10. GAZPROM CRITICAL TO HOMELAND’S ECONOMY

The state-controlled natural gas supplier is Russia’s largest company

Jim Heintz, Associated Press (AP), Moscow, Russia, Fri, Dec 30, 2005

MOSCOW – Even in a country built on an outsized scale, OAO Gazprom
stands out as a behemoth.

The state-controlled natural gas supplier is Russia’s largest company and a
critical element of the country’s economy. As holder of the world’s largest
gas reserves and supplier of about half the gas consumed in the European
Union, it can throw its weight far beyond Russia’s borders.

Gazprom’s might is in the spotlight this week in a tense feud with Ukraine
over prices. Gazprom wants Russia’s neighbor to quadruple the amount it pays
for gas and says it will stop supplies on Jan. 1 if Ukraine doesn’t swallow
the bitter pill.

Ukraine depends on Gazprom for about 30 percent of its gas, but it’s not the
only one worried. About 80 percent of the gas that Gazprom sells to the West
goes through Ukraine, and Europeans fear that reducing the amount going into
Ukraine’s pipelines could lower the amount they get at the other end.

If Ukraine’s refusal to pay the new higher price results in a diminished gas
flow to Europe, that could undermine Ukrainian President Viktor Yushchenko’s
assiduous efforts to court the West. That, presumably would be just fine by
the Kremlin, which has been cold to Yushchenko since he overcame a
Moscow-backed candidate to become president this year.

Gazprom and the Russian government don’t put the dispute in political terms,
portraying it as strictly rational economics. Ukraine was recognized by the
EU as a market economy, so it should pay in line with market prices, they
argue. But Russia’s commitment to market principles came into question this
week when Gazprom agreed to sell gas to Belarus for just 20 percent of the
price sought from Ukraine – essentially cutting Belarus a break because it
hasn’t reformed its Soviet-style command economy.

This isn’t the first time Gazprom has cited bottom-line finance issues as
justification for actions that carry a strong political message.

In 2001, Gazprom’s media subsidiary took control of NTV, Russia’s main
independent television station, citing nonpayment of loans it had made to
the station’s holding company. Many analysts saw the move as part of a
Kremlin campaign to muzzle obstreperous media.

NTV had been noted for its critical reporting on the government, especially
the war in Chechnya, but its reporting has softened considerably since the
takeover. It has given notably lengthy attention to the dispute with
Ukraine, including a long segment last week showing Gazprom officials
practising ordering a cutoff of gas to Ukraine.

That footage, from Gazprom’s high-tech pipeline control rooms, reinforced
Gazprom’s image of power, which the company’s statistics also demonstrate.
It claims gas reserves of 28 trillion cubic meters – more than 15 percent of
the world’s proven reserves. In 2004, Gazprom reported revenues of 887.2
billion rubles (US$29.5 billion, euro24 billion) and paid 363.7 billion
rubles (US$12 billion, euro9.6 billion) in taxes – about 13 percent of
Russia’s national budget for that year.

Sales to Ukraine are a significant part of that wealth: at the current rate
of US$50 (euro42) per 1,000 cubic meters, the 25 billion cubic meters that
Gazprom was to sell Ukraine this year would bring in about US$1.25 billion
(euro1 billion).

Ukraine says it can hold out for months after Jan. 1 on reserves and other
sources of gas and if it hangs tough, Gazprom could lose part of its revenue
stream just as it is preparing to make its shares available to foreigners
next year.

But Gazprom’s wide reach may call Ukraine’s bluff. That country’s single
largest gas supplier is Turkmenistan – whose gas comes through Russian
pipelines. In addition, Gazprom this week said it had struck a deal with
Turkmenistan to buy huge amounts of gas itself, so much that some analysts
suggested Turkmenistan won’t be able to supply Ukraine. -30-

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