Gazprom Expected to Benefit Further Under New Russian President

Medvedev Takes Over

In a ceremony filled with pomp and circumstance today in the centre of the Russian capital Moscow, Dmitri Medvedev, a career bureaucrat who rose to prominence under the tutelage of outgoing president Vladimir Putin, was inaugurated as the third Russian president in the post-Soviet era. Medvedev, who served in the presidential administration (the Kremlin) during Putin's presidency, rising to the position of first deputy prime minister, is expected to stick closely to Putin's policies. He was hand-picked as Putin's chosen successor back in December 2007, and coasted to an easy victory in the March 2008 presidential election on the back of Putin's soaring popularity. Putin himself is expected to be named Medvedev's prime minister tomorrow.

Putin, of course, owes much of his popularity to the economic boom that Russia enjoyed during his eight years at the Kremlin, a boom fuelled largely by soaring international oil and gas prices. His selection of Medvedev—who also served as chairman of state-run Gazprom during his presidency—as his successor thus makes the alignment of Gazprom's business interests and the Kremlin's economic and political interests complete. Gazprom's immense size and political clout, not to mention its economic importance to Russia, have given rise to the notion that the company is effectively a "state within a state"; now, however, with Medvedev moving over from chairing Gazprom to heading the state, the Russian gas giant essentially is the state.

Has Gazprom Taken Over As Well?

The transition of power in Russia—such as it is, keeping all the key decision-makers in place, albeit with a shuffling of portfolios between Medvedev, Putin, and Zubkov—is expected to see Gazprom's influence in government policy increase, expanding the company's already significant clout. Indeed, Medvedev has already shown his true colours in this regard, using his position as outgoing chairman of Gazprom and president-elect of Russia to oversee the transfer of the licence for the mammoth Chayandinskoye gas field in Eastern Siberia to Gazprom without an auction. Reports suggest that Gazprom is set to receive similar preferential treatment shortly with regard to the Sakhalin-3 project in Russia's Far East, being slated to receive three out of the four blocks in the overall project within a month, again without a competitive auction. (The fourth block is being developed by Rosneft together with China's Sinopec.)

However, fears of the tail wagging the dog are surely unfounded, as Gazprom itself will remain subservient to state interests, rather than dictate the state interests, with Medvedev in charge. Although the new president brings with him to the Kremlin a deep understanding of Gazprom's operations, and is likely to rule with a strong pro-Gazprom outlook, it is not as if Putin was oblivious to the importance of Gazprom and gas-sector issues in the Russian economy. Quite the contrary, in fact; the outgoing president demonstrated time and again his solid comprehension of the complicated challenges facing Gazprom, as well as skilfully ensuring that Gazprom's own interests did not overtake those of the government. With Putin expected to retain real power in moving over to the role of Russian PM, Gazprom's influence in the Kremlin, while increased, will be kept in check.

Outlook and Implications

Medvedev's move to the Kremlin surely is good news for Gazprom, but then there is very little real change in the "balance of power" between Gazprom and the Russian state. Although Medvedev as chairman of the board presided over the growth of the company into one of the world's most valued stocks, the most important decisions at Gazprom—including the state's move in 2005 to buy a 10.74% stake in the gas giant and regain direct majority ownership in the company—have always been taken in the Kremlin. This is expected to continue with Medvedev as president, while Zubkov, as the expected new chairman of the board at Gazprom, will be the chief implementer of Kremlin decisions with regard to Gazprom.

Still, the even closer alignment of Gazprom's business interests with the state's political, economic, and foreign policy interests should translate into added benefits for the Russian gas giant. Considering the importance of gas export revenues in Russia's economy—Gazprom's tax payments make up around one-quarter of Russia's total tax receipts, for example—gas issues are necessarily political in Russia. Hence the state's move to secure direct control over Gazprom, which also frequently takes a back seat to the Kremlin in "commercial" gas supply deals given the impact on Russia's foreign relations, particularly with Europe. The Russian president is the one who signs the political agreement, with Gazprom then brought in to fulfil the commercial terms.

With Medvedev now in charge at the Kremlin, but Putin moving over to the prime minister's residence in Moscow's White House, the verdict is out on how this power-sharing agreement will work. Nevertheless, Gazprom should see its portfolio of projects grow and its financial performance improve, particularly with domestic gas prices slated to rise over the next few years. The company is widely anticipated to be the main beneficiary of the ongoing official pressure on TNK-BP's ownership, and likely to become an equity shareholder in the Russian-British oil giant at some point in the near future. Gazprom should also see greater revenues from the Russian domestic gas market as prices rise significantly over the next few years. The government yesterday approved price increases for the domestic market that will see tariffs grow an estimated 20% next year, 28% in 2010, and up to 40% in 2011.

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