Those fortunate enough to have ignored Layard and Parker’s book and its advice to invest just before the 1998 financial crash but who did invest after 2000 in Russian stocks (except, of course, for Yukos) probably did quite well. By then the boom had indeed come to Russia. When Putin took over as prime minister in August 1999, the capitalized value of the country’s publicly traded stocks amounted to $74 billion. By 2006, the capitalized value exceeded $1 trillion.23
EUROPE DIVERSIFIES
At the same time that Russia’s energy sector brought prosperity to most of those who invested in it, energy imported from Russia had also become attractive to those seeking to reduce their dependence on energy from the Middle East. Given the political and military turbulence in the Persian Gulf, Europe was eager to avail itself of a supplemental source of energy. Since Russia was part of the European continent, petroleum and gas could be delivered by an on-land pipeline as well as by ship, railroad, and highway. This meant not only a shorter journey but also one no longer vulnerable to terrorism in the Persian Gulf or Suez Canal, not to mention OPEC hijinks and 1973-type political embargoes.
The land link between producers in Russia and consumers in Europe is particularly important for natural gas customers. As we just noted, unlike petroleum, which is a liquid and thus can be delivered easily by railroad tank car, truck, and pipeline, most gas can be delivered only by pipeline. The only other alternative to pipeline-delivered natural gas is LNG, carried by expensive, specially designed ships. Railroads and tank trucks are unsuited for transporting commercial quantities of natural gas.
Given all the advantages of a natural gas pipeline, it was no wonder that despite Ronald Reagan’s best efforts, the pipeline from the USSR to Europe was built. As German Chancellor Gerhard Schroeder later also noted, from an environmental point of view, natural gas would be more environmentally friendly than coal or nuclear energy. More than that, the Russian Republic had the world’s largest reserves of natural gas. Initially, Germany received most of its gas from the North Sea. But since the North Sea fields were more modest in size, before long, Russia became the largest supplier of natural gas to most of Europe. As the North Sea fields, especially the gas provided by Norway, begin to decline, Russia will undoubtedly provide an ever-larger share.
Of course, there was always the danger, much as President Reagan had warned, that like some OPEC petroleum suppliers, Russia might threaten to cut off the flow of its gas for one reason or another. After all, the USSR and then Russia did just that to several of its petroleum customers. Yet except for an occasional weather-related problem, Russia has behaved honorably with most of its West European customers. This was the case even during occasional tense Cold War confrontations. More than that, when OPEC cut back petroleum production and imposed an embargo on the United States and the Netherlands in 1973, the USSR refused to participate. Instead, as petroleum prices rose, it not only continued to honor its contracts but it expanded its exports of both petroleum and gas, and by doing so, it took advantage of the high world prices resulting from OPEC’s heroics. As its reputation for reliability grew, whatever hesitancy some may have had about becoming dependent on Soviet natural gas dissipated, and Soviet supplies came to be accepted throughout Europe as an integral and dependable part of the region’s supply network.
WHO OWNS GAZPROM?
With the collapse of the Soviet Union and its communist system, for the first time foreign and private individuals and companies could invest and buy shares of stock in these newly privatized Russian entities, including most of those producing energy. In December 1998, for example, Ruhrgas of Germany acquired 2.5 percent of Gazprom stock for $660 million and another 1 percent in May 1999 for $210 million more. Combined with another 1.5 percent of stock it controls indirectly, Ruhrgas at one point owned or controlled over 5 percent of Gazprom stock. For a time, nonstate investors, mostly Russian entities, owned 61.63 percent of the company’s stock. However, the state owned more than any other single holder and so, at least in theory, it has the right to determine management control.
Yet without 50 percent plus one share state ownership, there was always the possibility that a foreign group could accumulate enough stock to take control. When Putin became president, one of his priorities was to prevent such a possibility. Accordingly, in mid-2005, he arranged for state-run Rosneft to buy up another 10.74 percent of Gazprom shares. With these extra shares, the state or state-owned entities then held 50.002 percent of the company’s shares. Another 29.482 percent was controlled by other Russian businesses and institutions. Of the remainder, 13.068 percent was held by Russian individuals, and 7.448 percent by nonresident individuals, companies, and groups.24
Gazprom has worked to keep tight monopoly control not only over the country’s natural gas pipeline network but also over its natural gas output. Occasionally, when the Russians feel unable to master the technology required to work particularly difficult sites such as Sakhalin and the Barents Sea Shtokman field, they have agreed reluctantly to allow foreign companies to work a few such fields on their own, without Russian or Gazprom involvement. But as in the past, once their national treasury begins to overflow and new confidence builds, the Russians quickly move to circumscribe foreign involvement and invariably they take development back into their own hands.
AN OPENING FOR FOREIGN FIRMS
Because the petroleum ministry, unlike the gas ministry, was not held together during privatization as a unified whole in an entity comparable to a Gazprom, privatization provided more of an opportunity for foreign companies to set up their own petroleum-producing subsidiaries and enter into joint ventures. Philbro Energy Products created a company with the romantic name “White Nights.” It was one of the first joint ventures in the post-Communist era. Its concept was a laudable one. Drilling practices in the Soviet era were notorious for their poor conservation efforts and sloppy operating methods. Against this background, White Nights proposed forming a joint venture with a Russian company to take over some of the already worked and even abandoned oil wells. They were convinced they could restore them or increase their yield by utilizing advanced Western technology. So they created a joint venture consisting of a group from Anglo-Suisse and Philbro Energy Products, a subsidy of the American company Solomon Brothers. They joined with Varyeganneftegaz Oil and Gas Production Association, whose oil wells they would be reworking. The joint venture was predicated on the assumption that without foreign assistance, output from the Varyeganneftegaz field would decline at a rate of about 25 percent a year. Anything the joint venture produced above and beyond that trend line would be considered profit for the joint venture and would be shared equally by the Russian and Western partners.
While the White Nights project succeeded in producing more than Varyeganneftegaz alone working without Western technology would have been able to do, from the point of view of the Western partners, the project was nonetheless a failure. By the time all the taxes were collected (many imposed just for the occasion), the increased transit fees deducted, and the bureaucrats properly mollified (paid off), there wasn’t all that much left over to share. It was not a gratifying or unique experience.
For more than a decade, another company, Conoco, faced similar problems and similar losses.25 Conoco entered the Russian market as early as 1989. It joined with Rosneft in a venture called Polar Lights in 1991 to develop wells in the Timan Pechora Basin not far from Arkhangelsk.26 Conoco also formed a joint venture with Northern Territories.27