Business Blog: Hoover’s Business Insight Zone

Russian industry underwent a major upheaval after the Soviet Union fell in the early 1990s. Out of this process, which was often marked by corruption and cronyism, a number of giant Russian companies emerged — none of them larger than Gazprom, the former Soviet natural gas ministry that is now the world’s largest gas producer. Gazprom enjoys near-monopoly control of Russian gas, and the Kremlin enjoys effective control of Gazprom. In the words of Hoover’s petroleum industry editor Stuart Hampton, this arrangement allows “the Russian leadership [to use] Gazprom as a blunt instrument of foreign policy.”

Last week’s [i.e. the last week of July's] headlines offered a case in point: Gazprom threatened to halve gas supplies to Russia’s neighbor Belarus, citing the smaller country’s failure to pay $460 million worth of its gas bill. Besides angering Belarus, the threat spooked European countries further to the west, which rely on Gazprom gas that flows to them through pipelines laid across Belarus. This is only the latest round in this fight. At the end of 2006, in the depths of the Belarusian winter, Gazprom threatened to cut off Belarus’s gas supply unless the country paid much higher rates going forward. The outcome was the same in both cases: the Belarus government gave in, largely because it had no viable choice.

Gazprom reaps big rewards for its closeness to the Kremlin. Last year the Russian government squeezed Royal Dutch Shell out of its lead role in a $22 billion oil and gas project on the Russian island of Sakhalin, then handed the reins of the project to Gazprom. Last week, as the Belarus dispute unfolded, the Russian energy ministry indicated that another big partner in the Sakhalin project, Exxon Mobil, might be forced to ship gas from the project to Russian customers rather than markets abroad — another move in Gazprom’s favor.

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For more thoughts on Gazprom, see these earlier posts.

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* This article originally ran on our Company of the Day page on 6 August 2007.