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. Last Updated: 07/27/2016

From Blue Chip to Fizzle

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In theory, Gazprom should be one of the world's premier blue-chip companies. It owns the largest gas reserves in the world, employs thousands of highly qualified professionals, and most of Europe is its captive customer. But in reality, it appears that the company is coming apart at the seams.

Gazprom's 2009 revenue might decrease by some $20 billion due to dropping gas prices caused by the global recession, and it has asked the Russian government and foreign investors for help. The company will have to cut back on its long overdue investment program to develop new gas fields, according to media reports over the last six months. This curtailment is a serious blow because Gazprom desperately needs to replenish its diminishing reserves

According to a Dec. 16 Kommersant article, Gazprom was considering selling some of its shares in Shtokman Development, Nord Stream and RosUkrEnergo in order to raise money to fund its investment program. In April, Gazprom's option to buy a 20 percent stake in Gazprom Neft owned by Italy's ENI for $4.5 billion expires. Servicing its huge debt of $41.7 billion is another looming problem.

Instead of investing in developing new gas fields and infrastructure, CEO Alexei Miller, working hand-in-hand with the Kremlin, poured billions of dollars into senseless projects -- buying football teams, building a skyscraper, gambling that Central Asian gas will make up for Russia's lagging production and engaging in theatrical, highly political conflicts with Ukraine.

Gazprom's current problems can be traced back to the removal in May 2001 of CEO Rem Vyakhirev, a highly qualified gas professional, despite his alleged transgressions. When Vyakhirev ran Gazprom, it was a highly nontransparent commercial enterprise, but few in the West complained about the company's political role. Today, it is viewed as an opaque political enterprise.

Miller's team created a web of intermediary companies and gave away billions of dollars to unknown partners in shady companies, such as Eural Trans Gas and RosUkrEnergo. As Gazprom's reputation took a big hit, so did a chunk of Russia's federal budget.

To help whitewash its mistakes, Gazprom was forced to hire expensive Western public relations companies. All that was really needed, however, was to let Gazprom be what it originally was -- a gas company run by gas professionals and engineers, not siloviki.

To make matters worse, the high-priced PR campaign was a fiasco. Many businesspeople and analysts in the West cringed when they learned that Matthias Warnig, a former East German Stasi agent and close ally to Prime Minister Vladimir Putin, was sent on a dog-and-pony show to Washington to promote the Nord Stream pipeline. Had Vyakhirev been running the company, he may have retained Warnig, but he would have limited him to quiet, behind-the-scenes deal-making.

Gazprom's decline is not breaking news. In 2004, a study by Gazprom's own research institute, Gazekonomika, found that in order for Gazprom to meet its obligations in 2020, it will need to begin a serious revamping and expansion of its gas pipelines and to develop new fields. All the early warning signs by its own experts were ignored by Miller's team to allow the Kremlin to promote its geopolitical agenda.

Gazprom's political agenda has caused the company's market capitalization to drop from the third largest in the world to as low as 36th. This drop in value cannot be completely blamed on the collapse in oil and gas prices. A better-managed Gazprom would not have suffered as terribly as it has and would be able to meet European and domestic demand once the crisis is over and demand for gas increases.

The January Russia-Ukraine gas war was a vivid example of how Gazprom carried out the Kremlin's political agenda. The conflict had little to do with commerce. The stage-managed meetings shown on Russian television of Putin giving Miller instructions on how to act were mind-boggling. Imagine CNN showing the Chevron CEO getting instructions from former President George W. Bush on how to settle a contract dispute with Nigeria.

Had Gazprom been managed as a gas company and not a subsidiary of the Foreign Ministry, it would not have suffered so many losses -- both financial and reputational. Gazprom can recover from its losses under one condition -- if it cuts its umbilical cord to the Kremlin.

Roman Kupchinsky is a partner at New Jersey-based AZEast Group.