NY Times, April 24, 2006
Workers' Paradise Is Rebranded as Kremlin Inc.
By ANDREW E. KRAMER and STEVEN LEE MYERS
KRASNAYA POLYANA, Russia Here in the Caucasus, above Sochi, Russia's only
subtropical city, an elite ski resort is rising beside the Layura River.
The resort, a multimillion-dollar project with a hotel and conference
center, cottages, six lifts and miles of trails, is a centerpiece of
Sochi's improbable bid for the Winter Olympic Games of 2014.
Even more improbable is the project's developer: Russia's state gas
monopoly, Gazprom.
Gazprom is a vast and powerful energy giant, a company now worth more than
$240 billion, having gained $10 billion in value in one week in April
alone. Ranked by the value of its stock, Gazprom is the fifth-largest
corporation in the world, having in the last year leaped over Wal-Mart,
Toyota and Citigroup. Its executives vow to make it the biggest.
It has become something else, too: the leading model of a new Russian
capitalism that has emerged since President Vladimir V. Putin came to power
in 2000. It is an economic system increasingly built around huge
state-owned or state-directed companies that are open to investors' dollars
and euros but remain tightly controlled, like much else here in business
and politics, by Mr. Putin's Kremlin.
As the project at Krasnaya Polyana shows, Gazprom is not just a lucrative
state-owned monopoly, but also a powerful instrument of Kremlin policy at
home and abroad. It has undertaken an array of projects that have little to
do with its stated corporate interests, but much to do with politics from
bidding for the Olympics to buying up independent media, from sustaining
unprofitable farms to subsidizing Russian industries with cheap energy.
It has also been at the center of Russia's foreign policy, used as a cudgel
in recent disputes over gas prices with Ukraine and other neighbors. Its
chief executive, Aleksei B. Miller, recently warned Europe not to block its
further expansion into European markets, lest it decide to sell its natural
gas elsewhere.
Andrei N. Illarionov, a former economic adviser to Mr. Putin who has become
an increasingly outspoken critic since being dismissed last December,
called Russia's economy today a form of "corporate state."
He described a coterie of highly placed officials who control big business
through their government posts, using those posts to make not just policy,
but profit. Some have dual hats: Gazprom's chairman is Dmitri A. Medvedev,
the former Kremlin chief of staff, the current first deputy prime minister
and a man widely viewed as a possible successor to Mr. Putin.
"They look not like state business," he said of Gazprom's projects and
those of other state-controlled companies, "but the business part of the
state."
Mr. Putin's Kremlin, in this view, is not renationalizing industries sold
off in the 1990's as much as redistributing the assets to a new group of
tycoons, enriching favored investors and even, critics say, members of his
own administration, while ensuring that the Kremlin itself has influence
over the most important parts of Russia's economy.
Mr. Putin's efforts initially appeared limited to imposing state control
over the country's natural resources.
In recent months, however, the Kremlin has orchestrated the consolidation
of several struggling state and private aircraft manufacturers into a newly
created Unified Aircraft Corporation under the supervision of Mr. Putin's
appointed prime minister. The Kremlin has appointed its own directors from
the country's military export arm to oversee the largest automaker,
Avtovaz. [The government disclosed April 21 that it was considering
consolidating various airlines under the state-controlled Aeroflot.]
"Instead of properly regulating the economy, the state owns the economy,"
said Aleksandr Y. Lebedev, a billionaire whose own investments, he said,
are now under pressure from the state.
These large companies are continuing to absorb smaller ones, accumulating
even greater wealth and power. The state oil company Rosneft, for example,
acquired the main subsidiary of Yukos in December 2004 after a
prosecutorial assault against its former chairman, Mikhail B. Khodorkovsky,
now serving an eight-year sentence in a Siberian jail on charges of fraud
and tax evasion that many say were politically motivated.
Allies Become Insiders
The man most often linked to the Kremlin's campaign against Yukos is Igor
I. Sechin, the deputy chief of Mr. Putin's administration. In the midst of
the legal battle over Yukos, Mr. Putin appointed him the chairman of
Rosneft, a company now valued at $57 billion.
In 2004, before the demise of Yukos, Rosneft was worth an estimated $8.6
billion.
Sergei M. Guriyev, a professor at the New Economic School in Moscow, said
estimates based on World Bank studies indicated that the government share
of industrial output and employment had grown to 40 percent, from about 30
percent in 2003.
"The feeling is actually much worse," he said, "as even private owners know
that their property rights are contingent on their relationships with the
Kremlin."
Last year, for example, state and private oil companies reached a deal with
the Kremlin presented as a voluntary agreement to cap prices on gasoline.
To his supporters, and there are many, Mr. Putin has simply tamed Gazprom
and other big businesses that actively undermined state authority in the
turbulent transition that followed the collapse of the Soviet command economy.
In the case of Gazprom, he turned an unwieldy and corrupted gas monopoly
into a gleaming example of the wealth to be had from energy exports, a
company now nearly as valuable as Citigroup, with export ambitions that
include China and the United States.
He has done so by appointing to top positions associates from his days in
St. Petersburg and dictating moves in meetings with a small circle of
advisers "in the Kremlin or at Putin's dacha," according to Olga V.
Kryshtanovskaya, a sociologist who has written extensively on the Kremlin's
hierarchy.
Gazprom is now run not by mere Kremlin appointees, but by government
ministers and members of Mr. Putin's administration itself.
Buoyed by rising energy prices, the economy under Mr. Putin has boomed, and
investors have responded positively, even as the United States and other
governments express concern about the Kremlin's consolidation of political
and economic power.
By the end of April, Gazprom is expected to announce its international
partners in developing a huge gas field in the Barents Sea, one that holds
seven times the amount of gas that Europe uses each year.
Gazprom's suitors include Chevron and ConocoPhillips from the United
States, Statoil and Norsk Hydro from Norway and Total from France.
But even as Gazprom closes in on BP, now the world's second-largest energy
company after Exxon Mobil, critics say it is hardly a model for Russia's
future. "This is not why we had reforms in the 1990s," said Yevgeny G.
Yasin, a former minister of economy. "This is a little like the Soviet Union."
He added, "This is a questionable solution because the government will
dictate political and not economic decisions."
A Gas Company's Sidelines
Gazprom emerged in the early 1990's from the former Soviet Ministry of the
Gas Industry privatized in part, but still under state control and
inherited more than the ministry's core operations. It also inherited its
piece of the Soviet Union's paternalistic economy, in towns and settlements
stretching from the Arctic gas fields to those along the maze of pipelines
leading south.
Gazprom employs 330,000 people at major divisions for exploration,
pipelines and export sales, as well as a division for its newly acquired
oil company, Sibneft, a banking arm, a media company and hundreds of
subsidiaries. It generated profits of $4.6 billion on revenue of $28
billion in 2004, the last year for which audited results are available.
From its newly built headquarters in a blue-and-tan high-rise south of
Moscow's city center, the company's managers poured billions into dying
industries in the 1990's, made quick profits on construction and other
projects and spawned great corruption in the form of shady, insider deals.
All the while, Gazprom expanded its power in economic and political life,
while richly rewarding investors from the proceeds of its energy sales.
Gazprom built homes, roads and sports centers. It even guaranteed that
groceries would be available in the stores by forming its own agricultural
holdings. As once-proud Soviet collective farms failed and foreign imports
overwhelmed Russia's domestic production, Gazprom stepped in with financing
and became the biggest single owner of agricultural land in Russia.
The company's footprint has grown even beyond farms to include a
manufacturer of mining equipment, banks, a porcelain factory and, as of
mid-April, a new radio station called Relax FM, playing easy-listening pop
and rock from the West.
It now holds $14 billion worth of assets not related to oil and gas; and 38
percent of its employees still work outside the core business, like those
now clearing the slopes of pine trees for the new ski runs high above Sochi.
While executives say they intend to shed the company of noncore assets and
other Soviet-era burdens, Gazprom continues to make investments that seem
to have a political motive more than a corporate one.
Last year, for example, it expanded its media holdings with the acquisition
of Izvestia, one of the most influential national newspapers. It also
bought a soccer team, Zenit, in St. Petersburg and announced recently that
it would move the headquarters of Sibneft, the oil company once slated to
merge with Yukos but now absorbed into Gazprom, to St. Petersburg, the
former capital. The latter move fit into a stated policy to step up
investment in St. Petersburg, where Mr. Putin and many of his closest aides
once lived and worked.
[Its media arm is now in talks to buy one of the largest-circulation
newspapers, Komsomolskaya Pravda, and an associated publishing house for as
much as $300 million, Vedomosti, a Russian business daily, reported April 20.]
"The Russian government has a track record of pressuring state-owned
companies to undertake large and risky projects and significant
acquisitions financed mainly by new corporate debt," Standard & Poor's, the
international credit rating agency, wrote in a report in April.
Asked about political pressure, Gazprom's chief spokesman, Sergei V.
Kupriyanov, noted last year's freeze on gasoline prices, saying that both
private and state companies often acted in the national interest.
"There are decisions made in the interest of the people or the state,
regardless of whether government ministers are on the board," he said in an
interview.
A Gamble on the Olympics
While the Russian Olympic Committee is relentlessly upbeat about Sochi's
bid for 2014, promising a games where visitors can ski during the day and
lounge under palms in the evening, Gazprom has a checkered history with
similar investments.
Its noncore employee costs were $1.4 billion in 2004, the latest full-year
figures available. Those employees worked in businesses that, all told,
generated a loss of $350 million that year, according to a report by
Hermitage Capital Management, the largest foreign investor in Gazprom.
Those losses underscore the burdens on Gazprom to support companies not to
make profits, but to sustain struggling industries, to dispense patronage
and to wield political influence.
What is striking, however, is that even after 15 years of market transition
it continues to expand those holdings and investments, increasingly using
its monopolistic, politically favored position at the top of Russia's
economy to absorb other companies at discounted prices.
"Gazprom has the pick of buying what it wants to buy because no one else is
allowed to do it," said William F. Browder, a British citizen who is the
chief executive of Hermitage.
In an incident emblematic of the blurring of state and corporate power
here, Mr. Browder's visa was revoked in November, ostensibly on the grounds
that he posed an unspecified threat to national security. He is the largest
foreign investor in the Russian stock market, but he has also criticized
Gazprom, Rosneft and other large state-owned or controlled companies.
"When you're talking about strategic enterprises," he said, "business is
government."
Many investors, including foreigners, criticize Gazprom, but they buy in
anyway. Although official figures are not available, more than a quarter of
Gazprom's shares are estimated to be owned by foreigners, including
Hermitage and E.ON Ruhrgas of Germany. With a lifting of restrictions on
foreign shares, called the "ring fence," foreign ownership is now allowed
to be as high as 49.9 percent.
Mr. Browder, in particular, has waged a crusade to press Gazprom to shed
its noncore assets and politically motivated projects and to become more
transparent and professional. At the same time, however, he argues that the
losses from those nonessential projects are dwarfed by the money to be made
in the company.
The investment case made by Mr. Browder and others rests on the company's
huge reserves at a time of tight global supplies of oil and gas.
With reserves of 116 billion barrels of oil or barrels-equivalent in
natural gas, it has more than any publicly traded company. Exxon Mobil, by
comparison, has reserves of 73.2 billion barrels.
Gazprom's total energy reserves trail only Saudi Arabia's (263 billion
barrels) and Iran's (133 billion barrels).
Likewise, the Standard & Poor's report warned that there was "a risk
powerful vested-interest groups will use government-owned companies to
strengthen their political or economic positions," but concluded that state
ownership was "generally positive" and left unchanged its rating at BB,
already higher than other Russian energy companies.
For now, understanding Gazprom's internal workings recalls the task of
Kremlinologists who once tried to divine the Soviet Union's leadership
shuffles.
Gazprom holds regular board meetings and yearly stockholder gatherings, but
its decisions are still made within a tight, informal circle around the
president and relayed through Mr. Medvedev, the chairman and first deputy
prime minister, according to Ms. Kryshtanovskaya, a sociologist who studies
the Russian business and political elite.
Mr. Putin's role in Gazprom is so great that many have speculated he would
take over the company when his second and, constitutionally, last term ends
in 2008. In January, he jokingly brushed aside the question, saying, "I am
not a businessman, either by character or by previous life experience."
An Atmosphere of Secrecy
When it comes to projects like Krasnaya Polyana, Gazprom operates in almost
complete secrecy. Company officials refused to discuss the development
above Sochi, the decision to build the resort, whether they expected to
make a profit or even how much it would cost.
Gazprom's courting of foreign capital has brought pressure to become more
transparent. That could force Gazprom to start justifying its corporate
decisions, like the investment in Krasnaya Polyana, for example, or its
control over a mysterious energy trader, RosUkrEnergo, at the center of the
deal with Ukraine to resolve the New Year's dispute over natural gas prices.
Gazprom could also face more pressure to invest where analysts say it
should: developing new gas fields to replace deposits nearing depletion
where production is already declining.
Gazprom cannot currently meet internal demand and export commitments solely
from its primary fields in Siberia, and has been forced to purchase natural
gas from Central Asian countries, according to a report by Cambridge Energy
Research Associates.
At peak demand during a bitter cold spell in January, its entire pipeline
network came dangerously close to losing pressure, which would have forced
it to ration gas by shutting off supplies to some large industries.
In Sochi, however, Gazprom is fueling Olympic dreams. In a sign of the
intersection between state and corporate interests, a new road is being
built straight to the new resort, which is as yet unnamed, while Sochi's
airport is undergoing an expansion.
"Only monopolies," Sochi's deputy mayor, Andrei P. Platonov, said on a tour
of Krasnaya Polyana, "can afford to carry out projects like this."
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