OECD slams Gazprom and Kremlin

November 27, 2006

The Organisation for Economic Cooperation and Development on Monday raised concern about the “seemingly insatiable appetite” of Gazprom, Russia’s state-run energy giant.

In a harsh report on the Russian economy, the OECD also said the Kremlin’s expansion into key economic areas was a “disturbing trend” that “bodes ill” for the country’s economic growth.

Instead of concentrating on market reforms, the government had been increasingly focused on tightening the state’s grip on critical sectors such as energy, aviation, media and finance.

“The expansion of state ownership in important sectors will probably contribute to more rent-seeking, less efficiency and slower growth,” the OECD says.

It was particularly concerned by Gazprom’s “seemingly insatiable appetite for asset acquisition, often at the expense of a focus on its core business”. The report follows a chorus of international and domestic criticism of Gazprom’s business strategy.

Instead of investing in gas production, Gazprom has been expanding its interests in recent years in other sectors such as oil, electricity, power generation machinery and media. Last week’s announcement of the purchase of Komsomolskaya Pravda – Russia’s largest circulation newspaper – is the latest foray into media. It also owns an airline, a bank, three television channels, several newspapers, radio stations, cinemas and hotels.

At the same time Gazprom’s monopoly over transportation infrastructure has constrained the development of independent gas producers. “Unfortunately, the only significant recent change in this sphere was the adoption of a law enshrining in statute Gazprom’s existing monopoly on exports,” the report said.

The OECD’s criticism comes at a time of growing concern about Russia’s ability to sustain and increase its gas production.

But the report says Gazprom was only a vehicle for increasing state interests in the economy. According to one recent estimate, the state-owned share of Russia’s equity market capitalisation rose from 20 per cent in mid-2003 to 30 per cent early this year.

The change has been particularly visible in the oil sector where the state share of the total production increased from 16 per cent in 2000 to almost 40 per cent.

However, the Russian state has also been extending its reach to non-energy sectors of the economy, including aviation and automotive. Rosoboronexport, an arms trading agency chaired by a friend and former KGB colleague of president Vladimir Putin, has recently amassed a majority stake in VSMPO-Avisma, the largest titanium maker, and controls Avtovaz, the country’s largest car plant.

The OECD traces the beginning of the trend to the expropriation of Yukos’ assets in favour of Rosneft, the state-controlled oil company. It argues that the Yukos affair exemplified the trend towards state ownership.