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. Last Updated: 07/27/2016

World Bank Links Loan to Gazprom Reforms

The World Bank is taking aim at Gazprom, approving a $1.5 billion loan to Russia on condition that the government tame the gas monopoly and open the domestic gas market to competition.

Speaking in Washington on Thursday, World Bank country director Michael Carter insisted Gazprom would not be "broken up."

"But we do believe that it is important that Gazprom be organized in a way that facilitates proper regulation of its activities and particularly of the monopoly component of its activities," Reuters quoted Carter as saying. "There need to be steps to make sure that there is some level playing field between Gazprom and other producers."

A World Bank document dated July 17 outlines the lender's demands for reforming the gas market, including dividing Gazprom's production, national pipeline and local distribution arms into three separate businesses and encouraging new players to enter the gas production market.

The World Bank's aims are likely to ruffle feathers in the communist-dominated State Duma, Russia's lower house of parliament, which is set to renew debate of the Kremlin's emergency economic legislation Aug. 19.

The Duma shut down debate of the law package last month to punish Prime Minister Sergei Kiriyenko for launching a tax raid against Gazprom, which is revered by many Russian leaders as the nation's most strategic enterprise and one off-limits to reform. The state holds a 40.9 percent stake in the gas giant.

The hard-nosed raid last month forced Gazprom to begin paying its monthly taxes on time, and since then Kiriyenko has taken a more conciliatory tack with the monopoly, calling frequent meetings with Gazprom chief Rem Vyakhirev to settle months of arrears between the government and Gazprom.

The duo are expected to sign an agreement on the debt within a week.

Whatever Gazprom's political might, the lumbering monopoly is in dire need of reform. It collects only 15 percent of its domestic bills in cash and is seen as one of the pillars of Russia's crippling nonpayment problem.

The World Bank's plan aims to "promote efficiency in the natural gas industry, achieve greater transparency and accountability in the operations of Gazprom, and facilitate pipeline access for independent gas producers, including those now flaring gas," the document said.

Russia's major oil producers pump tons of gas out of the ground each year but are forced to burn it as waste because Gazprom has a lock on gas processing plants and the national pipeline. "It's a waste," Carter said, noting that the amount of gas flared in Russia each year equals half the annual gas consumption of France.

Each section of Gazprom's pipeline network is controlled by a separate regional subsidiary. The World Bank's document stipulates that the pipeline be ruled by one main enterprise or several main enterprises beginning Jan. 1, a move meant to create greater transparency in the system, said Stephen O'Sullivan, co-head of research at United Financial Group.

The document also calls for Gazprom's production, pipeline and local distribution divisions to be run by Jan. 1 as separate "cost/profit centers" with separate accounting and separate management teams.

Under such a scheme, Gazprom's top management is still likely to dictate strategy, with separate managers running operations at the three businesses, O'Sullivan said.

Breaking the business into three parts would encourage more efficient operation and make it easier to institute reforms or even to privatize some pieces eventually, he added.

The bank is also requiring gas prices to be adjusted by Jan. 1. Analysts have promoted the idea of raising gas prices for households and lowering them for industry, which carries most of the payment burden today.

The World Bank document did not specify which way tariffs would go but said new rates would ensure suppliers could recover costs and earn a "reasonable return on capital" and that rates would reflect the cost of supplying different regions.

The bank is also requiring that uniform contracts for gas purchases be introduced by Jan. 1, which could promote competition by making it easier for a buyer to switch to a non-Gazprom supplier.