PROFILE: RUSSIA'S NEW ENERGY CZAR

Russia's new prime minister is moving quickly to revitalize his nation's ailing petroleum industry. Russian and foreign observers are wary concerning the direction or even the continuation of radical reforms under Viktor Chernomyrdin, the oil-man who now directs Russia's energy policy.

Feb. 2, 1993

9 min read

Russia's new prime minister is moving quickly to revitalize his nation's ailing petroleum industry.

Russian and foreign observers are wary concerning the direction or even the continuation of radical reforms under Viktor Chernomyrdin, the oil-man who now directs Russia's energy policy.

Shortly after taking office late last year, Chernomyrdin called for fast action to provide Russia's investment starved fuel and energy sector an added 200 billion rubles (close to $500 million) in loans at reduced interest rates. Most of the money would be invested in the oil industry, where production has declined sharply since 1988, and in accelerated development of Russia's vast gas reserves.

Last year, Russia's crude and condensate production flow dropped about 15% to 7.7-7.8 million b/d, the lowest since 1974. Data for January November 1992 show Russia last year may have recorded its first drop in annual gas flow since the end of World War II.

CHERNOMYRDIN'S GOALS

Formerly Russia's minister for fuel and energy and before that the head of the state owned Gazprom monopoly, Chernomyrdin soon after becoming prime minister declared the nation must again place emphasis on bolstering production in heavy industry, including petroleum, rather than encouraging consumerism.

Shortly before he was named Russia's prime minister, Chernomyrdin declared that during the next 5 years Russia must carry out comprehensive modernization of the oil industry. He said he wanted to attract foreign investment in his nation's fuel and energy sector despite his determination to make greater use of domestic capabilities.

In obvious criticism of his predecessor, Yegor Gaidar, Chernomyrdin proclaimed, "We are going to give priority to basic industries. With its great wealth and powerful infrastructure, our country must not turn into a nation of shopkeepers.

"I am for reform - even for deepening reform - but without impoverishing the people."

Chernomyrdin is the first petroleum industry specialist to attain such high political office either in the former Soviet Union or present Russian government. In contrast to Gaidar, he is a tough administrator, not a theoretical economist.

Besides endorsing slower progress toward a market economy, Chernomyrdin is apparently much less prowestern than Gaidar.

AUTHORITARIAN, NATIONALIST

A technocrat with wide practical experience in the petroleum industry, the new prime minister is expected to be more authoritarian, demand greater discipline and accountability from subordinates, abandon Gaidar's laissez faire attitude, and, to a still unknown degree, shift back to a centralized administrative-command structure of past Soviet regimes.

Chernomyrdin is a strong nationalist who favors maximum use of Russia's resources to resuscitate the nation's chaotic and deteriorating industries, especially oil and gas.

He appears much more willing to pump more money into capital projects than Gaidar, who feared that such action would further accelerate the nation's enormous rate of inflation.

While recognizing the need to cooperate with the West when it is clearly to Russia's advantage, Chernomyrdin has shown he is a hard-nosed negotiator with foreigners. Even Russia's prowestern reformers who supported

Gaidar's "shock treatment" approach to solving domestic economic ills praised Chernomyrdin for his firmness in negotiating with German's Ruhrgas AG on marketing Russian gas.

THE PRESS'S VIEW

Moscow's Izvestia newspaper had obvious reservations about Chernomyrdin's avowed commitment to continue Gaidar's reformist policies. Meanwhile, the still hard-line Communist newspaper Pravda hailed Chernomyrdin's appointment as "a victory for common sense."

Moscow News, also prowestern and promarket, declared, "President Yeltsin's choice of Chernomyrdin as head of government has puzzled many people. Why did he make his last minute decision to renounce Gaidar, for whom he had been battling so fiercely?

"The appointment of Chernomyrdin as premier at least temporarily meets the public's main demands - that things be put in order' and taking control of them.

"Chernomyrdin conforms to the image of an experienced industrialist, one who is seen as responsible for some unquestionable achievements in the nation's gas industry, one of the few branches of the economy that remains afloat.

"His oil and gas background is also appealing because that sector is regarded as the only locomotive capable of pulling the Russian economy through its present difficulties. His appointment may help prevent strike action in the petroleum industry, which could be particularly dangerous."

But Moscow News also expressed concern over Chernomyrdin's remarks about giving priority to basic industry and deemphasizing consumerism.

"Taken literally, these statements mean our economy is in for rising inflation, which makes the new premier's intentions to stop the economic slump as illusory as his predecessor's promises to haft inflation. Nor does Chernomyrdin's desire to rely on basic industries promise any restructuring of the economy.

"Indeed, we have been relying on precisely these industries for the last 70-odd years, and no amount of priority has prevented them from falling into ultimate disrepair.

"This country's economy seems doomed to stay within the vicious circle of eternal vacillation between emphasis on 'basic' and 'consumer' industries, between recession and inflation, if we go on believing that a nation of shopkeepers is worse than a nation of industrial giants.

"Basic industries should not be destroyed, but without shopkeepers we can't feed the nation. And a hungry nation tends to turn into Luddites destroying basic industries."

MANAGEMENT LADDER

Chernomyrdin owes his rapid political ascendancy to his work in the Communist party's apparatus. He was a functionary in the party's Central Committee from 1978 through 1982. While serving as deputy minister and later minister of the former U.S.S.R.'s gas industry, his efforts were directed mainly toward increasing gas production in western Siberia.

But during his term as head of the gas industry, he also was in charge of the Soviet Union's entire offshore petroleum exploration and development program.

The Moscow business weekly Commersant said Chernomyrdin's appointment as Russian prime minister drew a cautious response from the nation's business community.

But it observed that this attitude may be undeserved because with Chernomyrdin as prime minister Russia's government will for the first time be led by a top manager of what has become a transational corporation.

"Chernomyrdin's rise in business was a typical dream come true for the post-Communist generation of entrepreneurs," Commersant said. "As founder of Gazprom, one of the world's largest gas firms, Chernomyrdin belongs to Russia's business hall of fame - a Rockefeller of sorts.

"The empire he created will no doubt benefit from his new appointment, as well as the so-called basic industries linked to the gas sector. Established in 1989, Gazprom monopolized 95% of the former U.S.S.R.'s natural -as and all of the sulfur produced in the nation.

"It took control of the network of pipelines through which the Soviet republics exported gas. During the last 3 years, Gazprom has tripled its capital."

Commersant said the monopolistic privileges Moscow granted Gazprom undoubtedly played a significant role in its acquisition of power and influence.

"It now exclusively controls all state orders to gas producers for exports under intergovernmental agreements. The corporation pockets 45% of the hard currency earned from exports and does not pay duties.

"In addition-and this is unprecedented-money channeled into its 'stabilization fund' is not taxed.

"In mid-1992, when Chernomyrdin replaced Vladimir Lopukhin as fuel and energy minister, the Russian government promised to borrow $8.7 billion in the West for Gazprom's development."

GAZPROM'S HOLDINGS

At present, Commersant said, Gazprom controls at least nine exchanges of various types, eight joint ventures with leading western firms, seven Russian commercial banks, one foreign bank, a banking group, two interbank settlement centers, and two companies in Liechtenstein.

It has partnership arrangements with France's Credit Lyonnais and the European Bank for Reconstruction and Development.

Commersant said Gazprom, under Chernomyrdin's expansionist leadership, founded the Imperial Bank. This bank bought from the Central Bank of Russia the stock of East-West United Bank, a former Soviet overseas bank based in Luxembourg.

East-West United Bank, Commersant explained, is used to pay for all the gas and much of the oil exported to Europe by Russia's Rosneftegaz concern. Thus Rosneftegaz has in effect come under Gazprom's auditing control.

"The fate of hard currency obtained by Russian exporters had worried Moscow officials for a long time, especially after it allowed Gazprom to leave 38% of its foreign currency abroad. Last May, shortly after Gazprom received this privilege, Gaidar ordered an investigation into the firm's hard currency accounts and payments.

"Just 10 days later, fuel and energy minister Lopukhin was fired and replaced by Chernomyrdin, who was promoted to deputy prime minister. The case regarding Gazprom hard currency dealings was then shelved."

Commersant cited these deals as indicating the scope of Gazprom's farflung business activities under Chernomyrdin's direction:

Jointly with Freeport-McMoRan, a U.S. firm, Gazprom has set up the Gas-Agro-Freeport joint venture specializing in exporting the sulfur over which Gazprom has a production monopoly.
Gazprom is now eyeing transnational investment projects such as development of the Barents Sea's supergiant gas/condensate field. The project will need about $20 billion in investment and is expected to generate $4 billion/year in gas export profits.
Saudi Arabia and Kuwait reportedly have agreed to grant Gazprom $8.5 billion, with Japan providing an additional $700 million.
Gazprom is cooperating with Wintershall AG on jointly financing construction of gas pipelines in Germany. Gazprom will own 35% of the new German pipelines and is expected to invest more than $1 billion in their construction.
Gazprom owns 5% of the stock of the largest gas distribution firm in the former East Germany. These investments will help Gazprom increase its profits from gas exports to Germany by at least 70%.
Imperial Bank, established by Gazprom, now plans to buy stock of the German based Ost-West Handels bank from Tokobank. The stock formerly belonged to the Central Bank of Russia.

This means Gazprom will have property, a trading firm, and a bank in Germany, the largest buyer of Russian natural gas.