Saturday, February 02, 2008

A quick round-up

As my colleague pointed out not so long ago
The reason, she says, that Germany has 300 times as much solar power and ten times as much wind power than the UK is simply because German politicians, led by the Greens, have had the political will to lead the way.

Germany is, of course, is the country, which has
closed down its nuclear industry, making it critically dependent for its energy supplies on Russia, putting in hoc to an unstable and increasingly oppressive regime. And this, Mz Lucas, believes, is a suitable role model for the UK?
There is a confirmation of this in yesterday's Spiegel, which talks of the tough future energy producers are facing and if energy producers are having problems can difficulties for consumers be far behind?

It might be a good idea, therefore, to have a quick look at what is going on with Gazprom, Russia’s secondary government, particularly as there have been several interesting items in the news recently.

In the first place, the struggle to keep the existing slices of pie beyond the next election, which Dmitri Medvedev is going to win with a crushing victory which remains undecided as a hotly contested election is being fought out, is ratcheting up within the government and the various security organizations, the siloviki.

Finance Minister Alexei Kudrin has been under attack, as he is considered to be something of an economic liberal and a probable close ally of Deputy Prime Minister Medvedev. He was, nevertheless, bold enough to say at a recent investment forum in Moscow:
In the nearest future we need to change our foreign policy goals to guarantee stable investment.
Whatever could he and his supporter, Anatoly Chubais, have meant? Surely not that Russia once again throwing its weight around on the international scene to not much purpose might prevent foreign firms from investing money in that country? It is much more likely that the periodic war the Russian government wages against firms that are already there or organizations such as the British Council (and what a famous victory that was) will start deterring western investors, who are still hoping for those mega-profits and not too many problems with the authorities.

As it happens, we do not know what Mr Kudrin meant because in true Russian tradition he backtracked almost immediately.
Although Mr Kudrin later toned down his words when talking to journalists, saying there had been no major mistakes in recent Russian foreign policy, his intervention in the foreign policy debate was a surprise.
His change of opinion was hardly a surprise. One of his deputies, Sergei Storchak, was arrested last year on charges of fraud and embezzlement. It is best to reserve judgement on the case, in my opinion, even after the trial which will happen at some point.

It is not so much Putin's grandstanding that is going to have any effect but the expansion of Gazprom, though whether that will bring any long-term economic benefit to Russia is not clear.

Mr Medvedev has called on Russian business to imitate China and buy companies abroad, though whether Chinese expansion is likely to continue for much longer is becoming ever more questionable.
Russian businessmen have been flexing their muscle in western markets, and the state-run Gazprom energy group has become increasingly aggressive in its pursuit of global assets. As Gazprom's chairman, Mr Medvedev has witnessed the western backlash against the group's expansion drive amid fears it wants to tighten its grip on European energy supplies for political ends.

"This is not a reason for hysteria," he said. "We should quietly and measuredly forward our interests and convince people that investments from Russia are effective, transparent and necessary for the countries involved."
It is not entirely clear how Mr Medevedev is going to demonstrate that “investments from Russia are effective, transparent and necessary for the countries involved”, particularly transparent. The case of Yukos and last year’s shenanigans with Shell and BP do not precisely fill anyone with faith in Russian business transparency.

Nor is it entirely logical for a Deputy Prime Minister and Chairman of Gazprom to urge Russian companies to expand in a fairly martial way and then insist that there is nothing to worry about.

Gazprom has, indeed, been rather busy recently. An agreement was signed between Gazprom and the Austrian OMV, which will give the former a 50 percent stake in the latter.
"We are once again demonstrating the tremendous contribution Gazprom is making in securing Europe's natural gas supply," Medvedev said.

Gazprom, which supplies one-quarter of Europe's gas, wants greater access to Western Europe's retail and distribution networks. OMV's Baumgarten gas hub, which Medvedev pledged to make continental Europe's largest, would become the terminus for two rival pipelines through southeast Europe, one planned by OMV, the other by Gazprom.
President Putin signed an agreement during his trip to Serbia that “stipulates construction of a gas trunkline in Serbia with a throughput capacity of 10 billion cubic meters per year. The pipeline will be a part of the South Stream line, which will deliver Russia's natural gas to southern and central Europe”. Of course, stipulation is not the same as actual construction and delivery but one can see the planning here.

It is not secure energy for Europe but secure control for Russia, assuming it will be able to supply all the gas that is necessary. One could argue that with agreements signed in Italy and Bulgaria Gazprom is encircling Western Europe but I am sure one would not want to use such emotive language.
On January 17-18 in Sofia, Russian president Vladimir Putin signed an agreement on the South Stream gas pipeline project. With minute concessions, which made the deal that Bulgarian politicians thought improbable become possible, Russia bought Bulgaria’s agreement to the project and 50 percent ownership of the section of the pipeline that will run through Bulgaria.

On January 18, Russia’s gas giant Gazprom and its Italian counterpart ENI, which initiated the South Stream project through a memorandum of understanding in June last year, incorporated the entity South Stream AG. The agreement to establish the company, registered in Switzerland, was signed about five months after the memorandum. South Stream AG will be in charge of market research and a feasibility study of the project. The deadline for the completion of the research and the study is the end of 2008.
The latest news is that Gazprom is watching Kyrgyzgaz rather in the way the Big Bad Wolf was watching Little Red Riding Hood.
This week Kyrgyzstan’s newly appointed Prime Minister Igor Chudinov announced that Kyrgyzgaz will be sold in the next few months. Although no tender has been held yet, it is clear that Russia’s Gazprom will take partial or full ownership of Kyrgyzgaz. That move would make Russia’s potential presence in the Kyrgyz economy significantly greater, as Russian President Vladimir Putin has already announced plans to invest up to $2 billion into the Kyrgyz economy.
There are, as it happens, problems. According to a report by the Jamestown Foundation Gazprom is not performing as well as it should be.
The giant company had a reasonably good but unspectacular year with its market capitalization increasing by 15 percent, compared with 60 percent growth in 2006 (RBC Daily, December 29). Despite the breath-taking growth of world energy prices, Gazprom reported its net profit dropped by 25 percent in the first six month of 2007, and officials do not expect any improvement in the final accounts for the year (Nezavisimaya gazeta, December 6). Its external debt reached $36 billion, which contributed significantly to the fast expansion of Russia’s total indebtedness (Vedomosti, January 10).

Gazprom’s investment program was revised several times in 2007, so that the share of investments shrunk while acquisitions expanded, and the new investment program for 2008 approved just before the holidays appears – as presented very briefly on the company’s website – quite conservative and does not aim at compensation for the massive under-investment that has accumulated since the start of the Putin era.
2008, according to this article, should see substantial reduction in domestic subsidization of gas prices, which will mean an unpopular 25 per cent rise in fuel prices. So there is the vital question of whether, having partially eased Shell and BP out of their projects, Gazprom will actually deliver the required, ever rising amount of gas.

Furthermore, who will succeed Medvedev when he steps down after his probable (heh!) election to the Presidency? This is getting to be quite interesting. Recent reports diverge.

Two days ago Reuters and others announced that there was a strong possibility of Prime Minister Zubkov becoming the new Chairman on March 3 or soon thereafter. But a new contender has entered the field and he seems to have a great deal of backing.

Step forward Vladimir Putin. Kommersant hinted broadly that he is likely to take Medvedev’s place on the Board of Gazprom.
As of yesterday evening, there were 42 candidates (compared to 26 last year) and more are expected. There names are being kept secret. The election will take place at the annual shareholders meeting on June 27. On the market, they are waiting to see whether current President of Russia Vladimir Putin will run for a place on the Gazprom board.

Off the record, sources hint broadly that Putin will replace Medvedev on the Gazprom board. Experts say that, although article 11 of the Constitution of Russia prohibits the prime minister from participating in the management of an economic entity, being the chairman of the board of directors is not management in the immediate sense.
Pravda seems to agree with that analysis, which is unusual in that the two newspapers rarely agree on anything, least of all what happened to some Kommersant journalists.

In a way, that makes a great deal of sense and explains certain matters that were puzzling some of us. Well, one matter really – how will Putin ensure that he keeps power after the March election. The Prime Minister in Russia has considerably less of it than the President. On the other hand, the Chairman of Gazprom has a great deal of power behind and in front of the scenes.

Like Pooh-Bah in "The Mikado", Putin will remain Lord High Everything Else, while Medvedev will imitate the ex-tailor Ko-Ko and become Lord High Executioner.

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