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. Last Updated: 07/27/2016

Putin Rebuffs Fears of State Control

MTDuring Tuesday's news conference, Putin tried to alleviate fears about renationalization of oil and gas companies.
President Vladimir Putin on Tuesday said that the country's leadership is not planning a major renationalization of key industries and fiercely defended Gazprom's pricing policy for exports to Ukraine.

Speaking at his annual news conference, Putin said private investors were welcome in the country's energy sector, and he stressed market rules were guiding the gas negotiations with Ukraine.

"Forgive me for being rude, but we did not pull this price out of our nose," Putin said of the dispute over gas prices between Russia and Ukraine, which led to a temporary halt in gas supplies to Ukraine, and through Ukraine to Europe, at the beginning of January.

Putin insisted there was no political agenda behind the renegotiation of the gas deal, which would force Ukraine to pay $230 per 1,000 cubic meters of gas, about four times last year's rate.

Instead, Putin argued that until this year, the low price at which gas monopoly Gazprom was selling gas to Ukraine was costing Russia $3 billion to $5 billion per year in de facto subsidies to the Ukrainian economy. Analysts said the figure was on target.

"I consider [switching to market prices] to be a huge step -- taken by both Ukraine and Russia -- on the path toward stability in the European energy market," Putin said. "Regardless of the will of the Russian government, the price will be set by the world market."

The gas dispute prompted criticism from the West, where some branded Russia an unreliable partner and accused it of using gas to punish its neighbor in the wake of the Orange Revolution, in which a pro-Western leader became president.

Putin, however, signaled Tuesday that Russian-Ukrainian relations were on the mend as he offered the Ukrainian leadership praise for admitting that some 70 million cubic meters of gas destined for Gazprom's European customers was funneled from the pipeline during the cold spell in mid-January.

"I am pleased by the fact that, contrary to previous years, our partners in Ukraine openly said they were taking gas," Putin said, adding, however, that Russia was waiting for proposals on compensation for the gas consumed over the limits.

Putin also used the incident to stress the necessity of constructing the North European Gas Pipeline, which is expected to carry up to 55 billion cubic meters of gas under the Baltic Sea to Germany by 2012. "And now I want to ask those skeptics who thought that there is no need to build the North European Gas Pipeline under the Baltic Sea: Is it needed to ensure the stable supply of gas to Western Europe, or is it not?"

Putin acknowledged the need for energy security and backed the consolidation of Russia's energy sector, but he was quick to alleviate fears about across-the-board nationalization of all private oil and gas companies. "Large multinational companies call the shots in global energy," he said. "We also must develop in this way."

It was unclear whether the president was speaking about past deals or heralding further consolidation in the sector.

Putin, however, stressed that the state does not plan to grab the reins of all oil companies in the country.

Fears of mass renationalization were sparked in 2004, when state oil firm Rosneft took control of Yukos oil major's key production unit in a forced auction. Last fall, Gazprom bought private oil company Sibneft, pushing the state control over oil production to 30 percent.

"Not only in OPEC but also in countries such as Norway the energy sector is fully monopolized by the state. ... We are not going that way," Putin said.

In fact, Putin said, even the largest state-controlled companies are not off-limits to private investment.

Putin said private investors could tap into Gazprom and added that a German firm holds a 10 percent stake in the gas giant. It was not clear whether Putin was referring to Germany's Ruhrgas, known to control 6.5 percent of Gazprom. This makes Gazprom an international company, Putin said, and Rosneft will become one after its planned IPO.

While Gazprom and Rosneft are state-run giants, Putin said there are about 10 large private oil companies, including LUKoil, Surgutneftegaz and TNK-BP. "No one is planning to nationalize them. They will develop according to market conditions as private companies," he said.

Putin's remarks signal that "the state is quite comfortable with this mixed model of ownership," said Al Breach, head of research at UBS.

Continuing the reassurances, Putin downplayed rumors that state-controlled diamond monopoly Alrosa plans to buy private metals giant Norilsk Nickel. "I don't know anything about Alrosa's plans to purchase Norilsk Nickel," Putin said. The management of these companies would be "very surprised" if asked about it, he said.

Chris Weafer, Alfa Bank's chief strategist, said: "The state does not want or need to extend its controlling interest in companies beyond the biggest company in each of the strategic industries.

"The private and foreign companies will have to adapt to work with the state company and/or within the development framework set out by the state," he said in a note released after Putin's briefing.

Overall, Putin appeared pleased with the state of the economy. He said gross domestic product had grown by 6.4 percent in 2005.

The Russian financial markets also had strong year, "even compared with South Korea, the official [emerging markets] leader, where the market grew by 54 percent. We hold the absolute world and national record -- 88 percent," Putin said.

Putin, however, acknowledged failures on some fronts, including inflation, which reached 10.9 percent in 2005, above an initial 8.5 percent target.

He also expressed concern over allowing the national currency to strengthen, thus promoting imports and hurting domestic producers.

Putin also backed tax cuts, saying that the total tax burden, equivalent to 36.8 percent of GDP, was too large. He did not say which taxes should be cut or when.

"The government may be considering cutting the tax burden in the oil sector so as to help boost investment spending at a time when state companies will want to attract both foreign and Russian private oil companies as investment partners," Alfa Bank's Weafer guessed.

"Putin is a master of leaving lots of doors open," Breach of UBS said.

Putin on Economic Issues

Energy: The Kremlin has no plans to renationalize the energy sector. However, the state will support the creation of large oil firms able to compete with multinational corporations.

Debt: Russia is committed to keep paying off foreign debt ahead of schedule after repaying $18 billion to the Paris Club of sovereign lenders and the International Monetary Fund last year.

Ukraine: Russia's gas pricing policies are based on market principles, which guarantee that no political pressure can be applied. The fuel dispute with Ukraine highlights the need for the pipeline Gazprom plans to build along the floor of the Baltic Sea to Germany.

Taxes: Taxes will be cut, but it is not clear when, how or which taxes, or at what rate.

Growth: The economy grew at 6.4 percent in 2005. Getting inflation, which reached 10.9 percent by the end of 2005, down to single digits will be one of the top economic priorities.

Nuclear: Atomic energy currently accounts for no more than 17 percent of overall generation, but Russia should try to boost it to 25 percent by 2030.

Auto Sector: Combining AvtoVAZ, GAZ and KamAZ into a conglomerate is a possibility, but it is up to company owners to make the final decision.

WTO: Russia will enter the WTO only on terms that are acceptable to the country. The bilateral agreement with the United States is the last remaining obstacle to WTO membership.

Metals: The Kremlin is unaware of a plan to merge mining giant Norilsk Nickel with state-owned diamond monopoly Alrosa.

Technology: Russia plans to set up an investment fund with charter capital of $2.5 billion to help develop technologically innovative projects.