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. Last Updated: 07/27/2016

Gazprom Fights Off Domestic Woes

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The nation's biggest company, Gazprom, dominates more than just the gas industry.

Of the 590.7 billion cubic centimeters a year of natural gas that Russia produces — some 21 percent of world supply — Gazprom accounts for 92.4 percent.

A large amount of its production comes from Gazprom affiliates Urengoigazprom and Yamburggasdobycha, which control fields in the northern part of Western Siberia.

Gazprom also controls the pipes through which the country's 126.8 billion cubic centimeters a year of gas exports flow to the rest of Europe.

But the company does more than simply extract and export natural gas. Capitalizing on its massive cash flows — the company rakes in some $8 billion a year from exports alone — and the crucial role of gas in the national economy, Gazprom has accumulated holdings in a wide range of companies; its interests range from television to farming.

It also wields enormous political clout, so much so that the government's hold on the gas giant is far more tenuous than the 38.4 percent stake it owns in Gazprom would suggest. Part of the reason for that is the trust agreement under which chief executive Rem Vyakhirev manages shares representing 35 percent of the company on the government's behalf. Considering that the remaining 3.4 percent stake is effectively allocated for sale over the next few years, that leaves the government with no direct control — a state of affairs that President Vladimir Putin is seemingly less than happy with.

Last week, Putin criticized Gazprom and the five government members on its 11-man board over a $211 million credit granted to Media-MOST. The president said in a press conference in Germany last Thursday that he was bewildered that a company "which has trouble ensuring gas supplies to all households" can spare such a large sum to loan to a media company.

Nevertheless, Vyakhirev was seemingly able to shrug off the president's criticisms. That level of political power is of paramount importance for the company. Even though other companies — local and foreign — are aiming to get in on the market, Gazprom's dominance looks to be unshakeable unless politicians should suddenly heed calls from institutions such as the World Bank to split up the giant company.

Although Gazprom has reserves of 33 trillion cubic centimeters of gas, production in the first quarter of this year declined 0.9 percent year-on-year, while exports remained unchanged from last year, according to Economics Ministry figures. The ministry blames nonpayment for gas, low investment in the sector and low domestic gas prices (roughly 10 percent of average world prices) for the decline in production.

Gazprom also blamed the decrease on low domestic prices, and named high tax rates as well. But it singled out nonpayments as a chief problem. Domestic customers, used to Soviet-era subsidized rates, frequently pay their already low bills late or not at all, or with promissory notes and barter deals.

Gazprom said it received only 18.5 percent of what it was owed by domestic customers in cash. That leads to woeful under-investment in gas fields, hence the production decline.

Capital investment in the sector declined 26.7 percent in the first quarter of 2000, according to preliminary Economics Ministry figures. Based on the results for the first quarter, the ministry also forecasts that production will decline by just 0.2 percent to 590.7 billion cubic meters, while exports will decline 4.6 percent.

Gazprom will most likely look to exports as a means of offsetting such negative developments at home. Sales to Europe provide Gazprom with its chief source of revenues. Turkey is also a major customer and Gazprom's fastest growing market.

The company might also import cheap gas from Turkmenistan, something pricing and access disputes all but halted in the 1990s.

Vyakhirev floated plans for restructuring the company last year, but backtracked when the Kremlin made its distaste known. Gazprom promptly attacked former Fuel and Energy Minister Viktor Kalyuzhny earlier this year for incompetence and was seen as one of the principal lobbyers for his sacking.

Meanwhile, for all the Kremlin's carping at Vyakhirev, the Gazprom CEO looks to be as firmly in the saddle as ever.

After sniping at Gazprom, Putin watched last Friday as Vyakhirev signed four deals with major German companies. Those deals are expected to bring Russia more than $1 billion in new German investments, news agencies reported.

A relaxed and jokey Vyakhirev later nonchalantly dropped the word that he would retire next year — "If someone is very eager, I am ready to retire even now," he added — but he declined to name his successor.

He did make it extremely clear that it would be up to him when he retired and in whose favor, not the Kremlin, and certainly not the Gazprom board.