Page last updated at 22:21 GMT, Sunday, 24 February 2008

Russia's energy giant flexes its muscles

By Duncan Bartlett
Business reporter, BBC News, Moscow

Gazprom chairman Dmitry Medvedev
Gazprom's boss is expected to become Russia's next president

Russia's economic power lies in its key natural resources - oil and gas.

Many countries in Eastern Europe depend on Russia for energy, and it supplies about a quarter of the gas used in the European Union.

But the company which runs the gas business - Gazprom - is controversially close to the Russian state.

Critics say it is little more than an economic and political tool of the Kremlin.

But the company itself is proud of its influence both at home and abroad.

Cold war

Gazprom used to be a ministry before it became a company, and it retains extraordinarily close links to the state.

Russian President Vladimir Putin wants Gazprom's current chairman, Dmitry Medvedev, to succeed him as president following elections in March.

Gazprom's Moscow headquarters
Gazprom is a towering economic presence in Russia

Mr Medvedev is already used to life in the Kremlin, as he's Russia's deputy prime minister.

Indeed, Mr Medvedev recently threw a party at the Kremlin to mark Gazprom's 15th birthday, and hired his favourite band, the British heavy rock group Deep Purple, to play in front of Russia's political and business elite.

With earnings of more than $1bn a month, Gazprom can easily afford to pay Deep Purple to entertain its staff.

But Gazprom's close ties with the government is cause of concern for many observers, such as Edward Lucas, Eastern Europe correspondent for The Economist magazine and author of The New Cold War - How the Kremlin Menaces Both Russia and the West.

Powerful state

"I think we have to treat Gazprom as the gas division of Kremlin Inc," Mr Lucas says.

It used to be tanks and submarines and missiles that we were frightened of, now it should be banks and pipelines
Edward Lucas
Journalist and author

"This is not a normal company; this is the economic arm of a powerful state with a self-declared interest in confronting (the West) and exploiting our political and economic disunity."

Mr Lucas claims that Gazprom's marriage of economic and political power is particularly threatening.

"It used to be tanks and submarines and missiles that we were frightened of, now it should be banks and pipelines, and Russia has made tremendous strides in consolidating its monopoly of gas exports."

'Gas dictatorship'

Russia's critics, like Mr Lucas, maintain that the Kremlin uses gas as an economic weapon.

Russian professor and TV journalist Alexi Pushkov

Gazprom is an instrument of Russian foreign policy, like American oil companies are instruments of American foreign policy
Alexei Pushkov

But Alexei Pushkov, a professor of International Relations and a well-known author and Russian TV presenter, says that's a misconception.

"Gazprom is an instrument of Russian foreign policy, like American oil companies are instruments of American foreign policy," he says.

"If Russia was using gas in order to blackmail foreign countries, we wouldn't have special deals with European nations who are eager to have long-term deals with Gazprom."

Mr Pushkov says that claims among Russia's critics that it is trying to forge a "gas dictatorship", capable of forcing European customers to bend to the Kremlin's will, is little more than a return to Cold War prejudices.

Attractive investment

Gazprom has a monopoly over gas supplies within Russia, and - controversially - it intends to raise its previously subsidized domestic prices sharply in the near future.

James Fenkner, of Red Star Fund Management
American-born James Fenkner believes Gazprom is going places

Just over 50% of Gazprom's shares are owned by the Russian government.

The rest are listed on the stock exchange in Moscow and can be bought by Russian or foreign investors.

One such investor is James Fenkner, who runs Red Star Fund Management.

As an American at the top of a Moscow-based hedge fund, he handles millions of dollars and believes Gazprom's strong grip on the Russian market makes it an attractive investment.

"To be linked as a company to the Russian government, it doesn't necessarily have to be evil," Mr Fenkner says.

Largest Russian company
Founded in 1989
Net income US$24.6bn in 2006
Employs more than 430,000 people
Slogan: Dreams Come True

"The fact that you have Dmitry Medvedev as the chairman of Gazprom pushing this idea of increasing domestic gas prices, and then very likely becoming the next president of Russia I think speaks very well for the company."

And contrary to the view of Gazprom's critics, Mr Fenkner says Gazprom listens not just to the Russian government, but to its investors.

"The desire of this company is to become a global leader, and they understand that their share price will help in this because they'll be able to acquire other assets and be able to use that share price as currency, especially in acquiring assets outside of Russia," he says.

"To do that they have to be more investor sensitive than they have been."

Kremlin control

But not everyone is convinced that Gazprom is interested in becoming investor-sensitive.

Alexander Branis, of Prosperity Capital Management
Russian investor Alexander Branis is wary of Gazprom

Alexander Branis is the director of another investment company, Prosperity Capital Management.

He says that while Gazprom might appear to be an independent corporation, it is little more than another department of the government.

"Gazprom is largely still a ministry in my view, because it is not really focused on making a profit and creating a free cash flow, and distributing that free cash flow to shareholders as normal companies do," he says.

As an influential Russian at the top of a major investment company, Mr Branis sees little opportunity in Gazprom for the investors he represents, especially if the energy firm's current government-influenced structure continues.

But with Mr Medvedev likely to succeed Mr Putin as Russia's president next month, it seems unlikely that the Kremlin's close ties with Gazprom will loosen at any time in the foreseeable future.

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