth would they want Russia to carry on subsidizing their gas consumption, negating the development of the desired economic principles and maintaining an economic leash with which to rein them in at will? On the contrary, Moscow has throughout this decade made a string of concessions to the CIS states to establish their independence and re-mould them into strong, strategic partners, rather than subservient, and therefore reliant, puppet regimes. It is only in cases of open hostility (such as Georgia) that severe measures have been taken to draw a line in the sand. The outcomes of the price disputes of recent winters should be interpreted as the controlled release of the adolescent flock from the parental nest, and not as a threat to Europe, the US, or anyone else.

The question remains: what of the future? Russia is approaching an all-important crossroads, in the form of the March 2008 Presidential Elections. Suffice it to say that Putin will almost certainly not be a candidate, while common wisdom has it that former Defence Minister Sergei Ivanov and Dmitriy Medvedev (current Chairman of Gazprom) are the main contenders. The end of the Putin era will signify the closing chapter of a Golden Age for many Russians, while it cannot be supposed that much systemic change will be implemented by either victorious candidate.

In the meantime, we in the West must recognize that Russia is completing a crucial and at times painful first phase of transition from totalitarianism to capitalist democracy. Unreasoned hostility will only push the regime towards greater antagonism, as has been witnessed in the rise of Islamist militancy throughout the years of the War On Terror. Baiting the bear will only increase our own security worries, while positively encouraging liberal reform through cooperation and trade will serve to continue the ascendance of stability, democracy and reform in this most turbulent of countries. If alignment is what we wish from the Russians, then we must stop blindly criticising them.

Simon Lewis is an occasional writer on Russian and other international affairs. He studied Russian and Linguistics at Oxford University, and has worked as a teacher, orphanage volunteer, translator and writer in Russia. He is now employed in Russian oil and gas research in London.

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