Russia's neighbours left out in the cold by Gazprom

Financial News - Letter from Moscow

Jason Corcoran

January 8 2007

Letter from Moscow
European countries dependent on Gazprom breathed a sigh of relief on new year’s day as the energy group continued to pump gas westward through Belarus following a dispute over pricing.

The former Soviet republic agreed on a five-year contract hours before Russia had threatened to cut off gas supplies, which could have led to shortages along the pipeline in Germany, Poland and Lithuania.

Western European countries shivered in January last year after a similar dispute between Russia and Ukraine resulted in temporary reductions of gas supplies. Gazprom, with its massive energy reserves, supplies a quarter of Europe’s gas to more than 20 countries, with about 80% going through Ukraine and the remainder via Belarus.

The agreement more than doubles the price of gas to Belarus from $47 to $100 per 1,300 cubic yards and allows for the acquisition by Gazprom of a 50% stake in the Belarus gas-transit monopoly, which had previously been resisted.

Gazprom chief executive Alexei Miller said the state-run monopoly was not Santa Claus and that Belarus should not expect any gifts on new year’s eve.

His hardball attitude underscores how Gazprom has turned into one of the Kremlin’s most potent weapons for exerting Russian influence at home and abroad.

Gazprom flaunted its muscles last month by taking control of Sakhalin-2, the world’s largest combined oil and natural gas development, after a sustained campaign against foreign operator Royal Dutch Shell over alleged environmental violations. Shell had its 55% stake trimmed to 27.5%, while minority partners Mitsui and Mitsubishi had their interests halved to 12.5% and 10%, respectively.

Russia’s resource nationalisation is likely to continue unabated despite the likelihood of the European Bank for Reconstruction and Development pulling a loan for Sakhalin-2. The bank’s mandate is to back projects that contribute to the transition towards a free market.

Gazprom and rival energy company Rosneft are expected to take the remaining assets of the beleaguered Yukos oil company in an auction due to take place this month.

Shares in London-listed gold miner Peter Hambro took a pounding late last year following concerns about the fate of its mining licences.

Analysts at Renaissance Capital, Russia’s western-standard investment bank, believe TNK-BP, the Russian joint venture of BP, might be next. There is growing speculation that the venture’s Russian partners will sell out to a state company with BP being forced into accepting a subordinate role.

This growing pattern of the state reasserting control over the country’s natural resources has failed to put a dampener on investor sentiment. The RTS index reached a high of 1921 before closing for two weeks for new year celebrations.

The local bourses reopen for business tomorrow with more than 40 initial public offerings slated for the year at a total value of about $30bn. Among the most anticipated placements are those of large state-controlled banks, Sberbank and VTB.

With several Russian initial public offerings performing poorly in the autumn, analysts said there might not be enough interest from foreign investors to go round.

The Kremlin will breathe easily knowing it can call on strategic investors to pick up any slack. Last year’s Rosneft listing failed to attract large numbers of institutional investors but was covered by those keen to curry favour as Russia’s importance in the energy market grows.

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