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Gazprom sways as Russia plays hardball

Russian gas monopoly Gazprom Head Alexei Miller and Prime Minister Vladimir Putin, right, seen at a meeting with Prime Ministers of Slovakia, Moldova and Bulgaria at Meiendorf Castle outside Moscow, Wednesday, Jan. 14, 2009. Leaders of gas-starved European nations pressed Ukraine and Russia to restore supplies immediately Wednesday as the EU threatened both with legal action for ripping apart the continent’s winter heating plans. (AP Photo/Grigory Dukor, Pool)

By CATRINA STEWART – 2 hours ago

MOSCOW (AP) — Gazprom, which just a year ago was vowing to become the world’s biggest company, is sinking fast as the global meltdown hits hard and the Kremlin uses it as a pawn in its geopolitical battles — most recently in the gas dispute with Ukraine.

The state-backed gas export monopoly is bleeding an estimated $140 million a day in the energy war with Kiev. Experts say the company is being forced to sacrifice its interests to the government’s political aims, threatening its profitability as it teeters under huge debt.

As the spat between Russia and Ukraine moves into its third week, Gazprom’s ambition to become the world’s largest company by market capitalization by 2014 seems a mirage. The company’s share price has plunged 70 percent since last January, sending it tumbling from the No. 3 spot among the world’s biggest companies to 35th.

Since Russia shut off gas supplies to Ukraine on Jan. 1 and to Europe six days later, Gazprom has lost $1.1 billion in export revenue, Gazprom chief Alexei Miller said Wednesday.

Losing foreign income is catastrophic for Gazprom: It exports a third of its production and reaps much higher profits abroad than at home, where prices are capped.

Saddled with net debt of roughly $45 billion, the protracted dispute with Ukraine is one Gazprom can ill afford. And considering the company’s central importance to Russia’s prosperity, its mounting woes may hold the key out of the deadlock with Ukraine — which is also losing millions a day in the pipeline freeze.

Analysts estimate that the gas giant, which is Russia’s biggest debtor, will have to repay $7 billion this year — easy enough when gas is flowing and prices remain at record highs. But since oil prices have plummeted, gas prices will follow suit — with a lag of six to nine months.

Gazprom’s changing fortunes coincide with Russia’s bleakest economic period in a decade. The country is facing recession, industry has been ravaged by falling demand for metals, and investors suspect the government will turn to state-controlled giants such as Gazprom to prop up the ailing economy.

“The company is spending like crazy to do the state’s bidding, to keep growth up,” said James Fenkner, director at Moscow-based Red Star Asset Management. “They are completely unprepared for low oil prices.”

The Kremlin has often used Gazprom as a tool to implement its own, sometimes controversial policies.

Seeking a bigger slice of Russia’s energy industry, the Kremlin embarked on a renationalization program under Vladimir Putin’s presidency that saw Yukos oil company’s assets controversially fall into the hands of Gazprom and state oil major Rosneft.

Gazprom paid $13 billion to buy Sibneft oil company from billionaire Roman Abramovich in 2005, and a year later forced Shell to cede its controlling stake in the Sakhalin II project in Russia’s Far East for $7.5 billion.

Gazprom also plans to exercise an option to buy 20 percent of Gazprom Neft, formerly Sibneft, from Italy’s Eni for $4.5 billion by April.

Now Russia’s energy giants are facing a mountain of debt, raising questions over their ability to boost spending and invest in new and existing fields.

Gazprom has earmarked capital expenditure of 700 billion rubles ($22.4 billion) for 2009, some of which will go toward new pipelines and costly exploration in remote Arctic regions.

But Gazprom has also taken on extravagant vanity projects.

It is building gargantuan headquarters in St. Petersburg and is one of the key investors in the 2014 Winter Olympics to be held in Sochi — already besieged by cost overruns and delays.

It also faces costly commitments to upgrade power generating assets it snapped up during the state electricity monopoly’s privatization, while banking arm Gazprombank has been burdened by the government’s recent efforts to aid a troubled banking sector.

Fenkner claims Gazprom is spending eight times more than the last time oil languished at $40 a barrel. “They are still spending money,” said Fenkner. “They are doing all this stupid, stupid stuff.”

And it is Gazprom that seems destined to suffer most as Moscow and Kiev pursue a game of political brinkmanship over gas supplies to Europe.

While new projects such as Nord Stream will provide additional capacity for Russian gas, experts expect Europe to redouble efforts to back bypass routes from Central Asia, build more pipelines from North Africa and seek to expand more costly LNG imports.

“Gazprom has shown itself an unreliable partner to Europe,” said Alexander Rahr of the German Council on Foreign Relations in Berlin.

“I don’t think the European Union will distance itself from Russia … we need Russian gas, but I don’t think (Europe) will enhance imports from Russia … Russia is more dependent on us than we are on Russia.”

Copyright © 2009 The Associated Press. All rights reserved. 

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