Gazprom has been Prime Minister Vladimir Putin‘s main preoccupation since 2001, but it has been a spectacular failure. Gazprom possesses huge natural resources, however, it is extremely inefficient because of poor management and massive corruption.
In addition, it pursues an aggressive foreign policy that harms both the company and Russia.
In reality, Gazprom in many ways is more important in advancing the Kremlin’s foreign policy than the defence Ministry or the Foreign Ministry.
In short, the way Gazprom is run is an accurate model for how Putin rules Russia.
In May 2001, Putin ousted the powerful Rem Vyakhirev as CEO of Gazprom. At the time, it seemed that Putin was trying to clean up this pervasively corrupt corporation, retrieving assets that the old managers had passed on to private firms. Yet the only ensuing significant structural reform was the liberalization of sales of Gazprom’s stock that led to a tripling of its prices in 2006.
Since 2001, Gazprom’s management has been dominated by three groups: CEO Alexei Miller‘s young St. Petersburg economists, a group of St. Petersburg KGB officers — both closely linked to Putin — and a third group of old Gazprom officials. Putin himself has arbitrated between these three factions, preventing any one of them from gaining the upper hand. Using a classic divide-and-rule strategy, Putin thus retains the ultimate responsibility for the company.
As a result of poor management and corruption, Gazprom’s production has been stagnant for the last two decades, and its share of Russia’s gas output has fallen to 76 per cent. It enjoys a monopoly on gas exports, but its net exports have declined for the last decade. The company’s strategy is problematic. Essentially, Gazprom just sits on its giant fields that comprise a quarter of global reserves of traditional gas, and it pipes this gas from western Siberia to Europe. It maintains its old strategy with remarkable conservatism and does not stand up to new opportunities or challenges.
Meanwhile, the gas industry is going through a revolution with a huge new supply of liquefied natural gas, or LNG, and shale gas, but Gazprom barely participates in this game. It gained some LNG production after it muscled in on Royal Dutch Shell’s Sakhalin project, whereas it has largely ignored the shale gas market. Gas prices have fallen sharply in the United States and decoupled from high oil prices, while Gazprom insists on high prices linked to the oil price. It also persists with long-term contracts, trying to avoid spot markets. As a result, Gazprom’s export volumes to Europe have fallen and are likely to decline further despite the gas bonanza.
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