1. The Rise of Gazprom: Profits and Politics Rawi Abdelal CREECA Lecture Series University of Wisconsin September 24, 2009

2. Some Provocations  How is Gazprom not behaving like a profit-maximizing firm (and monopolist)? – If it is (mostly), then why is Gazprom’s business becoming the West’s politics?  Can Ukraine afford its sovereignty? – And if not, will the West pay for it?  The view from Nametkina

3. The Ministry  1965, Ministerstvo gazovoi promyshlennosti  1989, SGC Gazprom – Soiuzgazeksport to Gazexport  1992, RAO Gazprom  1998, OAO Gazprom  2005, state’s share increases to 50.002% – The only publicly traded state ministry?

4. Gazprom v tsifrakh  Possession: 30 Tcm of gas reserves – 17% of world reserves – 60% of Russian reserves  Production: 550 Bcm of gas – 20% of world production – 85% of Russian production

5. Gazprom v tsifrakh  A big firm – One day, the largest by market capitalization – 430,000 employees  An important firm – Product: 10% of Russian GDP – Taxes: 20% of Russian federal budget – Complete control over pipelines

6. Home and Abroad  Home – Subsidized prices until 2011 (or so) – 55% of production, but 25% of revenues  Europe – 26% of Europe’s gas consumption – 28% of Gazprom’s production, but 60% of revenues  Asia – Sakhalin II, LNG, and the future

7. Goals and Strategy  Growth through access to capital markets  Gigantic infrastructure investments  Recognition as the world’s most important energy company  Expansion: Asia and, with LNG, the rest of the world  Integration: oil (Sibneft), coal (SUEK), and power (RAO UES)

8. Some Problems  Insufficient capital for investment  The burdens of domestic monopoly  Eastern Europe (Belarus, Ukraine) in the way – Ukraine: transit route for 97% of gas exports to Europe during 1990s  Central Europe (Poland, Slovakia, Czech Republic) also in the way

9. RUSSIA FINLAND ESTONIA LATVIA BELARUS UKRAINE GEORGIA LITHUANIA RUSSIA (Kaliningrad) POLAND GERMANY SLOVAKIA CZECH REPUBLIC AZERBAIJAN ARMENIA BLACK SEA TURKEY HUNGARY MOLDOVA SLOVENIA ITALY CROATIA ROMANIA BULGARIA MACEDONIA GREECE AUSTRIASERBIA BOSNIA FRANCE SWITZERLAND AND ITALY The Path of Natural Gas Delivered by Pipelines from Russia to Gazprom’s Markets in the Former Soviet Union and Europe Source: Casewriters’ illustration.

10. Post-Soviet Grand Strategy  Reintegration – Armenia; Belarus – Gas for ~$30-45/mcm + “kisses” + equity  Ambivalence – Georgia; Moldova; Ukraine – Gas for $50-80/mcm  Reorientation – Estonia; Latvia; Lithuania – Gas for ~$150-210/mcm

11. Revolution and Renegotiation  Bold, Western, triumphant Viktor Yushchenko and Russian gas – Suggestion to Gazprom to replace Ukraine’s in-kind payments for transit with cash at the European level  Gazprom CEO Miller – What a fine idea… – Prices at the European level, too  From ~$60/mcm to ~$160/mcm (and, soon, higher)

12. The Decision Point  December 31, 2005 – Expiration of the contract between Naftogaz Ukrainy and Gazprom  January 1, 2006 – Gas for European customers enters Ukraine – And stays there – Russia: “Thief! Blackmailer!” – Ukraine: “Liar! Imperialist!” – Western media to Russia: “Liar! Imperialist!”

13. 20012002200320042005200620072008200920102011 Ukraine50.00 95.00a130.00180.00-- transit tariff1.09 1.60 -- Belarus30.0024.0030.0047.00 100.0067% mp80% mp90% mpmp transit tariff0.55 0.75 1.45 Moldova80.00 160.00b170.0067% mp80% mp90% mpmp transit tariff2.50 Armenian/a 54.00110.00 -- Azerbaijann/a 60.00110.00n/a-- Georgian/a 64.00110.00235.00-- The Price of Gazprom’s Natural Gas for the CIS States (in U.S. dollars per thousand cubic meters) Sources: Although gas prices were generally treated as commercial secret and Gazprom published only average prices for broad regions, gas trade between former Soviet states has become a political matter and led to the disclosure of the terms of trade. The table is compiled from Gazprom’s official statement and newspaper reports, mainly in Kommersant and Vedomosti. Note: Transit tariff refers to the fee charged by the country for the transport of Gazprom’s gas through its territory. The tariff is in U.S. dollars per thousand cubic meters per 100 kilometers. N/A means non-applicable, that is, the given country did not buy gas from Gazprom; Armenia and Georgia bought Turkmenistani gas, which was shipped by Itera. MP means market price, generally taken to be the price of the Russian gas at the German border. a The average of the mix of Central Asian gas and Gazprom’s gas at $230/mcm. b The price rose from $110/mcm to $160/mcm in the second half of the year.

14. Some Solutions  To manage the burdens of domestic monopoly – Gradual deregulation of gas prices by 2011  Improved access to investment – Borrowing in bond markets since 2002 – Elimination of restrictions on foreign ownership of shares since 2006  To go around Ukraine

15. Existing gas pipelines Proposed/planned/under construction gas pipelines and LNG delivery routes

16. Nord Stream  Nord Stream (55 bcm) – 51% Gazprom – 20% BASF – 20% E.ON – 9% Gasunie  Connections – Schröder and the German government – Warnig, Putin, and Dresdner

18. South Stream  South Stream (30-60 bcm) – 50% Gazprom – 50% Eni  Connections – Berlusconi and the Italian government – Enel, Eni, pieces of Yukos, Gazprom’s call option, and the move toward reciprocity

19. South Stream vs. Nabucco  Nabucco (30 bcm) – Support from Brussels and Washington – Some issues  A pipe with no gas? (Iraq, Egypt, Azerbaijan, Turkmenistan, and Iran)  Turkey as Europe’s new hub?  Putin’s sense of irony

20. The Gas Crisis of 2009  Similarities – The underlying structure of the problem – Complications of Ukrainian politics – Gazprom’s firmness  Differences – Gazprom’s improved management of stakeholder and media relations – Balance of commerce and politics – A fading orange glow

21. Implications  The renaissance of the Russian state – Energy and property: pomest’e, not votchina – Institutional foundations of capitalism  State capitalism and the market as means  The evolution of Russian grand strategy  The Nametkina gambit – Anxieties of the “new” Europe – Realpolitik of the “old” Europe: just business