[NGW Magazine]: Putin Divides to Rule

This article is featured in NGW Magazine Volume 2, Issue 17

By Dmitry Shlapentokh

Rosneft is provoking Gazprom, with demands for export pipeline access for its gas production. So far, Vladimir Putin has not stepped in but the struggle helps to remind Russians who is in control.

This summer a conflict erupted between Gazprom, the major Russian state-controlled gas company; and Rosneft, which is still half owned by Moscow. The reason was Rosneft’s demand that Gazprom provide access to its export pipelines, so it could make the most of a memorandum of understanding it signed in June with shareholder and partner BP for trading its gas in Europe. 

Rosneft has maintained this unsuccessful struggle for some years, having in the past sought pipeline access for its gas both in Sakhalin Island, where the Gazprom-led LNG project has all the capacity rights; and also in the Power of Siberia line, which would allow Rosneft to export to China. Nothing has been published though about the size of any contribution it would make to the construction costs of any lines.

Gazprom has strongly resisted all these demands, and this summer argued that to do so would seriously damage Russia’s interests. First, it said that Rosneft wanted access to Nord Stream 2, to send gas to the European Union. Gazprom noted that Nord Stream 2 is not even partly laid yet. Moreover, it has no free capacity. Second – and this was most important – Gazprom argued that the increasing number of suppliers would reduce the price of Russian gas so Nord Stream 2 would have no financial rationale and it would not be built.

Rosneft put forth other arguments. According to Rosneft, Gazprom has plenty of free space in its gas lines, and plainly does not want to lose its position as the monopolist gas supplier. At the same time, Rosneft could increase the volume of gas sent abroad. Rosneft management also implied that the very fact that a private gas company sent gas to Europe would reduce European objections in receiving Russian gas. Indeed, Europeans claim, as Rosneft implied, that Gazprom is just an agent of the Russian government, and the gas supply is just how Moscow projects its power to the West.

While this proposal was made by the authoritative Security Council (Sovet bezopasnosti), Rosneft and Novatek are companies with “powerful lobbyist support, and it is quite possible that Dmitry Medvedev was among those who supported the proposal, it is unlikely that Gazprom would lose its position as a major gas exporter. Indeed, despite the commotion, experts express little interest in ending Gazprom’s monopoly on gas supplies to the West. Most believe that Gazprom will retain its monopoly on gas exports, albeit some exceptions in the expert community exist.

Both Gazprom and its rivals present themselves as defenders of the public interest. One, however, should take this explanation with a grain of salt. They all dress up their personal and companies’ interests as what is best for society. Similarly in the US, drug companies pretend that they could not allow imports of drugs from foreign countries, even from Canada, because they believe that the drugs are not safe. The real reason, of course, is different. The drugs from overseas could create competition for American drug companies. It is clear that Gazprom’s resistance is due to the fear of competition. The most important for the story is, of course, not arguments, but Putin’s position. Indeed, it is he who would be the final arbiter in the conflict. And for him, the consideration is tightly connected with his desire to maintain authoritarian power.

Power and property in Putin’s Russia

One need not embrace Marxism wholeheartedly to see the direct connection between economic and political power. It was big corporations, or any other economically important bodies who controlled the political process in the US, ensuring a smooth transition from one oligarchical group to another. The elite could not tolerate exceptions.

The ill feeling Donald Trump arouses among conservatives of either hue is not so much due to his actions or outrageous statements which he made during the election, but to the fact that he had been elected against the will of the elite. While in the US, the control over “the commanding heights” of the economy is directly related to political power, this was even more the case in Russia, and Putin understood this well. The big owners are potentially a force which could create a problem for him.

Here they are quite similar to the barons who limited, or tried to limit, the powers of the king in the late medieval and early modern Europe. This was the case in Russia with those who have strong political ambitions. This was, for example, the case with Mikhail Khodorkovsky, the owner of Yukos, one of the leading oil companies in Yeltsin’s Russia.

His critics claimed that he would have been able to become a multibillionaire without breaking the law. Still, this was also the case with other tycoons in the late Soviet/early post-Soviet era: many had a shady past. Still, many of them had no problem with Putin. Some, like Roman Abramovich, had enjoyed his personal favour and friendship. The difference with Yukos was that these tycoons accepted Putin’s leadership and promised either not to be engaged in politics, or plainly emigrated. Khodorkovsky also received the signal that the Kremlin would prefer it if he emigrated.

Still, he stayed in Russia, and made it clear that he did not regard Putin as the unquestioned leader, and was ready to challenge him. For him, a “king” was not the absolute political master, but just the first among equals; the ‘barons’, including Khodorkovsky, could deal with him as an equal. According to rumours, Khodorkovsky, when granted an audience with Putin, appeared in front of him in a pullover, not formal attire, to demonstrate his disrespect.

This infuriated Putin, and he dealt with Khodorkovsky in the same way as early modern European kings dealt with rebellious barons: his ‘castle’ (Yukos) was dismantled, and Khodorkovsky spent many years in prison. While dealing with Khodorkovsky in the beginning of his rule, Putin did not destroy the socio-economic arrangements of the Yeltsin era, which had enabled the rise of men like Khodorkovsky, or renationalize assets.

This implied that tycoons, with the exception of those who had political ambitions, such as Vladimir Gusinsky, Boris Berezovsky, and Khodorkovsky, would keep their property. There was a sort of informal agreement between them and Putin: while Putin guaranteed their wealth and removed the spectre of renationalisation – which was looming large towards the end of the regime of the highly unpopular Yeltsin – they in return promised not to engage in politics, and regarded Putin as the supreme arbiter.

Thus, while retaining and increasing his absolute power, Putin did not deal much with the economic power of the super-rich, apart from some commanding heights in the economy, such as Gazprom and Rosneft.

The very fact that tycoons continued to retain their wealth and even increase it created a serious problem for Putin’s political future, and this has direct implications for Gazprom’s fate.

Putin’s dilemma

One could assume that Putin has a clear political interest in backing Gazprom. The company is nationalised. Formally, Alexei Miller, Gazprom’s chairman, is just a bureaucrat, and could be removed at any moment by Putin. Still, throughout his long career as the director of the company, Miller has become entrenched, personally rich and acquired his own quasi-political and quasi-economic base.

He remains loyal to Putin. Still, as one could assume, Putin, shrewd and seasoned politician that he is, took Miller’s pledge of loyalty with a grain of salt. In a way, Putin’s relationship with Miller could be compared – to take an extreme case from medieval history – to the relationship between the English king Henry II and Thomas Becket, the archbishop of Canterbury. Although friendly at first, Beckett did not act in the way the king had expected and paid the price.

Still, removing Miller from his job, or undermining his position and the position of Gazprom, is risky. The absolute dominance of Gazprom, still formally in the hands of the state, is a firm guarantee of the state’s important role in not just in economic, but also in political affairs.

Gazprom and, of course, Miller are directly connected with Putin’s pet projects – Nord Stream 2 and TurkStream. The completion of these projects is crucial for the Kremlin, both for political and economic reasons. Politically, it is quite important to bypass Ukraine, with which Russia engaged in a bitter conflict, with no end in sight. The economic implications of the project are also clear: TurkStream and especially Nord Stream are guarantees of Russia’s gas delivery to Europe, and a major source of revenue. There are not many alternatives to the European market.

Chinese illusion

One could remember here that the Chinese market is not as promising an alternative as one could assume. For Beijing, the project is more geopolitical than economic: it is a way to cement the Moscow/Beijing relationship, and ensure the flow of Russian gas in case of a conflict with the US.

But China has other options: first there is gas from central and southeast Asia, mostly from Turkmenistan; but also, increasingly of domestic origin. Consequently, China could bargain for cheaper prices. And the volumes are too small to replace the European market. Nord Stream 2 and TurkStream are still crucial for the Kremlin’s plans.

Reducing the power of Gazprom, or removing Miller, would send negative signals to potential European contributors to the project: one could remember here that Nord Stream 2 could well suffer from US sanctions, and the actual construction has still not started.

At the same time, altering Gazprom’s terms and conditions could create other potential problems in the future. While it would be economically risky to remove Miller or to undermine Gazprom’s position, Miller is still mostly politically harmless, regardless of all potential problems. It is true that Miller is well-entrenched and acquire a quasi-political base. He is also known abroad. Still, he is just a manager of a state-owned company, and it is accepted that he could be fired at will.

The story with Gazprom’s competitors is different. They are private companies. Their owners could not be easily removed or caused to act in certain ways, unless Putin decided to engage in wholesale nationalisation of ‘the commanding heights’; this could have been done in the beginning of his tenure comparatively easily, under the pretext of listening to the population’s clamour for a return to the Soviet era. But now the capitalist arrangements have become entrenched, and change would lead to major problems with the economy. One should remember that Putin is not the charismatic leader of the Joseph Stalin type, and wholesale attacks on capitalism in the fashion of “revolution from above” as happened in 1929, when private property was practically eliminated in the USSR/Russia, would be dangerous.

Thus, one could assume that Putin will be behind Gazprom for the time being. If this is the case, one could question the reason for some implicit encouragement for Rosneft and other companies to challenge Gazprom. The reasons were manifold. First, with all of his authoritarian/corporatist instincts, Putin is still predisposed to this or that form of market capitalism. Otherwise he would have ended the rule of oligarchs a long time ago.

Second, Gazprom could be a peculiar sacrificial lamb, needed in case Brussels might finally legitimise Nord Stream 2, but only on the condition that several other Russian gas companies are engaged in the project. Third, Putin has sent a signal to Miller and the Gazprom bureaucracy that they should become more efficient and successful, and they should not take their positions for granted.

One should also remember that Putin tries to balance the rising “barons” against other key players. Consequently he could hint that he might support the lead of Rosneft, his confidant Sechin, in order to send the message to Miller and others that nobody is replaceable. It is not enough to be economically efficient: they must also demonstrate their loyalty.

Finally, Putin’s moves could be explained in the context of his general model of behaviour as politician. He often sends mutually exclusive messages which are intended to confuse external observers about his intentions, and provide him with more room to manoeuvre.