June 29, 2006

ADR weighting in Gazprom’s equity tops 9%.

The ADR weighting of Gazprom’s total equity has climbed to more than 9%, 1% up from 8% in mid-May 2006, the company reported in a press release.

The ADR component in the concern’s total stock had been steady at 4.42% for quite a long time, before the gas giant launched its Level-1 ADR program, the closing stage in lifting the ring fence, on April 17 of this year. The Federal Securities Service (FSS) set the ADR limit at 35% of Gazprom’s charter capital. The Level-1 ADR program superseded the previous one initiated under Regulation S. Old ADRs launched under Regulation A-144 are still in circulation, but will be upgraded to Level-1 at a later time.

Update 1-Gazprom profit surge misses forecasts, shares fall

Fri Jul 7, 2006 2:04am ET

Moscow (Reuters) – Russian gas monopoly Gazprom (GAZPq.L: Quote, Profile, Research) reported on Friday a 49 percent rise in net profit due to greater gas sales, higher prices and new oil assets, but the results missed expectations and the shares fell.

The world’s largest gas producer, which covers a quarter of Europe’s needs in the fuel, said its net profit audited to International Accounting Standards rose to 311 billion roubles ($11.56 billion) in 2005 from 209 billion in 2004.

Sales climbed to 1.38 trillion roubles ($51.3 billion) from 977 billion, while operating expenses rose 30 percent to 930 billion. Taxes, salaries and costs for oil and gas purchases all were higher, as were costs for repairs and maintenance and depreciation.

“We believe the results are weak as they met our expectations on the top line, but were 7 percent lower than our net profit estimates,” said Kaha Kiknavelidze from UBS.

Gazprom’s stock, among the world’s top 10 by value with a market capitalisation of $253 billion, fell by over 2 percent in London to trade at $41.8 per ADR at 0930 GMT.

Citigroup had expected Gazprom to report a net profit of $13.8 billion, with Alfa Bank at $12.3 billion, Renaissance Capital $12.1 billion and Troika Dialog $11.9 billion.

Kiknavelidze also said he was disappointed by Gazprom’s low cash flow generation on the back of high cost increases.

The firm’s net debt rose by 60 percent to over $28 billion as it spent more than $13 billion in the fourth quarter to buy control of oil firm Sibneft from Roman Abramovich, the Russian billionaire owner of top English soccer club Chelsea.

But analysts including Kiknavelidze and Troika’s Maximov said they would not change their price targets and ratings on Gazprom as the firm has great growth prospects due to its massive natural gas resources.

International

Energy Tsar

Michael Freedman and Heidi Brown 07.24.06

Vladimir Putin is using publicly traded Gazprom, and its monster reserves, to remake Russia. Should you own a piece of it?

On a recent morning Alexei Miller, head of Russia’s OAO Gazprom, the world’s largest public energy company by reserves, strode toward a lectern in a standing-room-only convention hall in Amsterdam. There to deliver a keynote address to leaders of the world’s foremost oil and gas companies and investors, Miller locked eyes with the crowd and said icily, in English, “The speech will be in Russian.” At that, scores of executives rushed to the exits, tripping over one another to get headphones for a translation. Miller stood alone at the lectern, scowling into the spotlight.

The crowd returned moments later for the speech, a 30-minute overview of the company’s plans. But the incident underscored the contradictory faces of the sixth-most-valuable company on the planet as it lurches toward Western-style capitalism. There’s the slick salesman who needs billions of dollars in capital and technical know-how from the outside in order to exploit a quadrillion cubic feet of proven natural gas reserves (50 years’ U.S. consumption) and 300,000 miles of pipeline crisscrossing Russia from the Baltic border east to Tomsk in Siberia and from Uzbekistan north toward the Arctic Circle. And there’s the clumsy beast, wounded by its own history of cronyism and corruption but proud enough to insist on its own rules. These twin incarnations constantly vie with each other.

Whatever Gazprom turns out to be, it is today a formidable force. Though still inefficient and scandal-prone, the company provides most of the gas to former Soviet states and to central Europe, as well as 25% of the needs of western Europe. Since Miller took over in 2001, the company has increased earnings from $440 million to $7.5 billion, on $42 billion in sales. It has announced one deal after another and is discussing a pipeline to Japan and a joint venture in Iran. By 2010 it expects to send gas in liquefied state from reserves near the Barents Sea to ports in the U.S. And the company is looking eastward, too, with plans to build pipelines to China. In a decade, executives insist, Gazprom’s market cap will exceed $1 trillion.

Despite his title Miller is the second-most-important figure involved with Gazprom. Number one is the 53-year-old president of the Russian Federation, Vladimir V. Putin, who takes center stage at the Group of 8 summit beginning July 15 on his home turf in St. Petersburg. He has made energy security, a subject he has long pondered, the theme of the gathering. Nine years ago, in a late-life Ph.D. dissertation, he laid out his plans for management of the country’s natural resources. And when he assumed the presidency from Boris Yeltsin in 2000, he started consolidating the Kremlin’s power over the nation’s most valuable asset–its rich store of oil, gas and other resources. Putin has seized control of large sectors of the economy, including stakes in autos, aviation, metals and mining. As chief executive of Russia Inc., he is creating a post-Soviet, post-Yeltsin superpower whose strength comes not from warheads but from commodities.

Putin has put his stamp in particular on the nation’s largest company and crown jewel, Gazprom, where he packed the board with friends from his hometown St. Petersburg, including Dmitry Medvedev, simultaneously chairman of the Gazprom board and Putin’s first deputy prime minister, and installed Miller, then an unknown technocrat with little direct experience in the gas industry. Last year the government paid $7.1 billion to Gazprom subsidiaries for an additional 10.7% stake in Gazprom, giving the Kremlin a majority stake in the company. Putin’s interest in energy is perhaps not just geopolitical; there are rumors he will take over Gazprom himself in 2008 when his second term is over and he is supposed to step down.

He has denied any interest in the job. Yet, more than any previous Russian politician, Putin recognizes the importance of an industry that provides not just heat to the nation’s 143 million people but as much as 20% of its $77 billion in annual tax revenue. Energy is the foundation of Putin’s ultimate source of strength: the widespread support of the Russian people. Largely because of the national energy supply, and Putin’s ability to exploit it, per capita personal income has increased 29% annually since 2001. Renationalizing Russia’s resources is tantamount, in a post-Cold-War age, to resurrecting the old empire.

Putin’s role model isn’t Stalin but Peter the Great (1672–1725), whose portrait hangs in his office. Peter dragged a backward Russia into the modern age by exploiting Western technology–shipbuilding in particular–and creating a formidable navy, as he reformed the economy and enlarged national boundaries. By the time he died, Russia was a mighty European power.

To the outside world today a Russia resurgent comes across as threatening and potentially dangerous. Coincident with the Kremlin’s chauvinistic grab for greater ownership of energy companies comes its curtailment of civil liberties, the crushing of dissident media groups and jailing or expelling powerful political rivals (like Mikhail Khodorkovsky, now doing time in Siberia for financial misdeeds at his oil company). Gazprom’s brief shutdown of natural gas to Ukraine last winter sent a shudder through Europe and later provoked Vice President Dick Cheney to say, “No legitimate interest is served when oil and gas become tools of intimidation or blackmail.” A recent call for more government control of multibillion-dollar projects with ExxonMobil and Royal Dutch Shell has Westerners rethinking whether they want to send capital into this nation and wondering whether Russia has really molted a past pocked by scandalous inefficiency–and worse. Is Gazprom the latest weapon with which to wage foreign policy or a powerful partner ready to do business?

Gazprom executives insist the company’s role in Russia is merely to be a fast-growing enterprise. “Why are we attacked so brutally and unfairly?” asks Alexander Medvedev, deputy chairman of Gazprom’s management committee and architect of its ambitious plans for global expansion, in accented English. “Seven years ago we have a $20 billion capitalization; today it is ten times more. We don’t have any problems raising money for our projects. We are introducing modern marketing techniques, project management, and not everybody likes it because it’s a competition.” Adds Victor Khristenko, Russian Minister of Industry & Energy, “Our goal is to make Gazprom a strong international player that honors contract commitments and is respected worldwide.”

Sinister or stumblebum, Gazprom has long been intertwined with the government. Its roots date back to the Stalin era, when the government built a 525-mile pipeline to bring gas from Saratov in the south to Moscow. Though hugely wasteful and disorganized under the centralized Communist economy, in the 1970s it still supplied all the Soviet states and, by way of pipelines in Ukraine, even parts of western Europe, says Arild Moe, deputy director at Fridtjof Nansen Institute in Lysaker, Norway. By the 1980s the state gas sector that ran the operation was controlled by a classic Soviet functionary, Victor Chernomyrdin, and he held on tight to his post until 1992, a year after Boris Yeltsin became the first popularly elected leader of Russia.

Under Yeltsin the economy began to stagger toward free-market capitalism. Like many who became rich and powerful during those years, Chernomyrdin turned his government appointment into an opportunity for personal gain. In 1992 he created Gazprom. Nearly free from government regulation, it later provided financial support and advice to 130 political candidates, including his own “Our Home is Russia” party. In 1992 he became Russia’s prime minister, and control of Gazprom was assumed by his deputy, Rem Vyakhirev, a chain-smoking Soviet-style bureaucrat, whose first name stood for Revolution, Engels, Marx.

Despite his background, many outsiders believed Vyakhirev was absorbing lessons of Western business. In the three decades Gazprom had sold gas to western Europe, it never missed a delivery, and in 1997 he told FORBES of his ambitions to expand the company overseas. Yet the Yeltsin era was scarred by widespread corruption and asset looting; Gazprom was not immune. When the government sold a slug of the company in 1994, one-third of its shares were bought at closed auctions. According to the hedge fund and investor Hermitage Capital Management, between 1997 and 2001 the company lost 10% of its gas reserves via share dilution to partners in various joint ventures, totaling an amount equal to Exxon’s entire reserves at the time.

One outfit, called Itera, bought gas from Gazprom and the central Asian nation of Turkmenistan, resold it on the market to Ukraine and other former Soviet states and acted as a sort of guarantor that Gazprom would be paid by indebted former Soviet states. But Hermitage estimates that over a seven-year period, beginning in 1996, Gazprom gave away half the revenue from gas markets in those former states to Itera, at a loss of $7 billion. Itera also wound up owning Gazprom gasfields and other assets. In a recent U.S. federal court lawsuit Texas oilman Richard Moncrief alleged that Itera had fraudulently stripped Gazprom of assets. The suit has been thrown out on jurisdictional grounds; Moncrief has appealed.

Who benefited from Itera? The company is run by champion cyclist Igor Makarov from Turkmenistan, who operates out of a four-story building in Jacksonville, Fla. But the Russian press and many others have suggested that Rem Vyakhirev and Chernomyrdin or their families were enriched by the dealings with Itera, though both men have denied it. Still, FORBES estimated in 2001 that the two men each had fortunes upward of $1.1 billion, the direct result of their work with a onetime Soviet ministry.

Investors who complained were blackballed or worse. Boris Federov, an investor and a former minister of finance, criticized the company’s leadership, which reacted so fiercely he began to fear for his life, according to an account by Marshall Goldman, an economist and Russia scholar at Harvard. Federov was threatened with jail. The Russian mafia paid him a visit. His dog was poisoned. He remains on Gazprom’s board and is active in national politics.

But life at Gazprom, and the world of Russian business, started to change in June 2000, with the ascension of Vladimir Putin. He cracked down on the wealthy rogues who enriched themselves during the Yeltsin era. Sibneft Oil’s Boris Berezovsky fled to England; Russia’s richest man, Yukos Oil boss Khodorkovsky, was marched off to prison on a conviction for tax evasion and fraud. The Kremlin broke apart Yukos and seized control of its oil assets. Particularly dismaying to Westerners was the heavy-handed treatment of Khodorkovsky and the show-trial nature of the court proceedings. The Russian stock market plunged 10% on the news of his arrest.

Yet Putin’s tactics paid off. Last October Gazprom paid $13 billion, financed by banks, for 73% of Sibneft. Authorities dismantled Yukos in a closed auction, and its key assets were ultimately acquired by state-controlled Rosneft, which is slated to go public on the London Stock Exchange this summer in one of the largest initial offerings ever. With the oligarchs reined in, companies began paying taxes, living standards improved and, in the words of one of Russia’s most bullish investors, the nation went from “horrible to bad.”

By seizing control of energy resources, Putin could also begin to clean them up. At Gazprom he sent Vyakhirev packing and anointed the now 44-year-old Miller, who had worked with Putin in the St. Petersburg mayor’s office, served as a port director, run a small pipeline company and served as deputy energy minister. In 2001 the Gazprom board, made up of six government insiders and five others, unanimously approved a Kremlin proposal to appoint the young official as head of the company. With the arrival of Miller, notes Jonathan Stern of the Oxford Institute for Energy Studies, Gazprom became a part of the state of Russia, with direct links to Putin, and “accepted its role as an instrument of government policy.”

Miller’s first task was, according to the Russian press, “to restore constitutional order.” He dispensed with many of the old-guard characters who struck it rich at Gazprom, began paying dividends and set about repurchasing or reclaiming subsidiaries Gazprom had sold or lost control of. It won victories in the Russian courts, for instance, and supported an effort by the state prosecutor’s office to recover $85 million in an illegal sale of Gazprom assets. By such means, which some asset holders have contested, Miller has been largely successful, recovering billions of dollars’ worth of assets and regaining control of subsidiaries in former Soviet states and elsewhere. John Connor, who manages the Third Millennium Fund in New York City, which has 7% devoted to Gazprom, says the company has come a long way since Miller took over. “At shareholder meetings, it used to be you didn’t know who you were voting for,” he says. “Now they have an investor relations department that supplies information like that. It’s much more businesslike.”

But Miller–and Putin–still have a long way to go to remake Gazprom’s image in the West. Investors complain about its inordinately high payments to obscure intermediaries for basic supplies. Between 2003 and 2004 Ukrainian pipe prices inched up 1%, but Gazprom reported price increases of 35%. Following a 2002 project in Turkey, known as Blue Stream, the chairman of the Turkish pipeline company was tried and later fined over alleged corruption involving the cost of materials; Gazprom shelled out roughly twice as much. (The company says the Russian part of the project was more difficult because of terrain differences.) Then there are the billions of dollars worth of ancillary businesses, many of which are losing money. Over the years Gazprom has owned stakes in such things as a poultry farm and a resort on the Black Sea. In 2004, Hermitage Capital says, Gazprom paid $1.5 billion to employees in offshoot businesses, resulting in losses of $350 million. Gazprom executives say they are in the process of restructuring noncore assets.

Adding to outsiders’ suspicions about the company is a lack of transparency in its relationships with states like Ukraine and Turkmenistan. (Turkmen dictator, President Saparmurat Niyazov, is known for human rights violations and has renamed the months of the year after himself and members of his family.) In 2001 Gazprom cut out the middleman’s role for Itera, which bought gas from Gazprom and Turkmenistan, then sold it at a far higher price in Gazprom’s own markets, according to U.K. corporate watchdog Global Witness. But two new companies simply took its place. First came Eural Transgas, a Hungarian company granted rights by Gazprom to sell gas to Ukraine. Its true shareholders are unknown, and Carlos Pascual, then U.S. ambassador to Ukraine, remarked at a conference in Kiev that he feared it was connected to organized crime. The company’s long-term contract effectively ended in July 2004, when Putin himself met in Yalta with Ukraine’s then president, Leonid Kuchma, and a group of oil and gas executives, including Gazprom’s Miller, and drafted terms for a new outfit to deliver gas to Ukraine called Rosukrenergo.

Like its predecessors this new company makes enormous profits on each trade, buying Gazprom gas for $2.27 per million cubic feet and selling it for $5.55, according to Mikhail Korchemkin, a Malvern, Pa. energy consultant. But Gazprom owns just 50% of this company, giving up half the profits–and, seemingly, transparency. Ownership of the remaining half of Rosukrenergo was a closely guarded secret until April, when, amid news of a possible U.S. Justice Department investigation, two mysterious businessmen, Dmitry Firtash and Ivan Fursin, came forward to claim their stakes (respectively, 40% and 10%). Who are these guys? Firtash owns part of Eural Transgas and has media interests in Ukraine, while Fursin reportedly owns a movie theater and other small businesses. (Gazprom says the Ukrainians insisted on this arrangement.)

Gazprom has also raised hackles by the way it has thrown its weight around on oil and gas projects. It has, for instance, tied a much sought-after deal to extract gas at Shtokman in the Barents Sea and deliver it to North America–Chevron and ConocoPhillips are among the contenders–with Russia’s accession to the World Trade Organization, according to Andrew Somers, head of the American Chamber of Commerce in Russia. (Gazprom denies there is any quid pro quo.) More ominously, it is delaying TNK-BP, half-owned by the British energy giant, from developing the gas-rich field of Kovykta in eastern Siberia. Gazprom claims that TNK-BP is not addressing the gas needs of the region’s population. But the location makes the field ideal for eventual supply to China, and observers are convinced Gazprom is conniving to keep it for itself. Anton Rubtsov, an oil and gas analyst at Rye, Man & Gor Securities in Moscow, says if Gazprom denies TNK-BP access to the pipeline, the Russo-English company will lose its license for the field. “Gazprom could acquire full control,” he says. The company denies this, saying that Russian law makes it impossible for TNK-BP to fully exploit the fields on its own.

But nothing has inspired greater paranoia than Gazprom’s ham-fisted dealings with Ukraine. Last winter it raised prices on gas, as it had said it would. Yet rather than work through back channels or phase in the price increases, it briefly cut off Ukraine’s energy supply and began reducing pressure in transmission lines that carry supplies to western Europe. Gazprom blamed Ukraine, saying it needed to pay market prices, and insisted that the reduced pressure to Europe was the result of illegal siphoning of gas in Ukraine. Whatever its motives, western Europeans suddenly believed they had reason to fear for their own energy security.

The backlash erupted in the U.K., amid speculation that Gazprom was interested in purchasing Centrica, a British gas company. Tony Blair’s government promised “robust scrutiny” of the deal but backed down while Gazprom threatened to sell its gas in other markets, suggesting to many that it planned to tear up or renegotiate existing long-term gas delivery contracts. Gazprom now denies it was ever interested in Centrica and the implication that contracts were in jeopardy. Still, these incidents only ratcheted up nervousness about the reliability of Russian energy. “They don’t seem to get it when it comes to reputation,” says Clifford Gaddy, an economist and Russia expert at the Brookings Institution. “Nobody trusts them anymore. No one. They have no idea how much they’ve been hurt, and it’s impossible to say how long it will take them to recover the trust.”

Gazprom seems to be trying. This winter the Russian parliament relaxed rules on foreign ownership of shares, which trade as American Depositary Receipts. For all its ursine huffing and puffing, Gazprom vitally needs outsiders. Europe is likely to be the company’s biggest market for years to come. Fulfilling its other ambitions will require partners and the ability to make large acquisitions. And Gazprom executives will need foreign expertise to tap reserves in some of the world’s most inhospitable places–Sakhalin in the Far East and Shtokman, toward the Arctic Ocean, among them. If it hopes to crack the world’s biggest market, the U.S., it needs help every step of the way–from tapping the reserves and liquefying the gas to acquiring capacity at the handful of regasification terminals in North America.

Last September a group of Gazprom and other executives stood at the Cove Point Lighthouse in Maryland, cheering as the Castillo de Vellalba tanker cruised into the terminal. The arrival of the ship, filled with 4.4 million cubic feet of LNG, marked the company’s first delivery to America. Yet it was just a dress rehearsal, a favor from Western energy companies, to help traders at Gazprom’s new London trading desk learn how to put in place agreements between buyer and seller, work out kinks in the system and go through the process of finding and negotiating for cargo and locating a home for it. “This is not a business where you can get away with bullying a counter-party,” says John Hattenberger, Gazprom’s point man in the U.S., from his one-man office in downtown Houston, set up in preparation for building more permanent Gazprom digs there.

It will be at least four years before Gazprom is fully prepared to enter the North American market. Expansion into China is a long way off, too. But as Gazprom gropes its way to fulfilling its global ambitions, it will be under the spotlight as never before. Putin has turned Gazprom into the nation’s public persona–creating in the process the specter of a frightening and newly powerful Russia. This weekend at the G8 conference, the president, not Miller, is onstage for all the world to see. Will Russia–with its difficult and confounding history, its boom-and-bust cycles, its questionable commitment to rule of law and open markets–once again send investors stampeding for the exits?

Gazprom stock’s market value to increase tenfold

September 4, 2004

Liberalization of the stock market of Russia’s Gazprom gas giant will be announced before July, Boris Fyodorov, a member of the concern’s board of directors, told RIA Novosti Friday. (Boris Fyodorov earlier was Russia’s vice premier and finance minister – Ed.) In his words, the increase of the state-held package of shares to 51% and the beginning of liberalization will be announced. “This is inevitable,” Mr. Fyodorov said.

In his opinion, both Russian shareholders and owners of American depositary receipts will gain from the liberalization of Gazprom’s stock market.

Mr. Fyodorov said 500,000 Russian nationals are waiting for this liberalization. They are private shareholders of this company. “They are waiting for the company to start bringing profit,” he said.

The market value of Gazprom shares must total not $40 billion, as it is now, but $300-400 billion, Mr. Fyodorov said.

In the beginning of this week, Russian Economic Development and Trade Minister German Gref also said that liberalization of Gazprom’s market of shares will take place and thus the double market of the concern’s stock will be eliminated.

Vice Premier Alexander Zhukov spoke for the liberalization too. “We will try to transfer to a common market of Gazprom shares as soon as possible,” Mr. Zhukov said.

January 13, 2006 

By Jason Bush

Gazprom: Open for Global Investors

Russia has finally lifted the “ring-fence” restrictions that kept foreign money away from the gas giant. Result: A soaring share price.

It’s being called the “Big Bang” for the Russian stock market. Since Jan. 10, the first trading day since the end of Russia’s New Year holiday, foreigners have been free to buy into Russia’s largest company, national gas concern Gazprom, without restrictions. It’s a day long awaited by foreign investors in Russia. “The most important impact is that nearly every investor in the world who wanted to invest in Gazprom couldn’t until now,” says William Browder, CEO of Hermitage Capital Management, the largest portfolio investor in Russia.

Gazprom, after all, isn’t just any company. With hydrocarbon reserves equivalent to 119 billion barrels of oil and a market capitalization of $150 billion, Gazprom, which is 51% state-owned, is the world’s largest listed energy company in terms of reserves and the biggest company in emerging markets by capitalization. Yet thanks to legal restrictions imposed by the Russian government in 1997, international investors couldn’t get their hands on it.

Dubbed the “ring fence,” the restrictions prevented foreigners from buying Gazprom shares traded on Russian exchanges. The only way they could legally acquire Gazprom shares was by buying American Depositary Shares (ADS) traded in London, which accounted for just 3.5% of Gazprom’s equity. The resulting scarcity meant the ADSs were more expensive than the locally traded shares, at one time trading at a premium of almost 100%. Their absence from the main U.S. exchanges also helped to deter American investors.

Index effect.

True, many foreign investors evaded the restrictions through so-called “grey schemes” tolerated by the Russian authorities. For example, a Russian entity would buy local Gazprom shares and then give foreigners an opportunity to gain indirect access by selling shares in itself. As a result, some 15% to 20% of Gazprom stock was estimated to be in foreign hands last year. But such schemes tended to appeal mainly to investors specializing in Russia. Mainstream investors such as large mutual funds were put off by the complexity and legal risks.

An even bigger deterrent was the effect the ring fence had on the composition of key indexes tracked by the large investment funds. Only the internationally traded ADSs were included in estimates of Gazprom’s free float. Last year, Gazprom’s weighting in the Morgan Stanley Capital International (MSCI) Emerging Markets Index, a key emerging-market benchmark used by large investors, was just 0.4%. That’s now due to increase nearly tenfold, to 3.7%, reflecting the increase in Gazprom’s free float to around 40%. Gazprom’s weighting in the MSCI Russia index, is set to increase from 6.3% to 42.8%.

Gazprom’s stock has soared with the removal of the restrictions, rising by 24% in the first three trading days. The daily volume of Gazprom share trading has also surged, to some 80 million to 90 million shares per day, three times higher than a typical day’s trading last year, according to Alexei Dolgikh, a trader at Moscow investment bank Troika Dialog. “We’re seeing very big buying power, a lot of new money,” says Dolgikh.

Weight adjustment.

The run-up is even more impressive, because for the last year, Gazprom’s stock price has already registered impressive gains. Last year, the share price surged by 145%, as those investors able to buy snatched up Gazprom shares in anticipation of the ring fence’s removal.

Many believe the prospect for further increases is good. Russia’s two largest exchanges, the Russian Trading System (RTS) and Moscow Interbank Currency Exchange, have yet to begin trading Gazprom shares (the RTS is due to launch trading on Friday, Jan. 13). And it will still be a few more weeks until Gazprom shares start trading in the U.S. in the form of level-1 American Depositary Receipts (ADRs).

Finally, one of the most important effects of the ring fence’s removal — the revision of Gazprom’s weighting in the MSCI index — won’t be completed until May. “When they make that adjustment, it should lead to one-off demand of around $8 billion from [large mutual] funds. That’s one of the drivers of the share price,” says Chris Weafer, head of research at Russia’s Alfa-Bank. He adds that once the new weightings take effect, even the most conservative investors, such as large U.S. pension funds, will find it hard to ignore Gazprom and Russia.

Political influence.

Not everyone, though, is so bullish. Some analysts caution that Gazprom is now starting to look expensive measured against its current earnings. Yet Browder of Hermitage points out that Gazprom trades at around $2 per barrel of reserves, eight to nine times less than BP (BP ) or ExxonMobil (XOM ). “The asset valuation of Gazprom is still dramatically lower than any other major hydrocarbon company in the world,” he says.

Separately, questions remain regarding Gazprom’s corporate transparency. Despite the company’s recent efforts at portraying itself as an independent entity, rather than an arm of the Kremlin, it’s clear that its business, both at home and abroad, is affected by Russia’s murky politics.

Indeed, at the same time the ring fence was being lifted, Gazprom caused a major stir internationally by cutting off gas supplies to Ukraine. The move briefly caused shockwaves in Western Europe, Gazprom’s key export market, where the interruption of supplies may spur long-term efforts to diversify Europe’s energy imports away from Russia.

A ways to go.

But Gazprom’s heavy-handed tactics — obviously linked to political tensions between Russia and Ukraine — don’t seem to be fazing investors. They welcome Gazprom’s efforts to raise gas prices in countries such as Ukraine, and switch gas exports to more lucrative Western markets.

“Investors see this as confirmation that Gazprom is being moved away from being a foreign aid program towards a commercial orientation,” says Alfa’s Weafer. However, it remains to be seen just how far Gazprom and the Russian government are willing to go to complete the modernization of the company. What’s clear is that the long-awaited lifting of restrictions on foreign investment is a very large and welcome step in the right direction.

November 3, 2004

China Joins the Battle for Sakhalin

With ExxonMobil’s Help

People’s Friendship

Officials of Gazprom and ExxonMobil yesterday announced their intentions to cooperate in developing the Sakhalin-1 project. It was also learned yesterday that ExxonMobil and China National Petroleum Corporation (CNPC) have started negotiations on gas deliveries from Sakhalin-1 to China via pipeline. For Gazprom, participation in this project may become an alternative to constructing a gas pipeline from Eastern Siberia to China.

Gazprom’s press service reported that Aleksandr Ananenkov, acting CEO of Gazprom (CEO Aleksey Miller is on a short vacation), and Jeffrey Woodbury, president of ExxonMobil’s Russia Inc., held a working meeting yesterday. The main topic of discussion was future cooperation of the two companies in the Sakhalin-1 project, where ExxonMobil is the operator. Officially, Gazprom has no shares in Sakhalin-1, but last year the assets of Rosneft, including its 20% share in the Sakhalin project, became part of Gazpromneft.

Until recently, the participation of the Japanese consortium SODECO in the project suggested that gas from Sakhalin-1 would be delivered to Japan either by pipeline or as liquefied natural gas (LNG); however, the Japanese have long had doubts about the project’s profitability. The Japanese newspaper Nihon Kenzai reported yesterday that talks were underway between ExxonMobil and CNPC on possible long-term gas deliveries from Sakhalin-1. According to the newspaper report, the two sides discussed the possibility of constructing a gas pipeline from Sakhalin to China at a cost of $9.4–14.1 billion. ExxonMobil has not commented on this information. Gazprom’s press service says that Mr. Ananenkov and Mr. Woodbury discussed the possibility of exporting gas from Sakhalin-1 to countries in the Asia-Pacific region, as well as the inclusion of Sakhalin-1 in the Unified Gas Supply system

We note that at the present time gas reserves in Sakhalin-1 make construction of an expensive pipeline (the “pipe” to China could cost as much as $14 billion) uneconomic. Nevertheless, gas deliveries from Sakhalin to China are a real possibility.

A Sakhalin–Khabarovsk pipeline corridor already exists today, although its capacity is an order of magnitude less than potential delivery volumes from Sakhalin-1. Expanding this gas pipeline and completing it along the Khabarovsk–Vladivostok–Harbin route could secure entry to the Far Eastern gas market not only for ExxonMobil and Gazprom, but also for other projects on the Sakhalin Shelf.

Sakhalin-1 includes three licensed oil and gas fields (Chayvo, Arktun-Dagi, and Odoptu-More) being developed by a consortium of investors under a production sharing agreement (PSA). ExxonMobil has a 30% share in the Sakhalin-1 project, the Japanese consortium SODECO (Itochi, Maribeni, and JPEC) has another 30%, and the Indian company ONGC and Rosneft have 20% each. Two of the project’s fields, Chayvo and Odoptu, have gas reserves of 156.9 billion cu. m (category C2), allowing production levels of up to 20.4 billion cu. m per year; total recoverable oil and condensate reserves (C2) are 165.8 million tons. Total costs under the PSA are $57 billion, gross revenue is $148 billion, and government revenues under the PSA are $40 billion. Oil production is slated to begin in 2006, while the first gas deliveries to Khabarovsk should begin in 2005.

After the addition of Rosneft’s assets to Gazpromneft, Gazprom should acquire a share in a number Sakhalin projects, in particular, 51% and operator status in the development of the Vostochno-Shmidtovsky and Kaigansko-Vasyugansky blocks of the Sakhalin-5 project (probable gas reserves of the project block are estimated at 500 billion cu. m), a 33.3% share in exploration of the Kirinsky block of the Sakhalion-3 project (partners in the project are ExxonMobil and ChevronTexaco with 33.3% each; gas reserves are estimated at 720 billion cu. m), and 51% and operator status in the development of the Astrakhanovsky block of the Sakhalin-4 project (90 billion cu. m). TNK-BP is Rosneft’s partner in Sakhalin-4 and Sakhalin-5.

Counting its own projects, Rosneft planned to produce up to 20 billion cu. m of gas by 2015. We note that Gazprom is also holding talks with Shell on joining the Sakhalin-2 project with reserves of more than 400 billion cu. m in its main gas field, Lunskoe. And although most of Lunskoe’s gas will be sent to LNG plants on south Sakhalin, some of the fuel may be sent to the common pipeline to Vladivostok, which has a capacity of up to 40 billion cu. m of gas. Sakhalin Shelf projects may provide these gas delivery volumes in 2012–2020. We also note that the hypothetical gas pipeline is comparable in cost to the gas pipeline from Kovykta, and Gazprom would not have to hurry to realize gas projects in Eastern Siberia before 2010.

Of course, this scenario, which seems fantastic today, is probably beyond the power of Gazprom alone – it will likely require the formation of a consortium to construct the new pipeline. Potential participants include ExxonMobil, Shell, BP, and Japanese companies. However, talks on this subject are unlikely to begin before 2005.

Times Online

December 17, 2004

Banks freeze Gazprom loan

By Times Online

An international banking consortium has decided to suspend approval for the €10 billion (£6.9bn) loan to Gazprom that would have financed the state-controlled company’s acquisition of Yukos’s most important oil production plant.

The consortium, led by Deutsche Bank, has decided to delay its final decision over the loan until the end of an American bankrupcty case over Yukos, the Russian Interfax news agency reported. A Houston court has already ruled that the auction of Yuganskneftegaz should be postponed for ten days.

It was thought likely that the auction of Yukos’s prize business would go ahead regardless. Russian officials said that the sale of Yuganskneftegaz, responsible for 60 per cent of Yukos’s oil output, would take place on Sunday “as planned”.

“An auction on selling Yuganskneftegaz stock is quite legitimate and scheduled for this Sunday, December 19,” Igor Igoshin, the deputy head of the State Duma committee on budget and taxes, said.

However, freezing the loan could effectively prevent Gazprom from bidding unless it found alternative financing.

The American court decision, made last night, granted Yukos a temporary injunction to stop the auction and was designed to raise funds to help pay the $27.5 billion (£14bn) the oil giant owes in back taxes.

However, a list of entities barred from taking part in the auction excluded many Russian-based organisations, because of the sovereign immunity granted foreign governments in US courts.

Nonetheless, Gazpromneft, a subsidiary of Gazprom, viewed as the likely victor in the auction was included. The order by the US Bankruptcy Court also covers the participation in the sale by Western banks, including Deutsche Bank, ABN Amro, BNP Paribas, Dresdner Kleinwort Wasserstein and JP Morgan, which were to have helped finance the Gazpromneft bid.

Gazpromneft was this morning quoted in the Russian press as saying it would press on with its bid.

Yukos said that is was “pleased” with last night’s ruling.

“It is heartening to see a ruling established clearly in the law, with a transparent and due process, before a fair and impartial court,” the company said.

However, it acknowledged the limitations of the judgment.

“We remain realistic about the ruling’s immediate effect,” it said, adding: “While Russian authorities have stated their intention to proceed with the auction, we hope the ruling will lead international banks and other parties to reconsider their participation.”

Yukos said it was continuing “all potential legal remedies” to protect its assets.

Fears over Yukos production helped oil prices hold on this morning to nearly all of their 9 per cent gains made this week.

Benchmark US crude stood $0.17 a barrel lower at $44.01 a barrel in morning trade. Brent, which on Wednesday saw its biggest one-day rise since 1991, was $0.18 lower at $41.25 a barrel.

Prices have been primarily revived by a decision by Opec, the producers’ cartel to take 1 million barrels of oil a day off the market and by data showing low reserves of US heating oil, rendering supplies vulnerable to a cold snap.

Gazpromneft to invest $16.5 bln in oil production through 2020

May 25, 2006

Moscow, May 25 (RIA Novosti) – Gazpromneft, formerly known as Sibneft (RTS: SIBN), said Thursday it would invest $16.5 billion to develop oil production until 2020.

Alexander Ryazanov, the oil company’s head and also a deputy board chairman at energy giant Gazprom, said Russia’s third largest state-controlled oil company would expand its oil prospecting operations rather than buy assets ready for production.

“It will be an addition to our [oil] reserves,” Ryazanov said.

At the beginning of May, the company announced its net profits had increased by 50% in the first quarter of 2006 year-on-year, to 11.6 bln rubles ($425 mln).

Russian energy giant Gazprom controls over 75% of the shares in Gazpromneft, one of the world’s 20 largest oil companies with proven reserves of over 4.5 billion barrels. Gazprom acquired a 72.7% share in the oil company in September 2005 for $13.1 billion.

Sibneft shareholders voted on May 13 in favor of a proposal to change the company’s name to Gazpromneft and re-register it in St. Petersburg.

Gazpromneft “buy”

Monday, July 10, 2006

New York, July 10 (newratings.com) – Analysts at Alfa Bank maintain their “buy” rating on Gazpromneft (GAZ.FSE). The target price is set to $11.70.

In a research note published this morning, the analysts mention that Gazprom has reported its FY05 consolidated results under IAS/IFRS including Gazpromneft for the first time since the latter company’s acquisition. Gazprom reported Gazpromneft’s sales for the period at $3.2 billion, short of the estimates due to the timing of the consolidation. Gazpromneft’s FY05 EBITDA contribution and net income were short of the estimates, the analysts add.

May 26, 2006

The Gazprom nation

By Pepe Escobar

Whatever the results of the EU-Russia summit this Thursday in the Black Sea resort of Sochi, there seems to be one clear winner: the Gazprom nation – Russia.

With the United States – the European Union’s No 1 trade partner and North Atlantic Treaty Organization (NATO) ally – mired in the Iraq quagmire and the EU with an ongoing constitutional crisis, Russia is exceptionally positioned to have its way in the negotiations leading to the post-2007 “Strategic Partnership Treaty” between the EU and Russia.

Former leader Mikhail Gorbachev, in an opinion piece published on Wednesday by the Rossiyskaya Gazeta daily, admits “this will not be an easy conversation”. He stresses the EU’s huge internal contradiction “between two approaches to economic development, the ‘Anglo-Saxon’ one, based on unrestricted market freedom and maximization of profits, and the socially oriented [one] embraced above all by Germany and France. The admission to the EU of new members, many of whom prefer the former model, has changed the balance of forces, and so far a synthesis of the two approaches has been an elusive goal.”

Gorbachev also denounces stinging criticism of Russia according to which the country “is inherently incapable of assimilating democratic principles and procedures, of creating a civil society and renouncing ‘imperial ambitions’, so Europe and Russia cannot follow the same path. A new version of deterrence policy has been proposed. What is behind such policy? I think it is the desire to keep Russia in a ‘semi-strangled’ state for as long as possible.”

Ultimately, though, Gorbachev remains optimistic: “The mutual benefits from an intensified interaction between the EU and Russia are obvious.” The devil, of course, will be in the details, lost in translation to myriad languages and with the EU without a common foreign policy.

The key talks will start as part of the broad, President Vladimir Putin-suggested, energy-security agenda of the Group of Eight summit in St Petersburg in July. The G8 summit will in essence address the extremely sensitive question of the new, post-Cold War global balance of power. But as Russian analyst Sergei Karaganov recently warned, energy security is also “a powerful catalyst” for replaying the Cold War.

Blue gold’s pipeline power

Natural gas, “blue gold” in industry lingo, has become, in an emerging multipolar world, the prime source of intractable conflict and a formidable political and diplomatic weapon in the hands of such states as Russia, Iran, Venezuela and Bolivia.

Gas, unlike oil, complies with the constraints on carbon emissions defined by the Kyoto Protocol. It is even more abundant than oil; proven reserves, with existing technology, may last as many as 70 years, compared with 40 or so for oil. According to the International Energy Agency (IEA), gas will be consumed in a faster progression (2.3% annually) than oil (1.6%), carbon (1.5%) or nuclear power (0.4%).

But there’s a catch: for this to happen, says the IEA, the industry would need global investments totaling at least US$100 billion a year.

Before the January Russian-Ukrainian crisis, there had not been a geopolitical gas war. Now we’ve entered the era of pipeline power, where geopolitical turmoil is intimately linked to gas-pipeline routes, as in the Northern European Gas Pipeline, the Russian-German project under the Baltic Sea (bypassing Baltic states and Poland); the pipeline from Siberia prioritizing either China or Japan; and the pipeline from Venezuela to Argentina via Brazil, bypassing Bolivia.

Geopolitical turmoil is also linked to pipeline routes in the making, as in the Arctic, which pits the US against Canada, Russia against Norway (in the Barents Sea) and Denmark (in Greenland) against Canada. According to the US Geological Survey, 25% of the world’s gas reserves still to be discovered lie in the Arctic.

French, Belgian and Spanish diplomats in Brussels tell Asia Times Online the key strategic challenge facing the EU nowadays is its dependence on Russian gas; for the 10 newest EU members it almost reaches 100%. The key to the 153,800 kilometers of the Russian pipeline network is in the hands of the Kremlin. The Russian state is thus afforded the luxury of musing on how to reinvest Russian petrodollars when, according to analyst Alexander Blokhin, 95% of the profits beyond $27 a barrel go to the Kremlin.

For Russian EU Ambassador Vladimir Chizhov, “much of the tension in the energy sphere is artificial”. He also insists that the EU and Russia “share a common position” on Iran (prevention of nuclear proliferation, by diplomacy). He may be only partly right on both counts.

GUAM is in the house

GUUAM (the acronym for Georgia, Uzbekistan, Ukraine, Azerbaijan and Moldova) was founded in 1997 ostensibly to “favor economic multilateral cooperation”, but really as a regional military alliance, under the benign protection of NATO, strategically placed right on the path of the Caspian Sea’s energy wealth.

In other words, it was an anti-Moscow club. Now the alliance is only named GUAM; Uzbekistan, under the brutal Islam Karimov, decided to leave last year and reinforce ties with Moscow.

This week, significantly right before the EU-Russia summit, the presidents of Georgia, Ukraine, Azerbaijan and Moldova got together again in Kiev. This led the Russian daily Nezavissimaia Gazeta inevitably to denounce the formation of “a new international organization whose goals are entry into NATO and adherence to European structures” – nothing strange considering that the “GUM” (Georgia, Ukraine and Moldova) in GUAM openly accuse Russia of supporting separatist movements and are still reeling from Russia imposing commercial restrictions on milk and meat imports from Ukraine, wine from both Georgia and Moldova, and mineral water from Georgia.

The message from Moscow seems to be unmistakable: if you want to join the EU and NATO, you will have to suffer. Off the record, EU diplomats – especially those from Eastern Europe – share an unshakable consensus: Russia always uses trade as a political weapon against pro-EU countries.

The Azerbaijani daily Azerkalo went straight to the point as far as GUAM is concerned, defining it as “an anti-Russian club”. In this new scenario, where everyone’s goal seems to become a member not only of NATO but of the EU as well, Kiev has become a de facto “alternative integration center” harboring GUAM’s headquarters. As the Russian daily Kommersant put it, GUAM is looking for “an alternative to Gazprom”, the Russian energy giant.

The alternative is even more pressing with the completion next year of another key node of Pipelineistan – the Baku-Tbilisi-Erzurum (BTE) gasoduct, which runs parallel to the oil Baku-Tbilisi-Ceyhan (BTC) pipeline reaching Turkey and European markets. The important question in this dossier is whether Azerbaijan will remain part of GUAM. Once again, in this respect the EU’s – plus the United States’ – wishes are pitted against Russia’s.

The meaning of ‘energy security’

Putin, as the undisputed czar of the global gas club – seconded by Iran’s Mahmud Ahmadinejad, Venezuela’s Hugo Chavez and Bolivia’s Evo Morales – may afford to compare the US to “comrade wolf [who] knows whom to eat, eats without listening, and [is] clearly not going to listen to anyone”. Chavez, for his part, may compare the US to “Count Dracula before sucking blood”.

With high gas and oil prices, the Kremlin does not have to waste time discussing democracy and human rights with the West. What matters are $170 billion in foreign reserves – and rising – a huge budget surplus, and 7% annual gross domestic product (GDP) growth.

According to Arnaud Dubien, Russian specialist at the French Institute of International and Strategic Relations, “this allows the Russian government to finance many programs of very strong social impact, benefiting categories of the Russian population which suffered heavily during the transition”.

No wonder “energy security” is Putin’s mantra as Russia – the world’s top gas producer and second-biggest oil producer – presides over the G8.

At a recent “Geopolitics of Energy Security” seminar in Brussels, organized by the European Enterprise Institute, Russia was inevitably the star of the show. Russians asked, “What does it really mean when the EU talks of ‘diversification of energy supply’?”

The Russians see it basically as a way of putting pressure on Russia, leading to a loss of traditional Russian exports. The Europeans for their part worry about the use of gas as a political weapon, plus the lack of transparency and the “undemocratic processes” in the Russian gas and electricity sectors.

Both parties agreed “there needs to be real political and technical dialogue in order to tackle the truly important issues”. The Russians agreed that “democracy and human rights are in the Russian constitution” – thus Russia doesn’t need to negotiate, but to implement.

And they all agreed that Russia and the EU “should create a non-discriminatory energy support agreement, including a fair regime for access to the Central Asian energy supply”. This agreement, said European diplomats, could be implemented within the next three to five years.

It’s going to be an extremely tricky affair. The EU is actively trying to explore deals with Central Asia – with both Kazakhstan and Turkmenistan – and also with Iran, bypassing Russia via the South Caucasus and the Caspian Sea. The key project in this Pipelineistan node is the proposed trans-Caspian gasoduct – which would in effect break Russia’s monopoly on transit of Central Asian gas.

In the new “Great Game” among Russia, China and the US in Central Asia, Washington privileges close allies Azerbaijan and Kazakhstan – which are also courted by the EU.

The Europeans stressed other crucial points for the complex EU-Russia relationship to work. There must be “open and frank discussions, not political niceties”. And the EU must consider nuclear energy as an alternative. Touching on an issue addressed by a recent Asia Times Online story (Iran impasse: Make gas, not bombs, May 9), EU experts stressed that according to EU forecasts and figures from the Russian Energy Strategy, the incremental offer from Russia could only cover 25% of the EU’s energy needs, so it was imperative that the EU diversified.

In sum: the Europeans believe that “progress is possible despite the changing political and economic climate”; pressure for Russia to reform “will come from within, not from the G8″; and the debate “already exists inside Russia’s political elite”. Among the intractable problems ahead is the fact that the Russians never ratified the European Energy Charter, which they signed in the mid-1990s.

Brussels diplomats argue that if the Russians really followed the charter they would need to finish off Gazprom’s monopoly, reschedule internal energy prices and give more guarantees to foreign investors. According to Russian Finance Minister Alexei Kudrin, the charter will be ratified. But he has been careful enough not to set a date.

Trillion-dollar baby

In April, Gazprom knocked back Microsoft as the world’s third-largest company by market value. Microsoft was valued at about $246 billion, Gazprom at $270 billion. Already the world’s biggest natural-gas company by output and reserves (16% of the total), and with its shares more than tripling in the past 12 months, Gazprom is on the way to displacing Irving, Texas-based ExxonMobil Corp as the world’s biggest company, now valued at $381 billion. General Electric is currently the second-biggest at $358 billion.

Gazprom employs 330,000 people and supplies more than 8% of Russia’s GDP. It is currently controlled 51% by the Russian state. Since 2001, Gazprom’s executive director has been Alexei Miller, who is extremely close to Putin.

Gazprom had a gas output of 547.2 billion cubic meters in 2005. This is equivalent to 9.42 million barrels of oil a day, or the daily extraction output in Saudi Arabia, the world’s biggest oil supplier. Gazprom’s market value may soon reach as much as $1 trillion, according to its deputy chief executive Dmitri Medvedev, who also happens to be very close to the Kremlin.

Putin’s gas chess is always masterful. The president may occasionally threaten the EU that the Russians will go find some other, less demanding customers in case the EU decides to look for less problematic suppliers. But he may also reassure the EU – via German Chancellor Angela Merkel – that a Ukrainian scenario such as January’s will never repeat itself (80% of Russia’s exports to Europe transit via Ukraine).

Since the 1960s, Russia has been a trusted European supplier – responsible for 50% of the EU’s gas imports and 25% of consumption (for oil, Russia supplies 30% and assures 26% of the EU’s consumption, as well as more than 30% of the uranium for Europe’s nuclear plants).

Gazprom is actively investing in Western distributors and wants to become a global gas giant under vertical integration, selling gas to everyone and his neighbor. What Gazprom wants is to control the whole chain – from production to the final consumer in Europe. What the EU wants is for Gazprom to bring gas to the EU’s external borders, where the gas will be bought by EU partners who will then distribute it inside Europe. This would mean the end of long-term Gazprom contracts with European energy giants – a no-no for Putin.

Igor Chubalov, one of Putin’s guides ahead of the G8 meeting in St Petersburg in July, is fond of stressing the difference between the strategy of an independent corporation and state policies – even if the Europeans cannot manage to spot the difference. Basically what Chubalov was saying ahead of the recent Putin-Merkel meeting was “We invest in distribution, you invest in production.” The word in Brussels is that this was former German chancellor Gerhard Schroeder’s idea.

Schroeder is the head of the supervisory board of the consortium building the $4.8 billion Northern European Gas Pipeline, the Russian-German gasoduct under the Baltic Sea. He’s reportedly being paid hundreds of thousands of dollars a year for the privilege. Other members of the board include Gazprom’s big boss Miller (51% of shares) and officials from Germany’s energy giants E.ON and BASF (24.5% each).

So Moscow and Berlin have already created a de facto energy alliance between E.ON and BASF and Gazprom. The inevitable result was that eyebrows were raised across the EU – because the 25-member union still does not have a common energy policy. Poland, for instance, has been bypassed by the gasoduct. So for Polish diplomats, the gasoduct is nothing other than “political blackmail”.

When Gazprom’s boss Miller hints in public, more than once, that trouble with the EU will mean more Russian exports to China, Eastern European diplomats once again cry in unison, “political blackmail”.

In practice, it boils down to Gazprom wanting to buy more gasoducts and distribution companies in Europe, such as British Centrica. And once again the really fascinating question regards the double standards employed by the developed world. Putin, after meeting with Merkel, in essence said that when European companies go to Russia, it’s a matter of investment and globalization, but when it happens the other way around, it’s a question of Russian companies expanding into Europe.

The new Saudi Arabia

Problems on the European front? No problem. Russia can always go east. And the Europeans know it.

Russia could not be presiding over the G8 at a more delicate moment. The US imperial drive remains defined by the control of sources of energy. To counteract it, Russia wants to invest in a strategic energy partnership with the EU. But the Russians also recognize that the future of global development is in Asia.

Both China and India are employing alternative strategies to the neo-liberal US model. So now Russia is presented with a very auspicious confluence of factors: its own fabulous energy reserves; energy dependence in Europe; and larger-than-life Asian interest in these reserves.

Russia is actually in search of a Euro-Asian equilibrium. As Natalia Narotchnitskaia, vice president of the Russian parliament’s Commission of Foreign Affairs, put it, Russia now boasts “energy independence, military power, high level of education, a complete cycle of scientific research, no overpopulation, a huge territory, and a modest level of consumption”. She added, “The only country in the world to meet all these criteria is Russia.”

On practical terms, for Narotchnitskaia, this should translate into more investment to explore Eastern Siberia and the Russian Far East. And no dreams of integration either with the EU or with NATO. She’s in favor of a true “independent historical project”.

Energy security, she said, means “a geo-economy which would lift us from demographic decline, reinforce the country and seduce our neighbors, especially those in Central Asia”. In other words, a real national project.

For the moment, the facts on the ground tell the story. Gazprom bought Baltic refineries. Gazprom bought majority stakes in distribution companies in Georgia and Belarus. Schroeder presides over the board of the Russian-German gasoduct under the Baltic Sea, controlled 51% by Gazprom. Putin convinces Russians nostalgic for empires past that Putinism is the best nationalism.

Russia fashions a G8 meeting under its terms – exploiting both the US quagmire in Iraq and the EU’s dependence on Russian gas. Thus the Gazprom nation is shaping up as the new Saudi Arabia: indispensable to the West, but certainly not integrated with it.