Russia uses natural-gas producer to exert power

MOSCOW — Before he was president, before his government gutted Russia's largest oil firm and sent the company's billionaire owner to a Siberian prison, Vladimir Putin laid out his views on his country's energy sector in a 1999 edition of an obscure St. Petersburg mining journal.

Russia's vast oil and natural-gas resources should remain under the wing of the state, he wrote. And they should be the means with which Russia regains its geopolitical might.

This year, it has become increasingly clear that the Kremlin will look to the country's natural-gas monopoly, Gazprom, as the engine behind that policy.

Gazprom is the world's largest natural-gas producer. In October, the energy giant got even bigger — it bought Russia's fifth-largest oil company, Sibneft, from Russian magnate Roman Abramovich for a reported $11 billion.

Earlier this month, Gazprom broke ground on a 737-mile, $5.7 billion pipeline between Russia and Germany that will deliver to Europe 20 billion cubic meters of Russian natural gas annually. The Russian government also has been in talks with the world's largest natural-gas consumer, the United States, about the prospect of shipping liquefied natural gas from Gazprom's gas fields to American ports.

Over the past two years, Putin has methodically returned Russia's energy sector back under the fold of the state.

Mikhail Khodorkovsky, former CEO of what once was Russia's largest oil firm, Yukos, was seen by the Kremlin as a renegade bent on usurping its authority. Khodorkovsky was arrested, convicted and imprisoned.

Yukos' core asset, a Siberian oil-production subsidiary, was sold and eventually fell into the hands of Rosneft, a state-owned oil company overseen by top Putin aide Igor Sechin.

This year, the Kremlin raised its stake in Gazprom to 51 percent, allowing it to lift restrictions on foreign investment in Gazprom stock. Analysts believe the move could increase Gazprom's market capitalization to as much as $300 billion from $119 billion.

Putin said last week that hiring foreign managers at Rosneft, Russia's third-largest oil producer, would show the openness of the Russian economy. Russia's Kommersant newspaper reported that Putin offered the job of Rosneft chairman to former U.S. Commerce Secretary Donald Evans, who turned him down Monday, The Associated Press reported Tuesday.

He cited a host of business and family commitments. That led some to suggest that the real deterrent was the reputation of Rosneft, which was catapulted into the nation's top five oil producers a year ago after it bought the biggest production unit of Yukos, stricken by enormous back-taxes claims that critics say were part of a Kremlin campaign against Khodorkovsky.

Now, with control over about 30 percent of the nation's oil output, the state feels confident enough to open up strategic projects and attract funds for its state companies via foreign stock listings and deals with strategic investors — where the influence of power brokers such as Evans could be invaluable.

"In the past, Russia used its military to project influence internationally," said Roland Nash, an analyst with Renaissance Capital, a Moscow investment bank. "Now the agenda has changed. Energy has become the way Russia projects its power."

An ongoing row between Russia and Ukraine over natural-gas prices shows just how big a hammer Russia's energy clout gives the Kremlin.

Ukraine, which provides Gazprom with a key gas transit route to Western Europe, gets cut-rate prices for gas — $50 per 1,000 cubic meters — and wants to keep it that way. When Ukraine rejected Gazprom's proposed price increase to $160, Gazprom fired back by demanding up to $230 and threatening to halt delivery to Ukraine if Kiev did not give in. Ukrainian and Russian officials are expected to continue talks this week aimed at resolving the dispute.

Commentators in Russia said they believe the Kremlin is turning the screws on Viktor Yushchenko's post-Orange Revolution government, which has set the country on a westward course. Belarus, one of the Kremlin's staunchest allies, will pay Gazprom just $46 per 1,000 cubic meters in 2006.

Gazprom could be on course to become an international energy powerhouse, depending on the successful development of its Shtokman gas fields in the Barents Sea, about 350 miles off Russia's northern coast. By April, Gazprom is expected to pick its Western partners in the project.