Region: Kremlin's policies shackled by oil and gas giant Gazprom

As Russia's largest oil and gas company is once again embroiled in an energy dispute with Ukraine, the country's dependence on hydrocarbon exports tests its government's commitment to further liberalization.

Ukraine, which is home to more than 8 million ethnic Russians, is tied by contract to pay Gazprom a set amount, no matter how much oil and gas it imports, a so-called "take or pay" policy. However, the government in Kyiv seeks to renegotiate those terms in order to not pay $7 billion worth of unused gas buys, a plea the oil and gas conglomerate rejects.

Alexander Medvedev, Gazprom's deputy chief executive and head of its export arm, told The Financial Times Feb. 15, "The principle of 'take or pay' is that if you don't want to take it, you still have to pay for it." He further insisted the dispute is "totally unconnected" to a landmark deal Ukraine signed with Royal Dutch Shell last month to exploit the country's vast untapped shale gas reserves.

Even so, Gazprom must be worried about the possibility of shale gas production in Europe. Similarly unconventional natural gas extraction in the United States has decreased prices there and prompted mainly Qatar to divert its exports to Europe - putting further downward pressure on the price of gas. Gazprom's customers argue it's time the company decoupled its gas price from the price of oil, something it has cautiously begun to do at the expense of $2.7 billion in profits last year.

The Russian state is a majority shareholder in Gazprom, which alone accounts for 12 percent of the nation's exports. While Gazprom still reported a $44 billion profit last year and expects to increase its share in the European gas market from 26 percent to 32 percent in 2030, in part due to a decline in nonshale gas production elsewhere, the Kremlin is aware of the risks of depending so heavily on one industry, indeed one company, for its income. Oil and gas revenues account for some 60 percent of the state's budget.

Deputy Economy Minister Andrei Klepach admitted last August Gazprom had underestimated competition from shale gas and said he feared the company could feel the pressure as early as 2014. The Washington Post similarly reported Sept. 24 that "Gazprom executives have been very slow to recognize the competition. Their company is large and sprawling and, with a seemingly eternal income stream, had no need to be innovative or especially adept at what it did."

The Kremlin has relied on Gazprom and other companies like Rosneft, which is almost fully state-owned, to put off otherwise highly needed economic reforms that would make Russia more competitive.

President Vladimir Putin enacted a series of liberal reforms in the first years of his tenure, including dramatic income tax cuts, fiscal consolidation and education and infrastructure investments that helped fuel economic growth. Since oil and gas are able to finance state spending, there is no apparent need for liberalization, which vested investors oppose. Putin's administration has thus resorted to protectionist measures to shield Gazprom from foreign economic and legal challenges.

When the European Commission launched an anti-trust probe to force Gazprom into reducing its prices and publicizing the formula that governs its supply contracts, Putin decreed Sept. 11 last year that "strategically important" Russian companies should ask permission from the Kremlin before providing information or agreeing to changes in contracts - a move that effectively enabled Gazprom to ignore the European inquiry.

Before Rosneft acquired a 50 percent stake in the oil venture TNK-BP Dec. 12 last year, Putin admitted he had "mixed feelings" about the deal. "This is not in line with our trend to reduce the growth of the state sector," he said.

Prime Minister Dmitry Medvedev told French media Nov. 23, "We don't need a state-owned economy." He described the TNK-BP deal as "exceptional" and suggested that while "Rosneft is a state-owned company, this doesn't mean that this will last forever."

In the same interview, Medvedev said once again that Russia relies "too much on hydrocarbons, crude oil and natural gas," but during his four-year stint as president, he made precious little progress toward diversifying the economy. Now that Putin has returned to the presidency, Russia is likely to remain a "petrostate" - at least, until changes in the international energy market force it to reform.

Nick Ottens can be reached at
news@praguepost.com