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Daily Telegraph: Kremlin Inc. – Putin runs Gazprom in-house

Last Updated: 1:20am GMT 12/12/2006

The world’s largest gas company, on which Europe is reliant for supply, is a fiefdom of the former KGB man who appointed his deputy as chairman, writes Adrian Blomfield

The critics, of which there are plenty, despairingly dismiss it as phallic, unharmonious and a soulless manifestation of the corporate ego. For Kremlin loyalists, though, it is a thing of beauty and innovation, a symbol of Russia resurgent.

But on one thing everyone agrees: Gazprom’s new headquarters in St Petersburg, plans for which were unveiled earlier this month, will be very big.

At 1,300ft – three times the height of any other building in Russia’s former imperial capital – the twisting glass tower will soar above the spires and canals of one of the world’s prettiest cities, altering its famous skyline for as long as it stands.

It is a remarkably apt representation of all the attributes its new tenants seek to project: power, fear, wealth and a general disregard for the criticism of others. It is not for nothing that Russians refer to Gazprom as Kremlin Inc. Born from the ashes of the Soviet Union, Gazprom become the embodiment of President Vladimir Putin’s style of government.

Mr Putin shared the humiliation felt by so many of his people over Russia’s diminished place in the world in the 1990s. When he came to office in 2000, the former KGB spy was determined to end the directionless chaos he inherited from Boris Yeltsin and restore Russia’s superpower status – in the energy sphere at least.

He embarked on his plan with remarkable vim, centralizing power in the Kremlin and ending dissent in virtually every quarter of Russian society. Yet it was the state’s renationalisation of key strategic assets and the rise of Gazprom that have been the apogee of his success. The company has emerged as the world’s largest gas supplier, controlling 16pc of global reserves. Only Saudi Arabia and Iran have more.

What has worried the West, however, is how Gazprom has also become a state within a state. Even by the standards of national oil majors, the distinction between company and government is so slight as to be virtually non-existent.

Mr Putin awarded the chairmanship to his deputy prime minister Dmitry Medvedev – who many believe is being groomed to take over as president when he steps down at the end of his second term in 2008.

The company’s upper echelons are largely filled with cronies of the Kremlin’s inner circle, dominated by former intelligence service officials. Mr Putin himself is said to run many of the day-to-day operations. Nor is Gazprom alone. In the 1990s, a handful of venal oligarchs dominated the Russian economy, enriching themselves often at the expense of the rest of the country.

Like many of the country’s most lucrative assets, Mr Putin essentially nationalized the oligarchy. Today it is estimated that 40pc of Russia’s GDP is controlled by the Kremlin’s “tea-drinker’s circle”, a group of about a dozen high-powered government officials that surround the president.

Igor Sechin, the shadowy presidential aide who is believed to be one of the most powerful men in the Kremlin, is the chairman of Rosneft, which emerged as an oil giant after its dubious acquisition of Yukos’s main production unit in 2004.

Other members of the inner circle head Transnefteprodukt, the state company for oil transportation and the national carrier Aeroflot.

The Kremlin has been happy to use Gazprom as a tool to punish recalcitrant ex-Soviet satellites – most recently by hiking prices for Georgia and briefly cutting of supplies to Ukraine in January, causing a shortfall in the rest of Europe. With Europe’s gas dependency on Russia growing all the time, the Kremlin’s disinclination to play by the rules is disturbing.

For the rule of law in Russia has essentially been expropriated as a political tool, selectively applied when it suits the Kremlin. Thus there was little fuss when Gazprom wanted to build its gargantuan tower – despite the law stating that no building in that location should rise above 157ft.

By contrast, when the Shell-led consortium was accused of environmental breaches on Sakhalin, a remote archipelago off Russia’s Pacific coast, the full weight of the law came into play. Few believed Shell’s suspension order emanated from a concern by the Kremlin nomenklatura for the plight of the Grey Whale.

The EU would like to see Gazprom broken up, not just because of the power it wields internationally but because the company has so many inherent problems. Experts say it is inefficient, riddled with corruption and lacks sufficient investment. The International Energy Agency predicts Gazprom may not be able to meet its supply commitments by the end of the decade.

While Gazprom enriches a powerful few, Mr Putin’s boast that the company is a reliable purveyor of energy are starting to look increasingly hollow.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/12/12/ccgazprom12.xml

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