State monopoly

When it comes to energy security, there is a fundamental lack of a common view between Russia and the European Union. The Russian President, Vladimir Putin, has several times stated his wish for the Russian state to dominate the energy sector. President Putin also never made a secret of his views on energy security. For him, energy security is the business of states and the appropriate state organs, not privately owned corporations.46 But the fact that large energy companies are mainly owned by the government is not a trend we find in Russia alone. According to The Economist, the national oil companies owned or controlled by the governments of oil-rich countries, which manage over 90% of the world's oil, depending on how you count. Of the 20 biggest oil firms, in terms of reserves of oil and gas, 16 are national oil companies.


Since Putin’s inauguration, state control over the sector has been gradually restored, Yeltsin’s people have been replaced by his own loyal personnel in the important positions in state controlled energy corporations. The starting point for the modern oil sector in Russia was 1992 when existing producers and refineries were united in Rosneftegas, an association evolving from the Ministry of Oil Industry. By presidential decree, the members of the association were transformed into joint stock companies. This was one of the first turning points in the history of Russian Since then, things have changed. The first restructuring of the Russian oil industry after 1991 created ten vertically integrated companies: Lukoil, Yukos, Surgutneftegaz, TNK, Tatneft, Sibneft, Slavneft, Rosneft, Bashneft and Sidanco. Transneft is in a way used as a puppet in the hands of the Russian government, since the government cannot have that much influence over smaller private companies. Since state-run Transneft is the company that takes care of crude oil transport by pipeline (while Transnefteprodukt operates pipeline transport for petroleum products) we can say that Kremlin controls the oil tap.
When President Putin won a second term in office in March 2004 he moved fast to end any speculation that private investors might be permitted to own independent pipelines. Both the President and his new Prime Minister, Mikhail Fradkov, have stressed that state control over the nation’s oil and natural gas pipelines will remain a cornerstone of government energy policy and be a key tool for containing the economic and political influence of Russia’s powerful and rich private oil and gas producers for years to come. Russia’s state Transneft pipeline monopoly controls the longest crude oil pipeline system in the world. Its sprawling network, which serves the entire Russian Federation, stretches over 48,700 kilometers of often extremely inhospitable terrain and carries over 90% of Russian domestic oil output. The network is linked to pipeline systems in almost 20 countries in the Caspian, the Baltics and Europe.
In contrast to the oil sector, the gas sector is state-run by Gazprom and its subsidiaries. No valid competitors exist, as small independent producers must cooperate with Gazprom to obtain access to the pipeline transport. Gazprom controls almost 90 per cent of Russia’s gas and is one of the largest gas companies in the world. For Russia it is not enough to be just an exporter of raw materials – “the state must assist in the formation of large, vertically integrated financial-industrial companies, established in a fusion of the state and private sectors. One such company is Gazprom, the Russian natural gas export monopoly that emerged out of the Soviet Ministry of the Gas Industry”

For the European Union a topic of concern in the gas sector should be Putin’s firm stand, reflected in his word in 2003, declaring that: “The gas pipeline system is the creation of the Soviet Union. We intend to retain state control over the gas transportation system and over Gazprom. We will not divide Gazprom. And the European Commission should not have any illusions. In the gas sector, they will have to deal with the state.” During the first decade of Gazprom the state owned up to 38.7%, but until 2005 as part of a major restructuring scheme increased its ownership share to 51%. According to the most recent data found on the official site of Gazprom, the state now owns 50.002% of the shares. Gazprom is the crown jewel of Putin’s emerging energy empire and accordingly the Russian president has taken great care to see that it remains firmly under his control. Most analysts agree that Gazprom is a largely mismanaged, rigid and typical Soviet-style company. Gazprom’s structure, lack of transparency, state-connections, monopoly position and its actions on the market are widely criticised. One example is Gazprom’s influence over third-party access to the pipeline system. Critics claim that Gazprom has a discriminatory policy and states that “in short, Gazprom at present has both the means and the motive to abuse its position”.
Martha Brill Olcott claims that Putin does not believe that privatisation is what is best for diversifying Russia’s economy and generating revenue. Putin does not rely on global forces to provide economic opportunities. A premature globalisation means hardship for Russian citizens in his opinion. Olcott also notes that Putin blames private ownership for the collapse of the sector (presumably after 1991). He dislikes the Western management style. In Russia in some ways it is better not to be a private company, since state owned companies have extra-favourable opportunities to ensure their interests on both federal and local government levels, for instance, with regard to receiving tax advantages. State companies receive stronger control over the activities especially dealing with foreign partners. The government can also assist companies in receiving loans (for example, not without Kremlin’s help the German Government issued guarantees for the Gazprom loan to build NEGP). According to The Economist, the easiest way to improve state oil firms' performance would be to privatise them. It suggests, that the authorities, no longer torn between nurturing their national oil companies and milking them for all they are worth, could concentrate on maximising their oil revenue through taxes and royalties. The less bureaucrats interfere, after all, the more money their companies will generate for them to spend. 

The Yukos affair started with the arrest of Mikhail Khodorkovsky the CEO of Yukos and Platon Lebedev of the Gibraltar-based group Menatep, which owns 61.01 per cent of Yukos trough the companies Yukos Universal (Isle of Man) and its subsidiary Hulley Enterprises (Cyprus). This happened between June and October 2003. The main motivation of the Russian government behind this affair was Putin’s struggle against the oligarchs who grew powerful under the reign of Yeltsin. Putin had no need for support from the oligarchs, but instead had to ensure that they would not oppose the president, which they surely had the financial means to do. In the year 2000, the economic power of Russia’s 25 richest men exceeded that of the Russian state.  From the energy perspective, the primary target was Michael Khodorkovsky, who headed Yukos. Khodorkovsky became the exposed target of Putin because he became too intermingled in the political life. In July 2000 Putin indicated that if the formerly emerged oligarchs wanted to keep their assets they simply had to stay out of politics. Khodorkovsky ended up in jail and almost all the Yukos assets ended up in the state’s hands. The arrest of Khodorkovsky and other Yukos shareholders for tax evasion and other charges, and the subsequent business crisis within the Yukos empire will likely persuade other Russian business magnates to think twice before confronting the Kremlin head on for some time. All the signs are that the Yukos scandal has hardened government determination to exert state control over the oil sector and to seek regulatory means to drain capital away from over powerful oil oligarchs