A mixed blessing: Gazprom's hold on the Economic Development of the Siberian Gas Industry

by Valery Kryukov

The gas industry is one of the most stable and well developed facets of the Siberian economy, and it is the most important sector of the Russian economy. With approximately 47 trillion C.Ms of gas reserves, Russia stands among the main gas producers of the world. 80% of its resources are located in Western Siberia.

All former production conglomerates in the oil and gas industry were transformed into "Soviet Union Concerns": Lukoil for the oil industry and Gazprom for the gas industry just before the breakup of the USSR. The next stage in the shift was to transform Gazprom from a state-concern into a state-owned joint stock company. This process essentially came to an end in 1995. Priorities of the state and Gazprom changed during the transformation process. Gazprom's main goals were:

  • to acquire substantial autonomy from the state,
  • to concentrate power in the central body of Gazprom,
  • to make a profit.

Below is an overview of Gazprom's main techniques for achieving its current power and position.

1) Acquiring rights as sole owner and distributor of access to the main trunkline;

2) using privatization as an instrument, the Gazprom board acquired control of stock share distribution , changed the internal structure of the post- Soviet gas industry and transformed the former Gas Ministry into a for-profit enterprise;

3) establishing strong protection against external interests by stipulating that shares can be freely bought on the open market, but requiring permission for their sale from the Gazprom board;

4) using a pricing policy, the Gazprom Board changed internal costs within Gazprom only periodically while external prices for Russia changed constantly due to inflation and thus Gazprom strengthened its financial independence;

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For the Siberian economy, a pricing policy means that its resource-based regions are poorer in terms of their sustainable economic development. The reason is that the main consumers, who are paying external prices, are outside Siberia. Once their main resources are depleted, these areas have nothing left with which to renew their economy. Therefore their budget is not suitable for the long-term development of their economy.

In addition, Gazprom used its pricing policy to transform the technical authority of the main board into a profit center. Then the legal status of the branches within Gazprom was changed. Now such units are no longer allowed to have their own financial sources or contact with the regions and companies purchasing their gas. As a result, the Gazprom board has become the main profit and strategic center for the development of the entire company.

5) Having a special relationship with the Federation due to overall declining production in Russia, Gazprom is one of the main financial sources for the entire country;

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This allows the Gazprom board and management to establish a strong bargaining position with the Federation; to use compensation procedures in negotiations with debt regions, and to acquire shares of privatized companies in other industries.

6) Diversifying assets by venturing into the military-industrial complex to produce oil and gas equipment, develop offshore fields (such as Roshelf), and acquire shares of these enterprises, as well as penetrating the financial sector and creating its own Gazprom bank and even its own bank system with more then 40 banks in various regions.

Beginning in 1997 Gazprom has decided to formalize all techniques used during the 1993-1995 period, announcing the division of the whole structure into three main sectors: distribution, trunkline system and production. This new structure will provide the company an opportunity to strengthen its links with big industrial consumers and use a more flexible price policy than previously.

For the Siberian economy the main result might be acquired only if a net back price mechanism is introduced.

In the author's opinion there is no need to separate Gazprom into various independent entities - as in the case of allocation licenses to develop new fields to other potential producers. In this case, open access to the trunk line system should be insured, (which can happen only if Gasprom's political resistance is broken down).

Paradoxically the current great economic success of Gazprom has already resulted in a series of disadvantages for the entire economy though Gazprom's own options for the future depend on the transformation of the Russian economy as a whole. For example, Gazprom prevents even its own, internal companies from maximizing their full potential. The point is that gas prices hold equal throughout all of Russia, so energy intensive industry has the same advantage in all regions. Nevertheless, Gazprom has the potential to survive as the main supplier not only of energy resources, but also as a key provider of financial resources for the entire Russian economy.