The Empire In Shadows

It's not everyday that American presidential candidates wade into the murk of Russian corporate politics. So it wasn't terribly surprising that George W. Bush Jr. got it wrong during the debate last week, when he suggested that loans from the International Monetary Fund wound up in the pocket of former prime minister Viktor Chernomyrdin. In fact, the recent allegation that Russian officials pocketed a $4.8 billion IMF loan date from the summer of 1998, when Chernomyrdin had already left office. The stories that do involve Chernomyrdin are a good deal more juicy. He has denied charges leveled by the CIA, among others, that he amassed a dubious fortune from the vast business empire he once ran: Gazprom, the natural-gas monopoly that figures prominently in so many recent tales of intrigue out of Russia.

Gazprom remains an enduring symbol of what's wrong with the Russian economy. In Soviet times, Gazprom was a vast bureaucratic monopoly, riddled with bottlenecks and badly mismanaging the world's largest reserves of natural gas. Under the name of "privatization" in the mid-1990s, Gazprom shares fell into the hands of former communist bosses, including Chernomyrdin, who would grow conspicuously wealthy at its helm. Now the government of President Vladimir Putin has vowed to make Gazprom a beacon of economic reform. Yet the Gazprom empire keeps popping up in more ambiguous roles: as a tool used by Putin against his enemies in the media, as the corporate partner of a shadowy firm that has come out of nowhere to become the second-largest empire in the Russian gas fields, as an epicenter of high-level political power struggles. At best, Gazprom is not yet part of the solution for Russia. "Making Gazprom more efficient isn't just a gas problem," says Jonathan Stern of London's Royal Institute of International Studies. "It's an economic-reform problem."

How Gazprom became such a pivotal force isn't very hard to explain. Russia sits on one third of the world's natural-gas reserves, and Gazprom accounts for 93 percent of the gas produced in Russia. Sales of nearly $12 billion accounted for roughly 7 percent of Russia's GDP last year. The company's 298,000 employees and 150,000-kilometer pipeline network funnel what the Russians lovingly call "blue gold" to customers throughout the former Soviet Union, and beyond. The nations of Western and Central Europe get 30 percent of their natural gas from Russia. As a result, Gazprom not only fuels most of Russian industry and pays 40 percent of government tax revenues, it is also Russia's single largest source of hard currency. "The Russian economy is Gazprom to a large extent," says analyst Marina Dracheva of the Energy Intelligence Group in Moscow.

That clout has also made Gazprom a major player in Russian foreign policy, particularly in the global duels for influence in South and Central Asia. Whenever Putin travels abroad--during his recent visit to India, for example--he's invariably shadowed by Gazprom CEO Rem Vyakhirev. In recent years Gazprom has beat out U.S. competitors by sealing deals to supply gas to Turkey through a pipeline under the Black Sea. And lately the company is even considering plans to build a huge new pipeline to India via Afghanistan and Pakistan, which would give it far greater weight in the region's affairs.

Like most "natural monopolies" in the Soviet Union, Gazprom was controlled exclusively by the state for many decades. Then in 1994 Gazprom bosses pushed through a plan that transferred most company shares to private hands, which in practice meant their own personal control. Foremost among those bosses were Vyakhirev and Chernomyrdin, who officially left the company helm when he became prime minister in 1992--but maintained close ties to Gazprom. The government was left with a maximum stake of 40 percent (today it holds 38.3 percent) and even most of that stake was placed in a trust under Vyakhirev's control. Small wonder both he and Chernomyrdin are reputed to be among the wealthiest men in Russia. (A 1996 CIA memorandum assessed Chernomyrdin's fortune at $5 billion.) So there are few outside Gazprom who believe that privatization achieved reform. "The fact that the state only has 40 percent is a scandal in itself," says one Moscow petroleum-industry insider. "The theft has already been done."

Under the gas-industry bosses, known as gazoviki, Gazprom gained a reputation for secrecy that was notable even by Russian standards. Until 1995 the company didn't pay taxes to the Russian government. When it finally started ponying up, the bill was usually the product of behind-the-scenes negotiations with the authorities. The talks could not have been easy, for Gazprom's books had been fudged for years. The company first adopted international accounting standards only three years ago, and it still uses Russian methods as well. In the first half of 1999, the international books exposed a $2.04 billion loss while the Russian ones showed a $1.05 billion profit.

Not surprisingly, Putin chose Gazprom as an early target of his reform campaign. This summer the government beefed up its control over Gazprom, in part by installing a key Putin aide, Dmitry Medvedev, as the new board chairman. His first challenge was collecting the bills. Today as in Soviet times, Gazprom is politically obliged to keep supplying customers even when they can't pay. In 1999, by its own optimistic estimate, Gazprom received only 40 percent of its payments in cash. And deputy chairman Sergei Dubinin, a former director of the Russian Central Bank, figures it would be a success to raise that to 60 percent next year.

Cracking down on the deadbeats is seen as a dangerous idea. What Gazprom does not collect in cash gets paid in barter or not at all. Some of the worst debtors are former Soviet republics. Earlier this year Ukrainian President Leonid Kuchma publicly admitted that his country was stealing gas from the pipeline because it wasn't in a position to pay. And the Russian economy is dependent on artificially low Gazprom prices. "You could cut off the nonpayers, and you'd have an economic catastrophe," says analyst Doug Rohlfs of the Energy Intelligence Group. "You'd have domestic production falling, whole cities blacked out, whole industries threatened."

Everywhere in the post-Soviet economy, the barter trade is an invitation to unorthodox business deals. Some of the oddest involve an eight-year-old outfit called Itera, which started out brokering obscure barter trades for Gazprom and rose to become the second-biggest gas company in Russia, producing 60.5 billion cubic meters last year. Critics claim that Itera's success is traceable to the secret holdings of some Gazprom managers, who allegedly have granted Itera such favors as privileged access to pipelines and gas fields. Both Itera and Gazprom have denied those charges, but Putin and his allies realize that hardly settles the matter.

Itera was cloaked in silence until recently, when officials started inviting reporters to its lavish glass-and-marble skyscraper in Moscow. Press reps passed out glossy brochures--but could not answer simple questions about sales or profits, or how Itera grew so fast. In written response to questions from NEWSWEEK, Gazprom chairman Medvedev vows that "we should thoroughly study all criticisms that have been directed at Itera."

Meanwhile Gazprom faces its own critics, who say it is a tool of the government. Back in 1996, Gazprom invested heavily in Media Most, which counts Itogi magazine, published in association with NEWSWEEK, among many holdings. At the time, Boris Yeltsin desperately needed media help in his election campaign, and businessmen were glad to oblige. Lately, after Media Most outlets started criticizing Putin, Gazprom started to demand its money back, and authorities are now accusing Media Most founder Vladimir Gusinsky of moving assets offshore to put them out of reach. Even some Gazprom investors are concerned about the appearance of political interference. "Gazprom should be dealing with gas, and not with political activities," says Boris Fyodorov, a shareholder representative on the Gazprom board.

The twilight of the gazoviki may not be far off. Some radical reformers in Putin's government would like to see Gazprom broken up. Many shareholders are increasingly restless at the company's failure to live up to its potential. Western investors are lobbying to ease limits on foreign ownership. While Moscow remains reluctant to lose control of its "blue gold", the clock is running. Gazprom produces less and less each year, due to rusting pipes and leaky wells. By one estimate, the company needs $50 billion over the next decade just to halt the decay. Putin has already prepared the departure of Vyakhirev when his contract ends next year, chipping away at the old guard. But so far, there's no credible successor, no new blood to make Gazprom a beacon of reform.