Gazprom's Dirty Secret

Unknown
To Our Readers

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On Thursday, during my testimony at a hearing of the U.S. Senate Foreign Relations Committee, I asked a rhetorical question: Did President Dmitry Medvedev, while serving as chairman of Gazprom, know that the company might have been linked to organized crime through the Swiss-based intermediary company RosUkrEnergo? I believe that he knew this but ignored it.

As Gazprom's chairman, he should have known.

The response from Russian readers to this statement, posted on web sites, was very defensive. Some reminded me of the Enron scandal and that U.S. President Bill Clinton on his last day in office pardoned Marc Rich, who was charged with tax evasion and making illegal oil deals with Iran during the hostage crisis. Readers were also disturbed that some American with Ukrainian heritage tried to damage the good name of the new Russian president in a Senate hearing.

These were understandable reactions, yet they revealed a traditional feature of Russian society -- no one is allowed to criticize the tsar. This means either that the country's president stands above the law, or that the dividing line between criminality and governance is blurred at best.

The conflict surrounding RosUkrEnergo, the company that transports gas to Europe, has been a thorn in the side of Russian and Ukrainian leaders since 2004. The company is owned 50 percent by Gazprom and 50 percent by a group of Ukrainian businessmen. So many contradictory statements have been issued by Gazprom spokesmen, the partnership's Ukrainian managers, politicians and leaders of the two countries that it is almost impossible to determine where the truth lies. Yet, Switzerland–based RosUkrEnergo seems to lead a charmed life, despite hundreds of critical articles in the press.

Recent reports state that Gazprom is upset with the company for its business dealings in Poland and is making plans to deprive them of this client. The absurdity of the situation is typical of the entire scheme. Gazprom is upset with RosUkrEnergo for selling gas to Poland at prices lower than those charged by Gazprom Export. The head of Gazprom Export, Alexander Medvedev, meanwhile, sits on the board of RosUkrEnergo. Such a schizophrenic relationship cannot be explained commercially, so Gazprom Export's director now claims that Ukraine forced RosUkrEnergo upon Gazprom. This is like saying Russia forced Sevastopol upon Ukraine and now wants it returned.

Throughout the four years of the RosUkrEnergo ping-pong game, Gazprom's business reputation has suffered considerable damage. Burghard Bergmann, the head of E.On Ruhrgas and member of the Gazprom board, has asked that ties be broken with RosUkrEnergo. But Gazprom's managers stubbornly cling to this company and to their two Ukrainian partners, whose names they claimed not to know for years.

Why was Gazprom willing to see its reputation destroyed over such a long period? Were there commercial reasons for this, or did personal interests play a greater role?

Did Medvedev, as Gazprom's chairman, know the full story behind RosUkrEnergo? Did he read the reports that Semyon Mogilevich, who was arrested in Moscow in January on tax-evasion charges and is on the FBI's wanted list on charges of defrauding investors, was supposedly linked to RosUkrEnergo? Did the Federal Security Services investigate these allegations?

There are simply too many questions and too few answers surrounding this matter, and the sooner it is closed, the better it will be for both Russia and Ukraine.

The time is opportune to finally clean up Gazprom. A new chairman of the board is due to be elected soon, and he should not be manipulated into ignoring this scandal and letting it drag on for another four years.

If Russians do not want to be preached to by the Western press and politicians, it is imperative that they do some preaching of their own to their elected officials. They should demand that the sun be allowed to shine inside the secretive halls of Gazprom.

Roman Kupchinsky is a partner in the risk analysis firm AZEast Group.