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. Last Updated: 07/27/2016

State Strikes Back Against Gazprom

The Russian government called on Thursday for a sweeping reform of Gazprom, setting the scene for a showdown between reformers in the Cabinet and the directors of Russia's most powerful company.

Officials announced a major push against the natural gas monopoly, which is 40 percent state-owned, only a day after Gazprom boss Rem Vyakhirev attacked reformers in the government, accusing them of working for foreign interests.

But the Cabinet, increasingly controlled by new Deputy Prime Ministers Boris Nemtsov and Anatoly Chubais, struck back Thursday by announcing plans to reform the company and significantly cut Vyakhirev's and Gazprom management's power.

Chubais emerged from a meeting with Vyakhirev on Thursday saying the Gazprom boss had been given a month to work out his ideas for restructuring the company, Interfax reported.

Chubais ally Deputy Prime Minister Alfred Kokh said the government was also considering taking direct control of its shares in the company which, for the past few years, it has given in trust to top management. Direct government control of the shares would effectively shut out Vyakhirev and sitting management from their seats on the huge company's board.

The stakes in the battle are enormous, since the winners will preside over the restructuring and pace of reform of Russia's industry titans.

Reformers charge that Gazprom and other monopolies, especially United Energy Systems, the electricity monopoly, and the national railways system, have eluded free-market reform and are a drag on the economy, contributing to tax arrears and hence to late payment of wages and pensions.

The monopolies have retorted that the government is out to destroy the crown jewels of Russia's economy in the name of Western capitalism.

In a sign of an increasingly open battle, Kokh dared to make a rare direct attack on Vyakhirev, whose control of Gazprom has given him tremendous political view and should be liquidated soon," Kokh said. Kokh's rebuke was just the latest salvo in a highly-public war for control over Gazprom reform and other huge monopolies which play a key role in Russia's economy.

The battle pitches two teams against one another: fast-rising reformers such as Kokh, Chubais and Boris Nemtsov, against an older guard that includes Vyakhirev and Prime Minister Viktor Chernomyrdin, who has long been an ally of Gazprom, which he used to head.

Chernomyrdin unexpectedly stated he would go on birthday leave this week and has been absent during the past two days of angry exchanges.

Aware of Gazprom's political and economic power, Nemtsov, recently placed in charge of monopoly reform, had seemed content to steer clear of Gazprom, setting his sights on the electricity and railway companies.

"UES is easier to restructure," said Jim Nail, head of research at Deutsche Morgan Grenfell investment bank. "Gazprom is much more complex, what with the tax and jobs implications."

But Vyakhirev's speech unleashed what most expect to be a "partly factional, partly ideological, partly substantive battle," Nail said.

"It's factional because of the gap between Chubais-Nemtsov and Chernomyrdin groups; ideological because Nemtsov has come to Moscow with a presumption of guilt on the part of big, interest-group politics; and partly substantive because everybody knows Gazprom has enjoyed particular tax advantages and had a pretty free hand. Now, the young guys want to review that."

The government began to rein in Gazprom's power last year, forcing it to increase tax payments. Further restructuring of Gazprom, if it is needed at all, would require "major, painful reforms," said Yaroslav Lissovolik of the Russian European Center for Economic Policy. "The stakes are high, and big power shifts are under way as a result."

Nemtsov and Chubais apparently have the green light from President Boris Yeltsin to tackle de-monopolization, but still have a long battle ahead. Gazprom's board of directors includes representatives of the Fuel and Energy Ministry, the Economics Ministry and, of course, Chernomyrdin, which Nail called "a formidable bunch to take on."

Chubais and Nemtsov on Thursday called for the Cabinet to review the management of the government's stake in Gazprom. Managers there currently control 35 percent of the state's 40 percent stake.

The state directly controls only 5 percent of its stake, and Gazprom manages the rest in trust, a situation Nemtsov called "inexpedient" at a government presidium session Thursday.

But Nemtsov's sway in the administration is not even clear, some say. The young reformer earlier this week was reportedly set to put in motion radical restructuring plans for United Energy Systems, but has so far failed to replace its top management.

Vyakhirev appeared to be casting about for communist and nationalist support earlier this week at the Duma, the lower house of parliament.

The Duma voted overwhelmingly (332-1) to condemn any breakup of the natural gas behemoth, a vote that "could be evidence of a new and unusual alliance between the Communists and some of Russia's newly vested interests," said brokerage Renaissance Capital in a research note.

"A massive shift in alliances and allegiances is under way, with the reformers apparently consolidating support at the executive level," Renaissance added.