European Gas Markets, May 31, 2006

The board of Russian state-controlled monopoly Gazprom has reappointed chief executive officer Alexei Miller for a further five years from 31st of May, the date when the old contract expires. It was president Putin himself who put Miller forward for the post in 2001, to replace Rem Vyachirev. Miller was a relatively unknown figure who had been general director of the Baltic pipe production system and a deputy energy minister. Under his leadership Gazprom took back control of the petrochemical major Sibur, several assets previously divested to Itera and it took back from Stroytransgaz over 5% of its own shares.

But Miller might leave his position after the presidential elections in 2008 in order to vacate the post for Putin himself, Russian Vedomosti was told by a source close to council of directors. A contract up till 2011 is not a guarantee; and the council of directors could terminate it at any time. Putin himself might in future head the council of directors of Gazprom - which would increase dramatically the chances of Miller completing the extended reign until 2011, according to Alexei Makarkin of the Russian centre for political technology.

Alexei Miller succeeded in achieving several goals. He achieved the mandate given to him on his appointment - to regain control over company assets that had been stripped out by the former managers, as well as bringing Gazprom back under state control. In addition, according to Mikhail Korchemkin, managing director of East European Gas Analysis, Miller successfully lobbied for a faster growth of the state-regulated price of gas for Russian consumers as well as increasing Gazprom's presence in European markets, especially via highly professional subsidiaries in Germany and the UK.

The transfer of assets to other firms was a very good decision during the hard time after the economic crisis of 1998, Korchemkin told EGM, adding:

"Consumers in Russia and the FSU were not paying gas bills, and the price of gas in Europe was just a quarter of the current price. Independent producers invested into gas fields' development and Gazprom got a steady cash flow from sales of transit services to these independents. When the market situation improved, Gazprom bought back its assets".

But many of the results of Miller's stewardship of Gazprom, Korchemkin argues, are negative. Gazprom has destroyed its reputation as a reliable supplier of gas to Europe - a reputation it took over three decades of hard work to build. During five years under miller, the security of supplies of Russian gas to Europe have decreased: Gazprom has cut off all alternative suppliers of gas to Ukraine and other FSU states, and has not left NAK Nafotgaz enough cash for proper maintenance of Ukrainian gas pipelines. Gazprom has also become a flagship of Russian corruption, Korchemkin says. Top managers of Gazprom are interested in keeping RosUkrEnergo in business as long as possible instead of replacing the Swiss broker by a fully-owned subsidiary like ZMB in Germany or Gazprom Marketing & Trading in the UK. RosUkrEnergo alone causes shareholders of Gazprom a loss of well over $1 billion a year, Korchemkin says. Meanwhile, questionable activities of Gazprom's management have increased the risk of legal action against the company and its managers outside Russia. While "Putin's pet company" may be above the law in Russia, Gazprom managers are responsible to minority shareholders for what they do with their money. The shareholders have turned a blind eye regarding managers' games while the company's shares were bringing huge profits. But with this month's fall in Russian share prices a lawsuit is just a matter of time.

"Gazprom's major advantage is that the company can increase its cash flow by several billions of dollars at no cost - just by getting rid of numerous brokers and liquidating kickbacks and overpayments. Unfortunately, managers of Gazprom are very unlikely to do so, which is the major disadvantage of the company", Korchemkin told EGM.