WASHINGTON, July 2 (UPI) -- At the height of the Cold War, the West feared the Soviet military. Now, it fears Russian energy companies, and the 800-pound gorilla of them all is Gazprom, Russia's natural gas monopoly, currently the world's third-largest company by capitalization.
Having absorbed capitalism with a rapacity that would make Lenin blush, Gazprom does not intend to rest on its laurels. On June 27 Gazprom CEO Alexei Miller told reporters that he intends to make the firm the world's largest company within seven to 10 years, when its capitalization is projected to reach $1 trillion.
While braggadocio towards foreigners is a core element of the Russian character, if the past is anything to go by, Miller could well achieve his goal. To begin with, Gazprom either has direct control of or access to an astounding nearly 30 trillion cubic meters of hydrocarbon reserves, a third of global natural gas reserves. Gazprom currently extracts 550 billion cubic meters of natural gas annually and exports around 150 billion cubic meters to 28 countries in Europe and the former Soviet Union.
The company's fiscal reserves are equally impressive, as since 2000 its capitalization has increased a staggering 4,600 percent and its market capitalization currently stands at $362 billion. Add to that the fact that Dmitry Medvedev, inaugurated on May 7 as Russia's third post-Soviet president, was CEO of Gazprom from 2000 to 2002, and you have a symbiotic executive branch-corporate relationship that Wall Street magnates can only dream of.
Any doubts about Medvedev's intentions towards his former employer were dispelled during a May 27 meeting that he held with Gazprom's board of directors. Medvedev called Gazprom "not only the flagship of the Russian economy but also a major force in the world." He lauded former colleagues' tireless efforts, observing that nearly 20 percent of the Russian Federation's budgetary income now comes from Gazprom's revenues before adding, "We have a lot of work ahead of us. We must move forward. We must work at developing domestic and foreign markets and continue with the gasification of the regions."
Once considered a "state within a state," in 2001 Gazprom came under stricter Kremlin control when Miller became chairman. Four years later the Russian government took a majority stake in the company, after which the company began to absorb its rivals, buying Russia's fifth-largest oil group Sibneft for $13 billion in October 2005.
Gazprom's European footprint is immense, as it currently supplies about 25 percent of the European Union's natural gas imports. Of the EU's older members, Gazprom supplies 65 percent of Austria's natural gas imports, 36 percent of Germany's, 27 percent of Italy's and 25 percent of French imports. As a rough rule of thumb, the further east an EU member, the more dependent it is on Gazprom imports. Of the new EU member states that joined in May 2004, Estonia, Latvia, Lithuania and Slovakia import virtually 100 percent of their natural gas from Gazprom, while Hungary imports 89 percent, Poland 86 percent and the Czech Republic 74 percent. Finland, a member of the EU since 1995, also imports 100 percent of its natural gas from Gazprom, while Bulgaria and Romania, which joined the EU in January 2007, import 97 percent and 39 percent respectively. Other EU members enmeshed in Gazprom's export web include Slovenia, Greece, the Netherlands and Switzerland.
The situation is unlikely to change anytime soon. Further unsettling Eurocrats in Brussels, the EU is now the world's leading importer of the two fuels, buying 82 percent of its oil and 57 percent of its natural gas from abroad. The EU is attempting to diversify its energy supplies, but the effects of such efforts will not be felt for years.
The former Soviet republics of Armenia, Belarus, Georgia and Ukraine also depend heavily on Russia for their gas supplies, while Moldova receives 100 percent of its natural gas from the state-owned monopoly. Other states heavily dependent on Gazprom include Bosnia-Herzegovina and Macedonia (100 percent), while Turkey receives 63.7 percent of its imports from Gazprom, primarily via the Blue Stream pipeline under the Black Sea.
Given the above, three broad patterns emerge. First, for all the unease that Gazprom's increasing presence in the European natural gas market produces, the EU's situation will not change in the short term, so Brussels had better get used to dealing with Gazprom and its former chairman, Medvedev.
Second, while Gazprom subsidizes its internal sales within the Russian Federation, and to a lesser extent, some former Soviet republics and Eastern European satellites, the future pattern will be for prices to eventually rise to global rates. The era of cheap Russian energy is over, and the sooner Gazprom's clients recognize it, the better they will be able to adjust.
Last but not least, Gazprom is likely to continue its efforts, aided by the Kremlin, to snap up Russian energy assets at bargain rates, especially those involving foreigners. The next likely target seems to be the TNK-BP joint venture, 50 percent owned by British Petroleum, whose crown jewel is the Kovykta natural gas field, one of the largest undeveloped gas fields in eastern Siberia's Irkutsk oblast, whose reserves are estimated at 2 trillion cubic meters of natural gas and more than 83 million tons of gas condensate. Despite having accumulated $37 billion in debt since 2006 after aggressive purchases, including a share in the Sakhalin-2 gas project and power-generating assets, according to Gazprom Deputy CEO Andrei Kruglov, acquiring the $1 billion Kovykta gas field is not a matter of money, but merely reaching agreement, as "We don't need to attract any loans."
Especially with friends like President Medvedev. Given the above markets and conditions, Miller's optimism doesn't seem so misplaced at all.