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Putin's Gazprom Problem

How the Kremlin Accidentally Liberalized Russia's Natural Gas Market

Just four years ago, the Western press commonly touted Russia's state-owned natural gas giant Gazprom as Vladimir Putin's premier instrument of power. Indeed, the $160 billion firm controls several mighty subsidiaries, including oil and power companies and groups that run Russia's export pipelines. It has the ability to leave millions in Europe in the cold, as it demonstrated when it turned off the taps to Ukraine in 2006 and 2009. And it even owns several media outlets, including NTV, a popular television station that was once a vehement critic of Moscow but is now a (somewhat reluctant) advocate of Putin's domestic agenda. In total, Gazprom's profits constitute about ten percent of Russia's GDP. Perhaps that is why the company -- which even has its own anthem -- is considered a bellwether of Russian power. 

Yet, as Vladimir Putin is sworn in this week for another six-year term as president, the energy giant is not what it used to be. Despite the Kremlin's best efforts, the Russian gas market has recently started to liberalize. In the coming years, Gazprom will not be able to rely on high profit margins to stay at the top of the energy business. And for his part, Putin will not be able to rely on Gazprom as a source of power. 

Gazprom was born out of the Soviet Ministry of Oil and Gas in 1989. Over the next few years, Viktor Chernomyrdin, its first head (and later Prime Minister of Russia), quietly watched as the company was gutted during a wave of privatizations. Meanwhile, a 45-year-old Putin was busy defending his Ph.D. thesis, "The Strategic Planning of Regional Resources Under the Formation of Market Relations," at the St. Petersburg Mining Institute. In it, he argued that Russian economic success would depend on creating national energy champions. 

And that is exactly what he tried to do when he came to power in 2000. Soon after he was sworn in, he appointed his political ally Dmitri Medvedev as chairman of Gazprom's board of directors. The following year, he installed Alexei Miller as chairman of the firm's management committee. Miller, an international affairs adviser, was later criticized for his utter lack of knowledge of Russia's oil and gas industry. No matter: By switching out the leadership, Putin graduated his "St. Petersburg clan" -- the group of associates who had surrounded him during his years working for St. Petersburg Mayor Anatoly Sobchak -- to the prime time.

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