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. Last Updated: 07/27/2016

Gazprom's Success Story Has Yet to Be Written

Gazprom -- the revered natural gas monopoly -- in so many ways defies comprehension: its 49.2 trillion cubic meters of gas reserves worth about $40 billion, its position as Europe's largest single supplier, its corporate culture formed over the decades spent in Siberia's harsh winters.

Since the beginning of 2001, however, Gazprom has been Russia's turnaround story that has yet to turn around.

A number of auditors and vocal investors have pointed out that the gas giant has lost a number of potentially lucrative assets since 1992, when the remnants of the Soviet Union's Gas Ministry were welded into a joint-stock company. With the explicit support of President Vladimir Putin, new Gazprom CEO Alexei Miller has been on a drive to get them back. Miller has basically already succeeded in reaffirming control over Sibur, Russia's largest petrochemical holding; Purgaz, a Siberian gas producer sold on the cheap to rival Itera; and Zapsibgazprom, which was bankrupted to benefit Gazprom.

Despite these recent moves, Gazprom is still plagued by problems and uncertainties about the future.

Foreign investors are still patiently waiting for the so-called "ring fence" to be dismantled. Although Putin, in April 2001, demanded that "new energy" be sunk into the liberalization of Gazprom shares, very little has been accomplished since then. The latest development occurred late last month, when Gazprom deputy board chairman Dmitry Medvedev said restrictions on the stock's domestic trading may be dropped sometime before the annual shareholders meeting, scheduled for June 28.

Currently, shares are traded on the Moscow Stock Exchange as well as the St. Petersburg Stock Exchange in conjunction with the Russian Trading System. While foreigners are legally allowed to own up to 20 percent of Gazprom, only 8.5 percent of the company is officially in foreign hands. But many analysts believe more than 20 percent of Gazprom is in reality owned by foreigners through gray schemes.

The most vitriolic complaints about the ring fence are reserved for the divide between Gazprom's American Depositary Receipts and domestic shares. Unlike most companies, Gazprom does not allow investors to convert domestic shares into ADRs and vice versa. Although the price gap between the two stock types has dwindled in recent months, ADRs trade at a 100 percent premium.

Gazprom board member Boris Fyodorov says that this restriction could be lifted by the end of this year, but most likely will stay in effect until 2003.

A more fundamental question concerns Gazprom's fate. The gas monopoly not only owns the licenses to a majority of Russia's reserves, it also controls the nation's gas pipeline system, and thus, the European export market.

Proposals for the reform of Gazprom and of the gas sector in general have been tossed around the Economics and Trade Development Ministry and have met little success. Reform will prove difficult unless the government agrees to substantially raise domestic prices, which languish at prices a fraction of what exports fetch despite a recent tariff hike.

One Western consultant, who wished to remain anonymous because of his relationship with Gazprom, says this lack of focus combined with Miller's profit-driven management style may threaten the implicit pact between Gazprom and the government, which holds 38 percent of the company.

"Given that the gas system will probably require in the future much larger investments than what has been done in the past 10 years, but that its resources are for the time being limited and fought over harder than ever, what will give in first?" the consultant asked. "Will domestic prices be raised high enough and quickly enough to change the business model of Gazprom, or will the government choose to maintain low prices to protect domestic users, effectively preventing any real reform of the company? Will the current system collapse one day from the conflicting demands put on it?"