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Friday, March 28, 2008

Industrial Espionage at TNK-BP

On a Side Defending Commercial Secrets
The concept of commercial secret appeared in Russian legislation in 1994, when the Civil Code of the Russian Federation was adopted, with a definition of that type of secret in article 139. Sanctions for receiving and disclosing commercial, tax and banking secrets were set in article 183 of the new Criminal Code that came into force in 1997. The maximum punishment set by that article is ten years' imprisonment. In 2004, the president of the Russian federation signed the law “On Commercial Secrets.” The first criminal case of stealing commercial secrets was initiated by the FSB Sverdlovsk Region Department in 2003. Counterintelligence agents uncovered unauthorized copying of documents at Uralmashzavod, allegedly done in the interests of a commercial firm. Searches were carried out at the office of those companies, and to Uralmashzavod employees signed confessions. Investigators from other regions and Russia and other countries were involved in the investigation. It soon became clear, however, that the plans copied had no secret classification and the management of the company did not know that the information was a commercial secret. The management of Uralmashzavod officially announced that “a violation of the law by Uralmashzavod employees was uncovered that caused damage amounting to an insignificant sum.” The case was closed. The first sentences for disclosing commercial secrets took place in 2007. One of the first sentenced under that article was St. Petersburg senior tax inspector Sergey Sergeev, who disclosed the financial balance of companies to third parties in exchange for 3000 rubles. He received a suspended sentence. The sales manager of the Cherepovets Metals Combine, which belongs to OAO Severstal, was fined in December 2007 for sending secret information on production costs at Severstal to a business acquaintance by email in exchange for 250,000 rubles.
// FSB investigates
Mar. 21, 2008 - Kommersant by Alexey Sokovnin, Yulia Taratuta, Denis Rebrov
- The British Council implicated
The FSB yesterday explained the reason for its seizure of documents from the offices of TNK-BP. It was part of an investigation of a criminal case involving TNK-BP Management employee Ilya Zaslavsky and his brother Alexander, who is the head of the British Council project Graduate's Club. They have been accused of industrial espionage. “The company is cooperating with the law enforcement organs' investigation,” TNK-BP has announced officially. Unofficially, they call attention to the fact that the FSB searched the offices of TNK-BP and BP in their investigation of a single employee. Until yesterday, the reason for the search at TNK-BP was known only to those who performed it. The FSB denied its involvement in the actions, and Interior Ministry spokesmen claimed that they were investigating a case related to SIDANKO. Yesterday, the FSB public relations center told Kommersant that the confiscation of document was carried out as part of a criminal case of industrial espionage (article 276 of the Criminal Code of the Russian Federation) initiated by the investigative unit of the FSB. “The Zaslavsky brothers were detained on March 12 while attempting to obtain information that was a commercial secret from a Russian citizen employed by one of the restricted access facilities of the oil and gas complex,” the FSB public relations center said. According to the FSB, the Zaslavsky brother “carried out the illegal gathering of commercial information for a number of foreign oil and gas companies for the purpose of creating specific advantages for them over their Russian competitors, including on the markets of the CIS countries.” The suspects were released the same day on writs not to flee, and charges were made against them on March 18. The next day, documents were seized in TNK-BP and BP Trading Ltd. as part of the investigation of the criminal case. During the searches, the FSB claims, “substantive evidence of industrial espionage was uncovered and confiscated. The FSB has classified as evidence copies of documents from state agencies of the Russian Federation, reports and analytical memos concerning resource management that have preliminarily been identified as concerning commercial secrets and business cards of members of foreign military agencies and the FBI. The FSB public relations center was unable to explain to Kommersant why the seizure of documents took place only a week after the suspects were detained. That was sufficient time to destroy all documents germane to the case, especially since the Zaslavsky brothers were not in confinement. One representative of the FSB alleged that the Zaslavsky brothers made contact with the investigators themselves and indicated where to search for the relevant documents. That is why the investigators did not petition the Lefortovsky Court to detain the suspects under arrest. At TNK-BP, they favor another explanation, although unofficially. A Kommersant source at TNK-BP pointed out that the investigative activities were conducted not only in the personnel office of the company and at Ilya Zaslavsky's personal work area (he was highly specialized employee of the TNK-BP management division and had frequent contact with the media as an expert on the heating and power complex), but also in many other part of the company. Kommersant sources had the impression that the industrial espionage investigation was but a pretext for a larger sweep that had been prepared in the enforcement agencies, and Ilya Zaslavsky was a convenient figure to concentrate on because his brother is the head of a British Council project. On February 4 of this year, in response to the decision of the Russian Foreign Ministry to close down the branches of the British Council in the Russian regions, the club of graduates of British programs, which Alexander Zaslavsky is the president of, sent an open letter to Russian President Vladimir Putin. The graduate of the British programs asked the head of state “to exert influence to resolve the conflict and restore the operations of the regional branches of the British Council.” The letter read, in part, “We understand that there are disagreements at present between Russia and Great Britain. However, it is impermissible for culture and education, and the interests of Russian citizens, to become hostages to it.” Alexander Zaslavsky was not among the 154 signatories of that letter. Officially, they say at TNK-BP that they found out about the charges against their employee from the FSB and they intend to cooperate with law enforcement in every aspect of the investigation. “We have always decisively opposed any illegal activities that do damage to the Russian Federation and any unscrupulous forms of competition,” TNK-BP's official statement reads. The company did not specify the nature of Ilya Zaslavsky's professional activities. Sources say he handled legal issues connected with TNK-BP natural gas business. TNK-BP is now negotiating with Gazprom on the sale of the major Kovykta gas condensate deposit. The deal was to have been concluded last year, but they were unable to come to an agreement on the price of the asset. Deputy chairman of the Gazprom supervisory board Alexander Medvedev suggested in The Financial Times yesterday that the deal would be closed by the end of April. Although the FSB has stated that the Zaslavsky brothers are accused of industrial espionage, several Kommersant sources familiar with the case have stated that it may concern the disclosure of state secrets. The law “On State secrets” states that it pertains to data “on the volume of untapped reserves, extraction, production and consumption of strategic types of mineral wealth,” including oil. A Kommersant source said that the charges against the Zaslavsky brothers may include revealing “certain accounts” that concern the Russian energy strategy through 2020. Another source claimed that the president of the BP division in Russia, BP Russia, Richard Spies, received a summons from law enforcement related to the case of the Zaslavsky brothers. Spies has been head of BP Russia since September 2005. Previously he managed BP projects in Latin America. The FSB declined to comment on that information. British Council representatives declined to comment on the case of the Zaslavsky brothers yesterday. At the British Embassy in Moscow, which coordinated the activities of the British Council in Russia, Kommersant was told that “The Zaslavsky brothers are embers of the British graduate's club,” but “they are not employees of the British Council.” “We are studying the situation as it emerges and are in constant contact with BP,” a spokesman for the embassy said. When asked whether British diplomats consider the charges against the Zaslavsky brothers to be connected with the conflict over the British Council and whether they are a sign of new tensions in Russian-British relations, the answer was ambiguous. “It's hard to say,” the spokesman said. Kommersant has learned that the British embassy has already contacted Alexander Zaslavsky by telephone, but the contents of that conversation remain unknown. The Zaslavsky brothers and their lawyers were unavailable for comment yesterday. The Russian Foreign Ministry urged Kommersant not to tie the detainments and searches of TNK-BP with the conflict over the British Council and growing tensions in Russian-British relations. A day earlier, the ministry issued its latest accusations against “The British elite, whose political mindset has not made a decisive breakthrough from the stereotypes of the Cold War.” Deputy pres secretary of the ministry Andrey Krivtsov stated that “It is a matter of Russian citizens, and there are many members of the graduate's club, so I do not see an interconnection. It is not worth trying to tie it all together. All sorts of coincidences happen in life.”

Billionaire boom in Russia

28.03.2008 - RBC - Moscow The number of dollar billionaires in Russia does not correspond to the scale of the country’s economy, believes Sergei Stepashin, Chairman of Russia’s Audit Chamber. “Over the past eight years the number of dollar billionaires in Russia grew from a handful of people to more than a hundred. By the number of billionaires Russia is now second to the United States, but this does not correspond to the scale and level of the country’s economy,” Stepashin said at an audit conference in Moscow today. Meanwhile, the gap between the rich and the poor continues to widen, Stepashin warned. The income difference between the richest and the poorest ten percent increased from 13.9 percent in 2000 to 15.3 percent in 2006, according to the Federal State Statistics Service. The Central Economics and Mathematics Institute of the Russian Academy of Sciences reported a wider gap, at 30 times. “This misbalance is a serious potential threat, and the government should develop an effective incomes policy,” Stepashin concluded. According to the Forbes rich list, Moscow is home to the largest number of billionaires. It is followed by New York. The United States leads with 469 billionaires, with Russia a distant second with 87 billionaires. Russia’s richest man is Oleg Deripaska. With his fortune estimated at $28 billion, he was ranked 9th, outdoing his rival Roman Abramovich (last year Abramovich was ranked 16th, and Deripaska - 40th). The Governor of the Chukotka region and owner of Chelsea Football Club rose to 15th place, his fortune valued at $23.5 billion. There are thirteen other Russians on the Forbes list, including Severstal’s owner Alexei Mordashov ($21.2 billion, ranked 18th) and Mikhail Fridman, Chairman of Alfa-Bank ($20.8 billion, 20th). The poorest among Russian billionaires is businessman Alisher Usmanov, with $9.3 billion.

Most Russians feel happy, poll shows

28.03.2008 - RBC - Moscow - A poll held by the Russian Public Opinion Research Center (VCIOM) has shown that Russians mostly describe themselves as happy, with 22 percent of the poll participants answering they were "definitely happy", 55 percent saying they were happy rather than not, and only 15 percent of respondents complaining they were unhappy. Over the past 10 years, the proportion of unhappy people has dropped from 25 to 15 percent, while the percentage of happy people has expanded from 60 to 77 percent. Men tend to be slightly happier than women, with around 18 percent of women feeling unhappy compared to just 12 percent of men. Moscow and St. Petersburg are the two unhappiest cities in Russia, with just 74 percent of their population feeling happy. People are generally happier in Russia's south (84 percent) and in the Urals (83 percent), and the least happy people inhabit Russia's central part, northwest and Siberia (73 percent). Among different age groups, people under 35 proved the happiest (83-85 percent), followed by people aged 35-59 (76-78 percent) and people over 60 (66 percent). 94 percent of people describing themselves as well-off said they were happy, while among average-income respondents the share was 82 percent, and just 53 percent among low-income people. The poll was held among 1,600 people in 153 locations of Russia's 46 regions, with a margin of error no more than 3.4 percent.

Tuesday, March 25, 2008

Russia arrests two on suspicion of spying

Russia arrests two on suspicion of spyingMarch 23, 2008 - Russia Today - Russian Security Services arrested two brothers with dual Russia-U.S. citizenship on charges of industrial espionage. Ilya Zaslavsky works for the joint Russian-British oil company TNK-BP, while his brother Aleksandr heads the Alumni Club of the British Council. The FSB accuses the men of collecting confidential information on behalf of foreign companies in the energy market. It's feared the arrests may increase tension between Russia, the UK and the U.S. The men were arrested on March 12 while allegedly attempting to obtain secret information from a Russian working in the oil and gas sphere. The FSB says the Zaslavsky brothers intended to pass the secret information on to foreign companies to give them an advantage while operating with their Russian competitors. Searches were carried out in the Moscow offices of TNK-BP and BP-Trading Limited companies. "During the search, we found material evidence confirming industrial espionage, namely, copies of Russian government documents, analytical reports, relating to sub-surface resources management, preliminarily rated as commercial classified information, as well as cards of representatives of foreign military agencies and the CIA," said Sergey Ignatenko, FSB spokesman. Experts say more light needs to be shed on the men's actions, adding that the scandal will affect Russian-British relations and business ties. "It's just another episode in the long history of tensions and spy scandals. Maybe the parties have got used to that kind of bilateral relations," suggested Nikolay Krutikhin from Rusenergy Consulting. Meanwhile, TNK-BP says it is co-operating with authorities. "The work of TNK-BP has always been based on Russian law. We are against uncivilised practices of carrying out business or using illegal methods while being competitors in business," said Aleksandr Shadrin, TNK-BP press secretary. The company also says it is continuing with its normal course of work. Both the British Council and the British Embassy in Russia say they are keeping a close watch on the story. Meanwhile, a more thorough investigation into the matter is underway.

Thursday, March 20, 2008

Ulyanovsk Governor Embraces English

March 20, 2008 The Moscow Times by David Nowak - With international corporations like Mars and Metro Cash & Carry shopping around in his region, Ulyanovsk Governor Sergei Morozov is sending his top officials back to school to learn English. Morozov -- whose region is better known as the birthplace of Vladimir Lenin than as a future producer of Mars and Bounty bars -- announced at a meeting last week that all top officials would be required to converse in English with a basic level of fluency, his spokesman, Dmitry Shikov, said Wednesday. "At times, we are like dogs," Morozov told the meeting, using a popular Russian saying. "We understand everything, but we can't say anything." Ulyanovsk's drive is a rarity in regional government, where most officials' English skills remain limited. In contrast, top federal government officials and Russian business leaders nearly all speak good English these days, as evidenced by their speeches at international conferences. Ulyanovsk's top officials will take English lessons paid for by the regional government, Shikov said. It was unclear how long the lessons would last. Shikov said that if an official failed a test at the end of the course, he would be required to repeat the course until the test was passed. The officials, however, will not face demotions or salary cuts for not learning fast enough. "The law forbids that because knowledge of English is not a legal requirement for a civil servant," Shikov said. Morozov himself will be taking lessons as well, because his own English "is not so good," Shikov said. He denied media reports that Morozov had ordered the lessons after being embarrassed by his officials' poor English during a recent real estate conference in Cannes, France. Instead, he said, the governor saw English as the way to attract more investment. "Ulyanovsk is a growing region economically. We regularly host international companies and would understandably like to be in a position to converse with their representatives without the help of interpreters," Shikov said. Shikov singled out recent visits to the region by representatives of Mars and Metro Cash & Carry. Mars, the privately owned U.S. food giant, is negotiating with the regional administration to build a 3 billion ruble factory to make Mars and Bounty bars. Germany's Metro Cash & Carry is looking to expand its wholesale stores in the region. Representatives from Mars and Metro had no immediate comment about Russian officials' English skills on Wednesday. Russia seems to be gradually shaking off its historical reluctance to conduct public discussions in English, the international language of politics and commerce. Just a decade ago, Russian officials and business executives rarely spoke in English at international conferences. These days, everyone seems to be doing so, both on and off the stage. President Vladimir Putin famously broke with tradition in August 2007, when he delivered a key speech in fluent English to Olympic officials in Guatemala. The decision has been credited with playing a crucial role in securing Sochi's right to host the 2014 Winter Olympics. President-elect Dmitry Medvedev and First Deputy Prime Minister Sergei Ivanov both speak fluent English. Ivanov displayed his skills at the St. Petersburg International Economic Forum in June. Medvedev had his chance at the World Economic Forum in Davos, Switzerland, in January 2007, but he has promised to refrain from speaking in English during public speeches in Russia. A noticeable exception is Finance Minister Alexei Kudrin, who still prefers to speak in Russian at conferences. At the most recent World Economic Forum, he slipped on his translation headphones as fellow panelists from Kuwait, Saudi Arabia and Norway spoke in eloquent English about sovereign wealth funds. When it was his turn to speak, Kudrin took off his headphones and a rustle washed across the hall as the other panelists and audience members reached for theirs. Many Russians would probably sympathize with Kudrin. Only 6 percent of the population believes that their English is good enough to read a newspaper, listen to the radio, or watch television without subtitles, according to a survey conducted by the independent Levada Center in 2006, the latest year available. The survey found that English was the favored foreign language, with only 3.7 percent of respondents saying they were similarly fluent in German, and 2.5 percent saying the same about Ukrainian. Other languages scored less than 1 percent. While English has been taught in schools for years, obtaining statistics on the number of English-speaking Russians is impossible, said a spokesman for the Education and Science Ministry. In Ulyanovsk, this will not be the first time officials have gone back to the classroom. In February 2007, as the region began celebrating 2007 as the year of the Russian language, Morozov ordered 2,500 regional officials to retake high school-level exams in their mother tongue. Media reports said at the time that Morozov was angry that pamphlets and Internet documents were riddled with basic grammar and spelling mistakes. Weeks later, Morozov told the officials that they had prove they knew how to use computers by taking computer literacy tests, said Shikov, his spokesman.

Friday, March 14, 2008

How the State Got a Grip on Energy

March 14, 2008 - Moscow times by Miriam Elder - Editor's note: This article, the 10th and last in a series about President Vladimir Putin's legacy, examines the energy sector. It was early March 2000 when Vladimir Putin landed in Surgut, one stop on a long campaign trail that would help take the acting president to the official seat in the Kremlin. He toured the oil fields that surrounded the bleak west Siberian city, shaking hands with the men who toiled to produce the black gold that was the country's lifeblood. It was in Surgut -- before the high-profile arrests and well before the days of $100-per-barrel oil -- that Putin first gave a glimpse into what would become a defining strategy of his eight-year rule. "We will support [oil and gas companies] by all means, but we will also control their work," he said, hinting at a sector-wide review that would boost the state's presence in an industry that had become the domain of dueling oligarchs. Eight years later, two state champions -- Rosneft in oil and Gazprom in gas -- tower over a sector that provides for two-thirds of the federal budget and forms the foundation of the country's swaggering foreign policy. The road to majority state control was rough, leaving a number of private businessmen jailed or exiled and foreign companies largely sidelined. Most worrisome, insiders and analysts said, was that the strategy of state control has left production stagnating at near crisis levels, as the firms were encouraged to focus on acquisitions rather than making much-needed investments in new fields. "We had high hopes that this period, an eight- to 10-year period, would be one of the major breakthroughs in developing certain very important projects," said Vladimir Milov, a former deputy energy minister. Instead, Milov, who became a Kremlin critic after leaving the Energy Ministry in 2002, speaks of an era of "disappointed expectations." "Putin's legacy is largely a bunch of heavy discussions with few delivered projects," he said. "Putin's presidency has mostly focused on the redistribution of ownership and using energy resources as a tool for expanding Russia's international influence."
An Encouraging Start
When Putin came to power around 90 percent of the country's oil production lay in private hands. Foreign oil companies, like Shell and ExxonMobil, ran huge projects in the east, after concluding preferential contracts in the mid-1990s that offered them favorable terms in order to compensate for the country's volatile tax and legal system. It was a total departure from the policy of the Soviet state that built Putin and an anathema to the powerful state that he hoped to rebuild. He took notice of the fact early, devoting a 1997 doctoral thesis at the St Petersburg Mining Institute to the state's role in managing natural resources. That role was impossible to realize while the country was run by a gaggle of oligarchs long used to pulling the Kremlin's strings. Putin quickly moved to rein them in, calling a meeting in late 2000 to announce: Stay out of politics and business is yours. Investors were encouraged. Putin appointed liberals to top government spots. In September 2000 he visited the far eastern island of Sakhalin and called for foreign investors to be supported. He urged a revitalization of the energy industry by bringing online new oil and gas fields in the largely untouched eastern Siberia and offshore regions, as well as new export pipelines, such as a major route to the northern port of Murmansk. The optimism reached its peak in February 2003, when a trio of oligarchs joined with British oil major BP to form TNK-BP, a 50-50 venture formed around the flagship gas field of Kovykta, in largely untapped eastern Siberia. Announcing the deal, Mikhail Fridman, head of TNK-BP shareholder Alfa Group, said: "It is a reflection of the political change that has taken place in Russia over the past three years. Russia has stopped being associated with instability and nontransparency."
The Yukos Attack
Five months later, Platon Lebedev, a major shareholder in oil firm Yukos, was arrested on suspicion of illegally acquiring shares in a fertilizer firm Apatit back in 1994. In October 2003, Khodorkovsky, Yukos CEO and then the country's richest man, was arrested and the legal onslaught on the country's largest oil company began, forever changing the landscape of the energy sector and the view of Russia and Putin's Kremlin. What precisely prompted the arrest is anybody's guess -- that Khodorkovsky was on the verge of selling a 25 percent stake in Yukos to a U.S. oil company, that he was planning to build a pipeline to China to bypass state-run pipeline monopoly Transneft, that he was openly funding opposition deputies ahead of December's State Duma vote, or that he planned to grow even larger through a merger with Roman Abramovich's Sibneft. The final straw came in February 2003, when Khodorkovsky publicly criticized Putin for state-run Rosneft's murky acquisition of medium-sized producer Severnaya Neft. "We knew we would have serious problems," said Alexander Temerko, a former Yukos vice president now living in self-imposed exile in London. "While they had a monopoly position in gas [with Gazprom], they didn't have one in oil." Khodorkovsky was sentenced in 2004 to eight years in prison on charges of fraud and tax evasion, and the lion's share of Yukos assets went to Rosneft in a series of orchestrated auctions, epitomized by the December 2004 sale of Yuganskneftegaz. He accused Igor Sechin, Putin's powerful deputy chief of staff and chairman of Rosneft's board, of orchestrating the attack on Yukos. Yuganskneftegaz, which produces 11 percent of all Russian oil, went to an obscure company called Baikal Finance Group for just $9.4 billion. Rosneft bought Baikal weeks later, tripling its own production overnight and putting it on the path to becoming the country's largest oil producer -- a goal it achieved last year after buying the two remaining large Yukos units up for grabs. "We are a state company and at the same time a public company, and one of our strategic priorities is to continue to improve our operations in order to demonstrate to our main shareholder that we are the best partner for developing new assets in Russia," said Rosneft vice president Peter O'Brien, an American who was brought to the company ahead of its July 2006 initial public offering in London, which saw nearly 15 percent of the company sold off. "During the IPO process, clearly some market participants, whether press or investors, did have a view toward the Yukos process which inhibited them from taking part in the IPO," he said, but added, "Since the IPO, as we've followed through on increasing transparency and profitability, interest and share ownership by leading global institutions has accelerated." Rosneft's Yukos acquisitions, plus Gazprom's purchase of Sibneft in 2005, drastically boosted the state's share in the energy game. The approach was codified as early as May 2003, when the Cabinet passed an energy strategy through 2020 that signaled the beginning of the end of private reign over the sector. Temerko, the former Yukos vice president, said that, after reading the strategy, "we knew they'd go after some company." The first line of the strategy reads: "Russia possesses great energy resources and a powerful fuel and energy complex that provide the basis of economic development and are the instrument for carrying out domestic and foreign policy." "It was then we realized the state runs everything," Temerko said. It took foreign oil companies and foreign capitals longer to wise up. The euphoria of the TNK-BP deal faded into widespread concern over the role foreign firms would play, as they functioned in a legal vacuum while the state carved out its strategy through practice rather than regulations. "[TNK-BP] represented the end of that chapter, when foreign companies could get almost unrestricted access to Russia's energy sector," said Chris Weafer, chief strategist at UralSib. A notable exception is ConocoPhillips' 2004 acquisition of a small stake in private oil firm LUKoil, which it has since increased to 20 percent. Foreign oil firms rushed the country in the mid-1990s, capitalizing on its chaotic industrial landscape to win major contracts in the country with the world's largest proven gas reserves and vast untapped oil fields. For the most part, they were awarded production-sharing agreements, which ensured that the firms would win back all expenditures before paying out revenues to the state. With the oil price inching ever higher on the back of instability in the Middle East and rising demand from China and India, Putin realized that the state was missing out on billions of dollars per year and soon joined the trend of global resource nationalism. Sustained campaigns led by Oleg Mitvol, the deputy head of the Natural Resources Ministry's environmental watchdog, cast shadows over Royal Dutch Shell's PSA at Sakhalin-2 and TNK-BP's flagship Kovykta project. Months of pressure, during which Mitvol threatened to revoke the firms' licenses over purported environmental violations, ended with Shell handing a controlling stake in Sakhalin-2 to Gazprom and TNK-BP selling the entirety of its 63 percent stake in Kovykta to Gazprom. Rather than codifying a long-awaited law on strategic sectors, which would limit foreign involvement to 49 percent stakes, Putin laid out his strategy through practice. "It's a strategic sector and certain rules are being applied, like in every country of the world," Kremlin spokesman Dmitry Peskov said. "The situation with Sakhalin and Kovykta occurred when foreign companies, foreign major shareholders, were having problems with Russian law. It is easier for every company to have a joint venture with Russian partners to avoid that," he said. Gazprom's stake in Sakhalin-2, a sprawling project in the Far East, gave it a foothold in the country's first foray into liquefied natural gas, in which gas is cooled to liquid form so it can be easier stored and shipped on tankers, rather than confined to pipelines. Yet it has failed to follow through on decades-long promises to develop much-needed fields on the Yamal Peninsula and has delayed plans to produce from Shtokman, a field in the Arctic offshore estimated to hold 3.7 trillion cubic meters of gas. "It is much easier to use the windfall to acquire companies that already generate cash" than bring new projects online, Milov said. "I'll quote a top Gazprom manager, who once said to me, 'Why should we bury money in Yamal, in the development of projects that will start to deliver in a decade, when many Gazprom managers will be long gone?'" This has prompted concern in Europe, which relies in Russia for one-quarter of its gas supplies -- an amount expected to grow to half by 2030.
The Gazprom Behemoth
Many had held high hopes that Putin would seek to reform Gazprom after replacing Yeltsin's management team with his own, led by St. Petersburg native Alexei Miller as CEO. Yet, eight years later, Gazprom remains an unwieldy behemoth, employing some 500,000 people and the domain of competing clans eager to shape what has become the country's largest firm by market capitalization, with a value of $312 billion. Its current chairman is President-elect Dmitry Medvedev. A politically tinged pricing dispute with Ukraine in January 2006 signaled to Europe the return of "the Russian bear." "EU fears of over-dependence on Russian gas are a concrete expression of the progressive breakdown of political relations with Moscow, stemming from a range of issues of Russian domestic and international politics," said Jonathan Stern, gas expert at the Oxford Institute of Energy Studies. Just months after Ukraine's Orange Revolution ushered in a Western-leaning government, Gazprom abruptly announced its own brand of shock therapy in December 2005, cutting subsidies to Kiev and drastically raising gas prices to its eastern neighbor. When Kiev couldn't pay, Gazprom shut the taps, reducing shipments not only to Ukraine, but also to Europe, which gets some 80 percent of its Russian gas shipments through pipelines that crisscross the country. "I don't think it really led to any serious change with Europe, which is traditionally our biggest market," said Ilya Kochevrin, executive director at Gazprom Export. "The only recognition is that we need to be more proactive in explaining our position." Kochevrin said he did not believe that resistance to Gazprom expansion into Europe, as well as Brussels' proposal last year to bar non-EU firms from owning majority stakes in pipelines or power grids in the absence of reciprocal agreements, were direct responses to Gazprom's growing politicized clout. Pricing disputes with neighboring countries prompted Gazprom to pursue a strategy of direct shipments to Europe, including the Nord Stream pipeline, which will pump gas directly to Germany, and South Stream, which will send gas to the Balkans. Putin has spent the past few years eagerly pushing "strategic reciprocity," hoping to gain a solid foothold in the European market beyond long-term gas supply deals and pipeline agreements. Yet, with the notable exceptions of Germany and Italy, Europe's two largest gas importers, the opposition has been stiff. "When we talk about the energy sector in Russia it is impossible to separate politics and economics, and that's never going to change," said Weafer of UralSib. It is also impossible to separate the personal and professional, since, as one former bureaucrat put it, "everyone is trying to be the next Armand Hammer," referring to the U.S. oil magnate who won key deals during the Soviet era through strong relationships with the leadership. Putin's close relationship with Gerhard Schrđ¬der put the former German chancellor at the head of the Nord Stream consortium. Those who fall afoul of the regime and its energy champions tend to suffer. William Browder, CEO of Hermitage Capital Management, then Russia's biggest foreign portfolio investor, was denied entry into the country upon landing at Sheremetyevo Airport in November 2005, on the suspicion that he posed a threat to national security. The move was widely seen as retaliation for Browder's outspoken calls to improve Gazprom's transparency.
Supply Shortages
One of the most worrisome results of the past eight years, insiders and analysts said, is that Russia may soon face the prospect of failing to produce enough oil and gas supplies to feed growing markets both at home and abroad. One hallmark of Putin's presidency was the decision to liberalize gas prices inside the country, due to be achieved by 2011, in order to make the domestic market more attractive for its producers. Yet, the fact remains that production at Soviet-era fields in western Siberia is dwindling, and political distraction, in addition to unfavorably high tax regimes, means that the Arctic and eastern offshores remain largely undeveloped. "This is the result of the fact that private initiatives have been curbed and the advantage has been given to state companies, whose interest is not in production, but in the redistribution of control," Milov said. This has also increased Russia's dependence on buying gas from Central Asia, in the absence of long-term supply contracts and amid signs that countries like Turkmenistan are seeking to raise their own prices to market levels. Milov said Central Asian gas comprised 8 percent of Gazprom's reserve base, up from 4 percent in 2002. And oil production, after years of a steady rising, faces the specter of falling flat this year. "Without Rosneft, Russian production recently has basically been flat. With Rosneft, it's growing 1 to 2 percent annually," said O'Brien of Rosneft. "The vast majority of other oil producers are now fighting declining production. "Ruble appreciation and inflation and a tax regime that is outdated will soon make it difficult to approve some potential projects," O'Brien said. "Many projects look questionable in terms of future profitability, even with fairly optimistic, that is, low, inflation assumptions." "If something is not done soon, then many companies, particularly those with older portfolios, will need to reject investment proposals and as a result will see an accelerating decline in their oil production," he said. Putin has followed through on promises to reassert the state's influence. Around 42 percent of Russian production now lies in state hands, versus 10 percent when he first took the reins, according to UralSib research. That proportion is expected to rise if troubled oil producer Russneft, whose former owner Mikhail Gutseriyev last year accused the Kremlin of forcing him to sell, ends up in state hands. The fate of TNK-BP also remains unclear. The world of energy reflects the broader state of the country. Its firms are staffed with Putin's friends and FSB agents, from new Transneft chief Nikolai Tokarev to Andrei Patrushev, the younger son of Federal Security Service director Nikolai Patrushev who acts as an adviser at Rosneft. It is fiercely controlled from the Kremlin. Before Putin announced that he would take the prime minister's seat upon Medvedev's election to the presidency, Moscow's chattering classes proposed that he might move to chair Gazprom's board. Beyond the importance of the state's control over the energy sector, the energy sector's control over the state is just as key. Despite loud pronouncements on the need to diversify, Russia's economy remains inextricably linked to the dipping production of oil and gas, with revenues squirreled away in a $168 billion stabilization fund that is intended in large part to encourage wider economic growth. Yet the problem of its politicization remains. "The government has become used to a high oil price that suits what it wants to do in the economy," Weafer said. An announcement last month that the three-year budget would boost its oil-price prediction to $74 per barrel -- a sum that is, for the first time ever, higher than the previous year's average -- provoked worry. UralSib predicts that the country will begin eroding its surplus if the price dips to $64. "It's a real threat to the fiscal prudence we've had, which is part of the Russian story of the past eight years," Weafer said. "The legacy of the Putin era is that, at the end of it, Russia is even more dependent on energy than it was at the start of it," he said.
Energy Milestones

September 2000: Putin promises to support foreign investors and production-sharing agreements.
May 2001: Putin replaces Gazprom CEO Rem Vyakhirev with longtime St. Petersburg ally Alexei Miller.
February 2003: TNK-BP formed through BP's $6.75 billion investment into the joint venture with three oligarchs, the largest ever equity deal in Russia at the time.
February 2003: Yukos CEO Mikhail Khodorkovsky publicly questions Putin on state-run Rosneft's acquisition of mid-level producer Severnaya Neft.
May 2003: The Cabinet passes a state energy strategy through 2020, calling the energy sector an instrument for carrying out domestic and foreign policy.
July 2003: Major Yukos shareholder Platon Lebedev is arrested.
October 2003: Khodorkovsky is arrested.
December 2003: Yukos hit with a back tax bill of $3.5 billion, the first in a series that eventually reaches $33 billion.
July 2004: Putin's powerful deputy chief of staff Igor Sechin replaces Economic Development and Trade Minister German Gref as chairman of Rosneft.
September 2004: U.S. oil firm ConocoPhillips buys a 7.59 percent stake in LUKoil for $2 billion.
December 2004: Yukos' largest production unit, Yuganskneftegaz, is sold at auction for a knockdown price to Baikal Finance Group, later bought by Rosneft.
December 2004: The Energy Ministry approves oil pipeline monopoly Transneft's plans to build a major pipeline eastward, amid wrangling whether it will end in China or Japan.
May 2005: Khodorkovsky and Lebedev are found guilty of fraud and tax evasion and sentenced to eight years in prison.
May 2005: Gazprom and Rosneft call off a floated merger.
August 2005: Khodorkovsky accuses Sechin of orchestrating the attack on Yukos.
September 2005: Gazprom buys Roman Abramovich's Sibneft for $13.01 billion in the biggest takeover deal in Russian history at the time.
September 2005: Germany and Russia agree to build Nord Stream pipeline, providing direct gas deliveries to Europe.
November 2005: William Browder, CEO of Hermitage Capital Management and activist Gazprom minority shareholder, is barred from entering Russia on grounds that he poses a threat to national security.
January 2006: Gazprom cuts gas deliveries to Ukraine for three days following a pricing dispute.
March 2006: Putin, during a trip to China, signs a deal pledging to eventually sell gas to the country.
July 2006: Rosneft raises $11 billion during an initial public offering in London.
August 2006: A Moscow court declares Yukos bankrupt.
October 2006: Gazprom says it will develop the Shtokman gas field alone and retain 100 percent ownership, shutting down years of negotiations with foreign partners.
December 2006: Royal Dutch Shell, Mitsui and Mitsubishi each halve their shares in Sakhalin-2 to hand Gazprom a controlling stake in the project for $7.45 billion following months of pressure from environmental authorities.
February 2007: Putin says he finds the idea of a gas OPEC "interesting."
May 2007: Rosneft buys Samaraneftegaz and Tomskneft, Yukos' final two production units, at auction for $13.2 billion.
June 2007: TNK-BP seals a deal to sell its 62.9 percent stake in its flagship Kovykta field to Gazprom for $700 million to $900 million following months of pressure from environmental authorities.
July 2007: Russneft owner Mikhail Gutseriyev flees the country after accusing the state of forcing him to sell his firm through the levying of politicized tax charges; Oleg Deripaska's Basic Element says it is in talks to buy the firm.
July 2007: Reversing course, Gazprom gives France's Total a 25 percent stake in developing Shtokman.
September 2007: The EU issues proposals on unbundling of its power industry, seen as a move to bloc Gazprom's access.
October 2007: Gazprom gives Norway's StatoilHydro a 24 percent stake in developing Shtokman.

Medvedev Moves to Kremlin

March 14, 2008 - Reuters, Moscow Times - President-elect Dmitry Medvedev has moved into the Kremlin eight weeks before he officially takes over from his mentor, President Vladimir Putin, a Kremlin source said Thursday. The source confirmed a report published Thursday in Izvestia that Medvedev has moved out of his old office in the White House government headquarters and into a new workplace in Building No. 14 in the Kremlin. The location is a short walk from the Kremlin block where Putin has his office. The source, speaking on condition of anonymity, said the move was designed to help ensure a smooth handover of power when Medvedev is inaugurated on May 7. "Yes, I can confirm this," the source said. "If you recall, there were reports about a decree being issued on ensuring that the president-elect is provided with the right conditions for his work, and [the move] is connected to this." The decree, issued by Putin the day after Medvedev's victory in the March 2 presidential election, instructed Kremlin staff to provide him with a security detail, an official residence and administrative support in the handover period. Medvedev, 42, is set to become the youngest Russian or Soviet leader since Tsar Nicholas II. Meanwhile, Putin aide Igor Shuvalov has been charged with hammering out the structure of the new government, which Putin has agreed to head up as prime minister under Medvedev's presidency, Kommersant reported Thursday. Shuvalov, government chief of staff from 2000 to 2003, will also assess looming shuffles in the Cabinet and the presidential administration, Kommersant said, citing sources close to Medvedev. Political analyst and State Duma Deputy Sergei Markov told reporters this week that a clash between Putin and Medvedev after Medvedev takes office was unlikely. "But if such a conflict took place, it would be engineered" by their aides, Markov said.

Wednesday, March 05, 2008

Business as usual for Medvedev

03 March 2008 - Upstream onLine - Russia's next president Dmitry Medvedev - Russian gas giant Gazprom's chairman - pledged to uphold Vladimir Putin's policies today after a big election win that critics are claiming was stage-managed to let the outgoing Kremlin leader keep his grip on power. Displaying the double act that will be at the helm in Russia, Medvedev's first public appearance after results were released was to stand side by side with his mentor Putin on stage at a victory concert in Red Square. Medvedev, 42, who will be the youngest Russian leader since Tsar Nicholas II when he is sworn in on 7 May, has asked Putin to be his prime minister. Putin, 55, was prevented by term limits from running for re-election. But it is still not clear which of the two will really be in charge of the country, and analysts question if their power-sharing arrangement can last long in a nation accustomed to having a single, strong leader. "I think (my presidency) will be a direct continuation," said Medvedev, referring to Putin's eight years in office - a period marked by a concentration of power in the Kremlin and a willingness to stand up to the West on foreign policy. In a further sign Russia was not softening its assertive foreign policy, state-controlled gas giant Gazprom has cut gas supplies to pro-Western neighbour Ukraine by 25% at 0700 GMT this morning in a debt dispute. The company said supplies to Europe would not be affected by the move. "Gazprom is a reliable gas supplier, but we cannot and won't supply gas without payment," Gazprom spokesman Sergei Kupriyanov told Reuters. He said deliveries had been reduced by 40 million cubic metres per day. Ukraine's state energy player Naftohaz Ukrainy confirmed that supplies had been reduced. Earlier today Medvedev made clear he would not let his powerful prime minister encroach on his authority. "The president's main office is in the Kremlin. The prime minister's permanent location is the White House (government headquarters)," he told Reuters at his campaign headquarters. With 99.45% of the votes counted, Medvedev had 70.23%. His nearest rival, Communist leader Gennady Zyuganov, had 17.76%. Voter turnout was 69.65%, the Election Commission said. Kremlin opponents called yesterday's election a one-sided farce after Medvedev won by the huge margin without even taking part in a single campaign debate. "This is a secret service KGB operation to transfer power from one person to another," former Prime Minister Mikhail Kasyanov, who was disqualified from the ballot, told Reuters. Kremlin officials said the fact the election was one-sided did not mean it was unfair. Election chiefs said they knew of no violations that would put the result in doubt. Western observers monitoring the vote were expected to give an unflattering verdict later today. They have already called the contest unfair because of the blanket television coverage enjoyed by Medvedev. Civil society groups said millions of public sector workers were coerced into voting for Medvedev, some on pain of losing their jobs.

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