Global Economics

Why Russians Love Gazprom


At Midday in Novy Urengoy, the largest city in the Nadym-Pur-Taz region of northwest Siberia, the streets are empty. Nearly everyone is working in the nearby natural gas fields. This windblown outpost at the edge of the Arctic Circle is home to 110,000 people, most of whom are employed by OAO Gazprom, the world's largest gas producer.

Outside it can be -40 or -50. "We work," says Oleg Paulukov, a laconic southerner who moved to Novy Urengoy 15 years ago at the age of 18. "Working for Gazprom is considered prestigious." The company bills itself as the "Pride of the Nation."

The Communist Party's state socialism dissolved nearly two decades ago, but Gazprom's corporate paternalism softens the rigors of life in a region the locals refer to simply as "the North." While the average Russian worker makes $350 a month, gas field technicians here take home up to $3,000. Roadside billboards proclaim "Glory to the gas workers!" Nationwide, Gazprom has 330,000 employees.

Workers in Novy Urengoy live with their families in apartment blocks painted shades of blue, pink, and yellow. Gazprom covers 97% of the cost of running 14 kindergartens, charging employees only 100 rubles, or $4, a month for child care. It provides interest-free housing loans, free medical care, and heavily subsidized overseas vacations.

POWER PLAY. Gazprom has provoked anxiety in the U.S. and Europe as it has become Russian President Vladimir V. Putin's favorite weapon in a new kind of Cold War—one haunted not by the specter of nuclear annihilation but by fear of going without heat in the winter.

Europe's growing dependence on Gazprom has given the Kremlin more leverage over the Continent, from Finland to Germany to Italy. During the recent summit of industrialized nations in St. Petersburg, Russia responded to the continuing impasse on its bid to join the World Trade Organization by delaying the access of U.S. energy companies to a major Gazprom gas project in the Barents Sea.

What most Westerners don't appreciate is that Gazprom's swagger—on display when it temporarily cut gas flow to Ukraine in January and later intimated it might shift resources from Europe to China—reflects more than the company's muscle abroad. The assertiveness also points to Gazprom's ascendency as Russia's preeminent economic institution and as a central player in domestic politics.

"MY TSAR AND GOD." Putin, who largely runs the company from the Kremlin, relies on Gazprom to solidify his broad popular support, even as he stifles opposition. His subordinates determine which small towns get connected to Gazprom's pipelines and then court voters based on this largesse. Gazprom alone generates 8% of national tax revenue, while the broader energy sector provides the main thrust lifting per capita income in Russia by about 10% a year.

In a clearing in the flat, sparsely forested Siberian tundra, a dozen workers from Novy Urengoy manhandle a thick metal pole sunk into the ground. Gazprom and two German companies are investing $1.5 billion to extract the weightless treasure buried here in an untapped subterranean field. If all goes as planned, by 2010 natural gas from this new source will be keeping millions of Germans warm in the cold months. "This is our task, and we'll fulfill it," vows Eduard Khudaynatov, Gazprom's local boss.

The voluble Khudaynatov refers, without apparent irony, to Gazprom chief executive Alexei Miller as "my tsar and God." Khudaynatov, 45, embodies at a local level just how intertwined Gazprom and Russian political life have become. He joined the company in 2003 after 20 years in Nefteyugansk, a center of the oil industry 300 miles to the south, where he became mayor of a municipality. Before taking over a Gazprom subsidiary he also worked for three years as a federal inspector of the northern Nenets region, serving as the Putin regime's eyes and ears.

GIFTS FROM THE NORTH. Novy Urengoy's first buildings went up only 30 years ago, when gas workers arrived from Central Asia and the Caucasus to begin drilling. During the economic anarchy of the Yeltsin era in the 1990s, Khudaynatov explains, Gazprom lost control of key assets, including the untapped field his crews are now readying for production. Putin and Miller have used the Russian courts, as well as tough bargaining tactics, to reassemble the lost holdings—part of Putin's larger effort to consolidate government control over the oil and gas industries.

The North has been generous to Gazprom, which extracted 560 billion cubic meters of gas from the area in 2005. That's 91% of the total produced in Russia and a quarter of all global output. Europe relies on Russia for 26% of its natural gas, a figure expected to rise to 38% by 2020. The company reported net income last year of $11 billion, on revenue of $48.9 billion.

"Gazprom," Khudaynatov says, "is a serious organization with corporate discipline, which today works for the state." The government owns a majority stake in the company, and the two are thoroughly entangled. Khudaynatov's idol, Miller, 44, like many in Gazprom's top ranks, has political ties to Putin from St. Petersburg, the President's hometown and power base. Dmitry Medvedev, another member of the St. Petersburg clique and chairman of Gazprom's board, also serves as Putin's first Deputy Prime Minister.

A PAIR OF SHOES. Gazprom's political heft would be underscored if, as is rumored in Moscow, Putin becomes CEO after stepping down from the presidency in 2008. (Putin has denied any such plan.) Medvedev, meanwhile, is widely seen as a leading candidate to replace his boss as President in two years. Not coincidentally, Medvedev has been traveling the length and breadth of the country, talking up the benefits his company can bring to towns that still lack gas.

Until recently, Kalyazin, 100 miles north of Moscow, was one such town. Its 15,000 residents live along the Volga River in Tver Oblast, an agricultural region that is one of the poorest in western Russia. Dating from the 15th century, Kalyazin has a sleepy, rundown feel, but a closer look reveals that it has enjoyed a mild economic rally during the Putin years.

Orders have risen at its shoe factory, five sewing factories, and a small plant that makes parts for MIG fighter planes. Outside of town, opulent new dachas are going up: getaways for rich Muscovites who are a growing source of local income.

"GAS WILL CHANGE OUR LIVES." Communist party apparatchiki drew up the first plans for providing gas to Kalyazin in 1950. But nothing much happened until 1991, when Gazprom began building a pipeline into Kalyazin from a town 50 miles away. Construction crews stopped and started over the next 15 years. While Putin's men have been widely credited with cleaning up dubious contracting practices common at Gazprom in the 1990s, the company remains inefficient at buying supplies and building pipelines, according to outside analysts.

When the first gas finally trickled into Kalyazin last Dec. 28, several hundred people braved the cold to attend an open-air ceremony marking the occasion. Celebrants lit a symbolic gas-fired torch outside the town's central heating plant. "Gas will change our lives fundamentally and bring us closer to civilization," Mayor Konstantin Ilyin says.

The theme of "gasification" ripples through Russian politics. One of the main reasons Kalyazin has gas heat is that in 2004 Tver elected a dynamic new governor, Dmitry Zelenin, a polished ex-businessman who campaigned on the promise of bringing gas to towns without it. As is the custom around the country, he traveled to Moscow, hat in hand, to convince Gazprom CEO Miller that Tver could uphold its end of the gasification bargain to build the smaller pipes that tie local users into a mainline.

"A BIG PLUS." By the end of 2006 all nine of Kalyazin's heating plants are to be converted to gas from fuel oil, which sells for about $280 a ton. The equivalent amount of gas—1,000 cubic meters—costs just $93 for industrial users and $56 for residential ones. Consumers will pay just over a dollar each month for gas to power their stoves, compared with $4.50 for bottled propane.

Electric bills will decline sharply thanks to the fact that residents will no longer have to use electric water heaters. "I'm proud of it because it's our Russian company," local hotel manager Irina Zhupanova says of Gazprom. "For daily life, of course [gas] is a big plus," says resident Elena Chertovskikh.

With Gazprom board chairman Medvedev maneuvering ahead of the 2008 presidential election, Russia is gasifying furiously. Kalyazin is one of 1,120 towns and villages the company has promised to hook up under its 2005-2007 program. The miracle of gas is to be bestowed on 60% of all Russians, compared with 53% in 2005.

NO CONSERVATION. While Gazprom makes headlines for its exploits abroad—45% of the gas consumed in Germany now comes from the Russian giant—the great bulk of Siberian gas always has been burned at home at prices heavily regulated by the state. Long after the Soviet Union was dismantled and the old gas ministry evolved into Gazprom, the Kremlin continued to curry favor with the masses by setting gas prices well below market rates.

It wasn't until Putin succeeded Boris Yeltsin in 2000 that Moscow began raising domestic gas rates in hopes of discouraging consumption in those places where gas was available and freeing more of it for export. Prices are still only one-fifth of rates in Western Europe and certainly no spur to conservation.

MORE TO EXPORT. Gazprom says it loses money on domestic sales, although most outside analysts doubt this claim. What's not in dispute is that the company makes healthy profits selling abroad. Last August the connection between the two markets became evident in an unlikely fashion in out-of-the-way Kalyazin.

In attendance at a large town meeting were not only Gazprom representatives but also Ulrich Hartmann, chairman of the parent of Germany's largest gas supplier, E.ON Ruhrgas, a major Gazprom customer and joint-venture partner. Hartmann's presence in the provincial Russian town signaled Kalyazin's role as a showcase for new energy-saving technologies, which Ruhrgas hopes Gazprom will adopt more generally.

"The more Gazprom can economize on gas," Kalyazin Mayor Ilyin explains, "the more gas it will be able to export, including to Ruhrgas and to Germany."


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