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. Last Updated: 07/27/2016

Gazprom Wants to Get People Talking

Gazprom, which already supplies Europe with a quarter of its natural gas, is prepared to offer them something else: an extensive, state-of-the-art telecommunications network.

But it remains to be seen whether the Europeans will buy. Natural gas, for one, is in short supply in Europe and vital to economic development. Fiber-optic cables and other means of data transmission, on the other hand, aren't so scarce. Moreover, the volume of voice and data traffic coming in and out of Russia remains relatively low.

Alexander Gordeyev, Gazprom's pointman behind the telecoms project, understands both sides of the coin, but he also sees beyond it. He says his network can provide a cheaper, more efficient alternative to existing lines — and can be used merely to relay calls between European and Asian cities via Russian territory.

Gazprom installs high-tech telecoms cables along its pipelines for technical reasons anyway, so why not market them to consumers as well, reasons Gordeyev, who heads the gas giant's Gaztelecom subsidiary.

Gaztelecom, which is 95 percent owned by Gazprom, worked in relative obscurity until Polish newspapers discovered late last year that it had a high-capacity fiber-optic cable running through the Polish countryside. The cable caused a stir when farmers complained and demanded compensation for the use of their fields.

Gordeyev just happened to be in Poland at the time.

"It was unexpected having your company's name splashed all over the headlines," he said in a recent interview.

The $100 million cable in question runs through Belarus, Poland and Germany along the Yamal-Europe gas pipeline.

To the south, a $110 million line along the Blue Stream pipeline from Moscow to Istanbul is nearing completion.

To the east, Gazprom's pipelines — and the accompanying telecoms cable — currently go as far as Siberia. But Gaztelecom intends to lay a cable along a planned Gazprom pipeline to China and to branch out to the Far East and Japan on its own.

Gazprom established Gaztelecom in 1996, and the company began to lay the Yamal-Europe fiber-optic cable in 1998. Gordeyev declined to reveal any financial information about Gaztelecom's operations.

The uproar in Poland — which Gordeyev refers to more as a political than a legal phenomenon — has delayed the completion and activation of the line there, of which only a few kilometers remain to be laid.

Gaztelecom is in intense negotiations with the Polish government, and Gordeyev says a resolution should be reached in the next several months.

Telecoms analysts in Moscow and elsewhere are skeptical of Gaztelecom's plans, saying that a number of hurdles stand in its way, including small amounts of traffic, a bear market for telecoms and the grip national telecoms monopoly Rostelecom already has on household users.

In response to these critics, Gordeyev says he pays more attention to the "potential of transit traffic." As far as investment is concerned, he reaches for a proverb: "Buy when everyone else is selling, and sell when everyone else is buying."

"This backbone between Moscow and Berlin is the fastest, most technologically advanced connection between the two cities," he said, alluding to the black, 2,500-kilometer optical cable that runs underground along the Yamal-Europe pipeline. "There are others already there, but they are run by different operators levying different tariffs through different countries.

"We will offer a comprehensive package of services and a competitive unified tariff."

Gazprom's creation of Gaztelecom is a reflection of a global trend: National utilities — and other companies that have already heavily invested in networks — are branching out commercially to compete with traditional long-distance carriers. Last November, Gazprom struck a deal with Italy's ENI SpA, Europe's fourth-largest oil company. Together, Gazprom and ENI will provide high-speed data services by utilizing the Moscow-Istanbul as the backbone for an even longer cable linking Helsinki to the two cities.

This comes on the heels of similar moves by the Hungarian national power grid and the British Lattice Group PLC, a British gas pipeline business that plans to spend $485 million to build a telecommunications cable along its lines.

Looking at the hit European telecom stocks have taken over the past several months, Alisdair Gayne, an analyst with Credit Suisse First Boston's energy technology group, is pessimistic about the viability of launching any such projects.

"Success will all depend on the pricing, demand and cost," Gayne said by telephone from London. "All of the telecoms have been derated because the market will probably not be as big as everyone had planned."

Even though there may be synergies between utilities — which often have already invested in networks — and telecoms, there are still a lot of upstart costs, he said. And once you have those factored in, it's uncertain when the cash flow will actually start.

Gaztelecom's business model is more suitable in countries that have more traffic volume, such as the United States or Britain, said Andrei Braginsky, a telecoms analyst with Renaissance Capital.

There are also three other players with similar projects, he said, pointing to national power grid Unified Energy Systems, Transtelecom — a pet telecom of the Railways Ministry — and telecoms monopoly Rostelecom.

Braginsky added that existing lines that run through the Atlantic and Pacific oceans already provide more than enough capacity for total traffic.

Despite the naysayers, Gordeyev remains optimistic that Gaztelecom will be able to sell extra capacity through operators working along the Yamal-Europe line.

"Our business plan has been accepted by banks and foreign investors," Gordeyev said. "And the fact that we're a subsidiary of Gazprom lessens the risk for everyone."