Posted on 09/21/2004 2:40:52 PM PDT by Tailgunner Joe
MOSCOW, Russia--It was a momentous week for the Kremlin. On Monday, President Vladimir Putin signaled his intention to control regional politics more closely by saying that regional governors would no longer be directly elected. On Tuesday, the government showed the world its determination to control the Russian oil and gas industries.
It will do so by merging Rosneft, an oil producer, with Gazprom, the dominant Russian gas extractor. The deal, flagged on 14 September and likely to be completed in 2005, would make Gazprom an even more gargantuan group. However, the importance of Rosneft is not so much its size, since it accounts for just 4.5 percent of Russian oil production and is only the fifth-largest producer in the country, but how its inclusion could transform the energy market.
THE DEAL--AND POSSIBLE FUTURE DEALS
The state will exchange its 100 percent stake in Rosneft for shares in Gazprom subsidiaries. That will leave the state with a controlling stake in Gazprom. The Russian government has always been the dominant shareholder in Gazprom (with 38.7 percent of shares) and has had the determining role in the group's policies, but by taking the state's stake to over 50 percent, the deal will set the state's control in stone.
As yet, the Kremlin has not yet indicated who would manage the new group. However, the promotion in July of Igor Sechin to head Rosneft underlined that close associates of the president were translating their influence into formal positions of power. Sechin, the former deputy head of the presidential administration, may now be the likeliest person to head the new group, which will apparently be known as Gazpromneft. However, even if Sechin is not chosen, no one doubts that the team at the head of Gazpromneft will do as its owner wishes.
Sechin's role also suggests that a final resolution of the Yukos question may be close at hand. Throughout the Yukos affair, which began in July 2003 with charges of tax evasion and involvement in contract killings, Sechin has called for the Yukos group to be broken up and sold, according to the daily Vedomosti. The betting now in financial circles is that Yukos' main asset, Yuganskneftegaz, will be folded into the new Rosneft-Gazprom group. Yuganskneftegaz is currently in the hands of the receiver after tax officials forced Yukos to pay billions of dollars in back taxes that the group allegedly owed.
Gazprom's CEO, Alexei Miller, has said that the company is not interested in acquiring Yukos' assets, but few analysts and commentators believe that this is the state's position. Putin himself indicated at a meeting with foreign journalists and academics on 6 September that Rosneft might buy Yukos assets, though he said he was unsure whether Rosneft would have the money. But its linkup with a company that produces an estimated 20 percent of the world's gas will mean that money is no longer likely to be a concern.
Yuganskneftegaz could be added to the new group in a number of ways. One would be for the group to take out loans and buy the company at a cost of perhaps $12 billion-$14 billion in a public tender. A second possibility is that the state could strip Yuganskneftegaz of its license. Speaking to the radio station Ekho Moskvy, Yevgeny Yasin of Moscow's Higher School of Economics said that would reduce the value of Yuganskneftegaz from $10 billion-$12 billion to $1 billion-$3 billion. That would allow Yuganskneftegaz to be bought at a low price. A third option would be for the state to strip Yukos of its assets and then offer Yuganskneftegaz to the Gazprom-Rosneft group.
The Federal Tax Service has already insisted that licenses granted to Yuganskneftegaz to develop oil in western Siberia should be suspended or rescinded.
THE IMPLICATIONS
The creation of Gazpromneft and a fusion with Yuganskneftegaz would effectively ensure that the state would, through just one company, dominate the gas industry and control one-fifth of the Russian oil industry. The state owns or has major interests in a number of other oil and gas companies.
The move has huge implications beyond sheer size. It would allow the state to manipulate domestic fuel prices more easily, gain a greater share of the currency earnings generated by the energy sector, and collect taxes more easily.
It would also enhance the Kremlin's ability to coordinate its use of energy for geopolitical purposes. Gazprom has huge interests in the former Soviet republics and also in Europe. Yukos had wanted to build a pipeline through Siberia to supply East Asia. Rosneft has interests in projects to explore oil reserves off Sakhalin Island, off the coast of Siberia. Prime Minister Mikhail Fradkov has already highlighted a stronger position internationally as a key goal of the merger, saying on 14 September that "combining oil and gas assets is necessary to improve competitiveness on foreign markets.
"We will soon have a large company that, in the future, could be turned into a transnational company of global significance," Fradkov continued.
It could also help the Russian stock market. The uncertainty about Yukos' fate has caused the company's stock, Russia's largest, to fall sharply in value over the past year. A decision on Yuganskneftegaz would clear up the uncertainty and create a vast company that would prove of huge interest to private investors, despite the risks posed by its relationship with the Kremlin. However, Gazprom shares can at present be bought only in New York, where supply is limited. The stock's value soared by 15 percent immediately after news of the planned merger.
Until now, Gazprom has not been listed in Moscow because of restrictions on foreign ownership of the company. There is now speculation, fueled by strong indications from the prime minister, that the government might partially lift that restriction once it gains control of the key energy assets through the Rosneft-Gazprom tie-up.
The deal would also send out a political signal to Russians summed up by a government official quoted in the daily Izvestiya: He said that Yeltsin lost Gazprom and Putin had regained it.
The same could be said of Putin's political reforms: Yeltsin gave up some of his control of the regions, famously stating that the regions could take all the power that they could stomach; Putin has now regained that power.
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