The Legacy of Gazprom’s Image Problem

RFE/RL journalist Roman Kupchinsky, who also testified before the Helsinki Commission on Russian energy imperialism earlier this summer, has an interesting article today giving a short history of how Gazprom became a “state within a state” – the underpinnings of their consistent reputation problems.



Gazprom’s image problems date back to Viktor Chernomyrdin’s leadership of the company following the collapse of the Soviet Union. His close relationship with President Boris Yeltsin was instrumental in getting the company special status with generous tax benefits, and set the groundwork for making Gazprom a “state within a state.” Under Chernomyrdin’s leadership a corporate culture that rewarded opaqueness set in, spawning Gazprom’s reputation as a company that operated outside the law. After Chernomyrdin was succeeded by Rem Viakherev, Gazprom was implicated in a number of corruption schemes. In one, the gas giant was accused of involving its fully-owned insurance company, Sogaz, in insurance scams that served to enrich Gazprom’s top management. Western reinsurance companies largely bore the financial losses from these schemes. Gazprom’s most controversial era began in 2001, with the arrival of Aleksei Miller as Russian President Vladimir Putin’s hand-picked CEO of the company. A colleague of Putin’s in the St. Petersburg governor’s office during Yeltsin’s presidency, Miller was in good standing with the future president and with other city officials who would soon reach high positions in the Kremlin. Among them was Valery Golubev, a former KGB agent who recently became the deputy head of Gazprom’s management committee. Following Miller’s appointment, Gazprom executives conceived a new scheme to transport Turkmen gas to Ukraine. With Miller’s and Putin’s approval, they created a Budapest-based company named Eural Trans Gas, which began acting as the middleman for Turkmen gas exports to Ukraine. The opaque company soon became the subject of a number of investigative reports in the Western media. The negative publicity Eural Trans Gas generated forced Putin and then-Ukrainian President Leonid Kuchma to dissolve Eural in July 2004 and replace it with a similar company called RosUkrEnergo headquartered in Switzerland. Gazprom later came under severe criticism for its handling of a gas-pricing dispute with Ukraine in January 2006 when, with great fanfare, Gazprom briefly shut down the pipeline carrying supplies to Ukraine — and inadvertently to Europe. Many in the West saw Gazprom acting at the behest of the Kremlin, which, many claimed, was taking its revenge on the newly elected, pro-Western Ukrainian President Viktor Yushchenko and his Orange Coalition. During the Ukrainian election campaign of 2005 Putin had lobbied vigorously in support of pro-Moscow Viktor Yanukovych’s bid for the presidency. This raised suspicions that by pressuring Yushchenko on gas prices in January 2006, Putin was underscoring the vital impact Russia has on Ukraine’s economy. Many in Kyiv saw Gazprom and Putin’s actions as blackmail. Western observers became alarmed when Gazprom insisted that Ukraine give up its sovereign right to buy gas directly from Turkmenistan and do so only through the services of the mysterious RosUkrEnergo, controlled by Gazprom. However, the worst publicity for Gazprom was generated by a series of questionable deals presided over by the Kremlin — the apparent goal of which was to bring under its direct control most of the country’s oil and gas industry. Beginning with the questionable license revisions for Western oil companies developing the Sakhalin 1 project and followed by the ouster of BP/TNK from the Kovykta gas field, Gazprom benefited enormously.