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Wednesday, May 17, 2006

The right response to these Russians is: Nyet

Russian bearApril 2006 The Telegraph by Martin Vander Weyer -
The Trade and Industry Secretary, Alan Johnson, told a British Chambers of Commerce audience recently that "Downing Street's electricity is supplied by a French company, the water is supplied by a German company, and there is a choice of four gas suppliers, three of whom are foreign owned". It will be fascinating to see whether he repeats that boast about open economic borders when he shares a conference platform in London on Tuesday with a director of Gazprom, Russia's state-controlled energy giant.
The absence of legal barriers or of cultural hostility to foreign ownership is an article of faith of the modern, flexible British economy. Our energy sector, like every sector from financial services to Premiership football, welcomes all-comers. But Mr Johnson has reportedly been preparing legal steps to block a takeover by Gazprom of Centrica, the parent company of British Gas - provoking a warning from Gazprom's boss, Alexei Miller, not to "politicise" gas supply, lest Russia decides to sell to North America and China instead.
But there could hardly be a more politicised issue today than security of energy supply, and no nation is more acutely aware of its own strengths than Russia. As supplies from the North Sea run out and the Middle East descends into violent turmoil, it might be thought wise for Mr Johnson not merely to offer Mr Miller a handshake next time they meet, but to embrace him in a bear-hug.
Gazprom controls more than 90 per cent of Russia's natural gas, plus a sizeable chunk of its oil through Sibneft, the company it bought from Roman Abramovich. Only the Saudi and Iranian national oil companies have greater reserves under their control. On a superficial analysis, Gazprom - which is also thought to be interested in Scottish Power - looks like just the kind of friend we need for the era of energy scarcity ahead.
And given the propensity of our continental neighbours to erect "patriotic" barricades at the first whiff of a foreign takeover, maybe this is a moment to secure an advantage over them by extending to the men from Gazprom the same welcome we have given not only to any number of American and European investors, but to the Chinese who salvaged the remains of MG Rover, and the citizens of Dubai who bought P&O.
Or maybe not. That welcome is traditionally extended to companies whose motives are transparently commercial: to turn a profit, boost stock market value and gain kudos among their peers. Gazprom does not fit that description. It does not respond to normal commercial signals or act on commercial motives. It is an arm of the Russian state, at home and abroad.
Mr Miller is a prot�g� of President Vladimir Putin, a loyal sidekick ever since Putin left the KGB to become deputy mayor of St Petersburg in the early 1990s. So is the chairman of Gazprom's board, Dimitry Medvedev, whose day job is deputy prime minister and who has been tipped as Putin's potential successor.
Created in the Gorbachev era to take command of the crumbling Soviet gas industry, Gazprom has always stuck close to the Kremlin, despite partial privatisation. Its first boss was the thuggish Victor Chernomyrdin, who became Boris Yeltsin's prime minister but continued to treat the gas company as a personal fiefdom until Yeltsin fired him in 1998 and demanded an investigation into Gazprom's tax affairs. A series of scandals came to light, and Miller was parachuted in by Putin in 2001 as chief executive to clean the place up.
Having done that, his task was to direct Gazprom towards Putin's aim of a pivotal geopolitical role for Russia through control of energy. This use of Gazprom as a foreign policy tool was apparent during this past winter when gas supplies to the Ukraine were cut off after the Ukrainians refused to accept a price hike from a subsidised $50 per 1,000 cubic metres to a "market" rate of $230. The Russians settled for a relatively modest $95 a few days later and the gas flowed again, but there was no doubt that the incident was a warning shot across the bows of the pro-Western Ukrainian leader, Viktor Yushchenko.
Pro-Russian Belarus, meanwhile, was allowed to continue paying low gas prices until 2007 as what its president, Alexander Lukashenko - now an international pariah after his dubious re-election in March - called "a reward for loyalty".
Inside Russia, Gazprom made little attempt to turn itself into an efficient commercial venture. It agglomerated control over as much as possible of Russia's energy resources and much else besides, including parts of the media. Its finances are far from transparent and it remains a huge, wasteful bureaucracy in the Soviet style, selling gas at a loss to municipal heating plants, without which the populace would freeze. As to welcoming foreign participants into an industry desperate for capital investment, Gazprom's stance was made plain last year when it vetoed BP's plans to build a pipeline from the Siberian Kovytka gasfield to China.
Gazprom's interest in buying Centrica and Scottish Power, meanwhile, is an element of a larger strategy to secure a substantial share of the western European gas market, to be supplied by a pipeline planned to reach our shores by 2013. But the threat to leave us begging for gas if we thwart that plan tells us much of what we need to know about Gazprom. Just as Vladimir Putin is at heart an authoritarian nationalist rather than anyone's idea of a democrat, so his strategic energy weapon, Gazprom, is a natural monopolist and political puppet rather than anyone's idea of a friendly competitor.
Our energy sector was not liberalised in order to allow access for the corporate equivalent of a column of Russian battle tanks with snow on their turrets: until it proves itself otherwise, Alan Johnson would be right to treat Gazprom as an exception to the rule of open British markets.

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