by Anders Aslund, Peterson Institute for International Economics
Op-ed in the Moscow Times
February 24, 2010
© Moscow Times
Gazprom is Russia's leading company, but few enterprises have been as badly beaten during the global financial crisis. The Russian economy has recovered as the crisis has abated, but Gazprom may suffer from a profound structural crisis. It needs to downsize, cut waste, and reform.
In May 2008, Gazprom's market capitalization exceeded $350 billion, but it has dropped to $135 billion today. The Russian oil sector increased its production and exports last year, but gas exports fell by 11 percent and Gazprom's production decreased by 16 percent because of low demand.
Gazprom's problems are largely because of the following six factors:
In sum, Gazprom may have far too much gas in the medium term because of likely energy savings both at home and abroad, whereas the prices that Russian gas can fetch abroad are likely to stay low and decouple from oil prices. Even if domestic gas prices in Russia rise, Gazprom's finances are likely to be squeezed.
Gazprom's management—that is, the Russian government—does not seem to understand the severity of these challenges. After a long time in denial, it has reacted ad hoc. It is trying to maintain the old European demand while ceding new markets and cutting its supplies. It has reduced purchases from Central Asia and postponed the development of the giant fields Yamal and Shtokman.
Gazprom is moving to a new defensive strategy, but strangely it is still intent on building the two new huge European pipelines, Nord Stream and South Stream, for which neither new demand nor new gas supply is available. If actually built, these two pipelines might become wasteful white elephants, as it is far cheaper to use the existing pipelines through Ukraine.
Less demand, less production, lower prices and excessive capital investment will render Gazprom smaller, less profitable, and less valuable. But the advantage is that Gazprom will cease to be a state within the state, and Russia could become a more normal and open society. The current crisis offers an excellent opportunity for long-desired reform. The crucial insight is that what is good for Gazprom's management is bad for Russia since Gazprom is the essence of the country's energy curse.
An alternative policy should start by dividing Gazprom from the state. Even if the majority of Gazprom remains state-owned, it must gain integrity as an autonomous joint stock company. It should be deprived of its regulatory functions to be transferred to an independent regulatory agency. Since the Gazprom management has failed so miserably, it should be replaced by competent managers from the private sector. Nord Stream and South Stream should be abandoned immediately because neither appears commercially viable.
In a rational market economy, a conglomerate such as Gazprom wouldn't exist. Noncore assets from farms to television companies should be sold off. Production of gas should be separated from transportation and sales in different companies. Undeveloped medium-sized and small fields should be auctioned off to independent gas producers. The gas pipeline system could stay state-owned but be separated from production and be open to all on equal pricing. As a result of reduced flaring, Russia would benefit from a huge cheap additional supply of gas, while air pollution would decline.
In accordance with the long-accepted policy, domestic and post-Soviet prices should be raised to the market level in 2011, and conditions would be created for a free gas market in Russia. Differentiation in taxation between the oil and gas industry will no longer be justified, and equal taxation should be introduced, increasing tax revenues.
For the European Union, Gazprom's current weakness offers an opportunity to clean up gas trade with Russia. The European Union could take up President Dmitry Medvedev's proposal to draft a new legal framework for energy cooperation to replace the Energy Charter of 1994 that almost all other European countries have ratified. The centerpiece should be an all-European gas reform, including the unbundling of transportation and production of gas leading to full marketization.
Gazprom's current crisis offers the best opportunity ever for Russian and European energy reform. The arguments for a profound reform of the country's gas sector have never been stronger. This is no longer a pipedream, while restoring the old Gazprom is.
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