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. Last Updated: 07/27/2016

Miller Takes Up Gazprom Gauntlet

Newly appointed Gazprom head Alexei Miller on Thursday faced what may turn out to be the most challenging task of his career as he set foot into his new offices with a Kremlin mandate to overhaul the world's largest gas company.

Gazprom's board named Miller as chief executive in a surprise decision Wednesday. Miller, a longtime associate of President Vladimir Putin's from St. Petersburg, was serving as a deputy energy minister.

The significance of the shakeup at Gazprom wasn't lost on anyone at a Thursday meeting of wealthy businessmen at the Kremlin as Miller was introduced to the group. Miller and ousted Gazprom chief executive Rem Vyakhirev, who is expected to be named chairman of Gazprom's board, sat at opposite ends of the table during the meeting of the Union of Industrialists and Entrepreneurs.

"It is not a coincidence that Rem Ivanovich is present here, too," Putin told the meeting. "He is staying on the team. I hope — and I repeat what I said yesterday — that there will be a very good tandem between Alexei Miller, who is an energetic young person of today, and Rem Ivanovich, who is a very experienced man."

Union president Arkady Volsky said the shuffle had left the group of oligarchs stunned.

"What can I say about Miller's appointment?" Volsky said. "We have to come to our senses first. We need time. The Energy Ministry has a good opinion of him."

Softening the blow of Vyakhirev's removal, Putin praised him for his "effective" work and said he would be awarded a state medal for his nine years at Gazprom.

Putin apparently played a major role in the sacking of Vyakhirev. The president called Gazprom's board to the Kremlin for talks at midday Wednesday. Hours later, the board unanimously agreed at a previously scheduled meeting to replace Vyakhirev with the little-known deputy energy minister.

Miller was presented to the staff at Gazprom's towering blue glass and steel headquarters later Thursday.

Investor enthusiasm — which sent Russian-traded shares to fresh highs Wednesday — cooled Thursday. Domestic shares, which are restricted for sale to foreigners, closed up 0.42 percent at 12.05 rubles ($0.414), while American Depositary Receipts traded in London continued to climb. The ADRs, each of which is the equivalent of 10 Russian shares, rose 7.3 percent to close at $9.55.

Gazprom's largest foreign investor, Ruhrgas of Germany, said it was relieved that Vyakhirev looks set to stay onboard the company. "That suggestion wouldn't be a bad idea," Ruhrgas spokeswoman Antje Nickel said. "We are also glad that there was a unanimous decision on this very important topic. We also don't doubt that our relationship with Gazprom will continue to be a positive one because it's beneficial to both sides."

Ruhrgas, Germany's main producer of gas, holds a stake of about 5 percent in Gazprom and recently expressed interest in acquiring additional shares.

The government controls about 38 percent of Gazprom.

Putin has placed Gazprom high on his list of reforms, so the signal he is sending is much more important than the change in upper management, said Philip Poole, ING Baring's chief economist for Eastern Europe.

"Clearly it's not enough to change the chief executive of the company," Poole said by telephone from London. "The government is looking to tackle the issue of natural monopolies. If that doesn't happen, then global economic reform gets stalled. You need to inject competition or else you won't get benefits of resource allocation. That's the first step, and it has specific implications for Gazprom's share price."

Poole said that a move by the government last week to increase export duties on gas showed it was prepared to get involved in the industry. "[All of] these issues have led to the euphoria," Poole said. "And over time, resolution of these issues will be good for investors."

Enthusiasm — and shock — over the changes at Gazprom spilled onto the pages of Thursday's newspapers. "Since Putin's election, this is the most serious evidence that he's in charge," said the business daily Vedomosti. The daily newspaper Kommersant echoed that observation, describing Vyakhirev's departure as a "landmark event."

"One of the stalwarts of [former President Boris] Yeltsin's era is gone," the newspaper said.

Nezavisimaya Gazeta described the shakeup as a kind of coup d'etat. "The appointment of Alexei Miller as chairman of the Gazprom board turned out to be literally shocking to the company management who learned about the appointment one hour before the board meeting began, during a conversation with the president in the Kremlin."

The official state-run Rossiiskaya Gazeta took speculation about behind-the-scenes talks one step further.

"It is not without interest that although about 10 names figured in a list of possible successors to Rem Vyakhirev, including those from the government and the presidential administration, Alexei Miller's name was not among them," the newspaper said. "It is possible that President Vladimir Putin had Miller in mind when he told the press in one of his interviews in April that he knew who would become the new chief of Gazprom. It was clear from the very outset that a decisive voice in the personnel issue belongs to the state."

Vremya Novostei asked more questions than it could answer, mainly: "How will the Gazprom system, which has always stood out for its cooperativeness, take to Alexei Miller?"

Miller has said little about his plans for Gazprom other than announcing that he wants to increase production 10 percent to 15 percent by 2010.

The company is under fire from minority shareholders for allegedly transferring its assets for free or at nominal prices to firms thought to be controlled by Gazprom management. Although it accounts for a quarter of the world's gas reserves, Gazprom pays out dividends worth kopeks and reported a miserly net income in 2000 of $2.2 billion.

Poole said Miller's reserved remarks made sense. "He's definitely not raising expectations," he said.