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Cablegate: Sechin As Energy Czar: More Powerful, More Vulnerable

VZCZCXRO4853
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2802/01 2611420
ZNY CCCCC ZZH
P 171420Z SEP 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0027
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY

C O N F I D E N T I A L MOSCOW 002802

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF

E.O. 12958: DECL: 08/08/2018
TAGS: EPET ENRG ECON PREL PINR RS
SUBJECT: SECHIN AS ENERGY CZAR: MORE POWERFUL, MORE VULNERABLE

REF: A. MOSCOW 2759 B. MOSCOW 2183 C. MOSCOW 1385

Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)

SUMMARY

1. (C) In ref A, we examined questions about Deputy Prime Minister Sechin's career and reputation and discussed whether his current, more public duties, would bring him into better focus. In this cable, we look at those new duties and the possible effects Sechin may have on Russia's all-important energy sector. Sechin has long been a force in the energy sector, but despite his chairmanship of Russia's largest oil company, Rosneft, he has largely operated behind the scenes. His new duties enhance Sechin's influence but also make it more visible and hence subject to greater scrutiny. Sechin has recently given support for important energy sector reforms. Of particular note are his efforts to force Gazprom to allow third-party access to its pipeline network. Echoing the debate about Sechin's political role, some observers see his embrace of reform as being driven by Russia's need for a more efficient and productive energy sector. However, other observers see Sechin as driven more by self-interest and animosity toward Gazprom. Regardless of his motivations, Sechin is the first senior Russian official to take on Gazprom publicly and this fight could either demonstrate the limits of Sechin's power or of Gazprom's influence over GOR policies. End summary.

SAINT OR SINNER

2. (C) Igor Sechin has played an important role in shaping and carrying out GOR energy policies since the beginning of Prime Minister Putin's first presidential administration. However, as deputy head of Putin's Presidential Administration, few outside the inner circle knew about, let alone were able to assess, his activities. During much of Putin's first term, Sechin was so shadowy that it was joked he may not actually exist but rather was a sort of urban myth, a bogeyman, invented by the Kremlin to instill fear.

3. (C) Adding to this malevolent aura, most observers believe it was Sechin who engineered Yukos' demise, a signal turning point in Putin's approach to governance. These same observers also believe Sechin has orchestrated the hard-core statist and silovik opposition to foreign investment in strategic sectors, including especially oil and gas. Sechin is also widely believed to have directed oil exports towards Kremlin-favored traders like Gunvor and to have ordered oil traders to cut-off certain customers. Many also believe he was behind the downfall of Russneft's leadership and the more recent attacks on Mechel and TNK-BP. In all these reported endeavors, Sechin faced no public scrutiny or accountability.

4. (C) Where he has had a semi-public role, as Rosneft's chairman, other observers claim Sechin has performed more openly and more admirably. In that role, he unquestionably transformed Russia's most dismal oil company into a globally competitive state champion (albeit with Yukos' assets). He also protected Rosneft from its putative merger with Gazprom in apparent contradiction to Putin's desires. Sechin also defied Putin in choosing to partner financially with a Chinese company when their funds were needed for Rosneft's expansion even though China had been consistently rebuffed by the Kremlin during years of attempted purchases of upstream assets. Another example of Sechin's enlightened management of Rosneft that close industry observers, such as RenCap's Deputy Chairman Bob Foresman, point to was hiring Peter O'Brien, an Amcit, as Rosneft's CFO. O'Brien, with Sechin's backing has since instituted international accounting standards in the company. Sechin is also credited with listening to minority shareholders in the company; a relatively rare occurrence in corporate Russia.

NEW POWERS

5. (C) As Deputy Premier in charge of energy and industrial policy and head of the government's energy policy commission, Sechin's powers over the country's most important economic sector have been formalized. He has been given broad oversight over the energy sector, the foundation of strong economic growth and the source of the revenue that has strengthened the GOR both domestically and internationally. As a member of the new GOR commission to oversee foreign investment in strategic sectors, he also has an important voice in shaping Russia's investment climate.

6. (C) His direct influence over the energy sector is not lost on industry players. Various contacts have told us they see Sechin, who continues to be Rosneft Chairman in addition to his "day job," as the ultimate decision maker on key energy issues. Shell Russia Vice President Alf D'Souza told us recently, "there's no doubt, Sechin's in charge" when it comes to energy. Cambridge Energy Research Associates' Russia specialist John Webb agreed, telling us recently that Sechin "clearly has the lead on energy now," while acknowledging that Putin himself is also playing a more hands-on role. Chevron's lead executive XXXXXXXXXXXX also told us Sechin is the key player on energy issues, noting that it will be Sechin who decides Russia's position on CPC expansion (ref B). XXXXXXXXXXXX said he has heard that most major energy sector reforms and projects are on hold while Sechin and his team mull over Russia's long-term energy strategy.

MOTIVATED TO DELIVER REFORMS...

7. (C) That long-term strategy is both a challenge and an opportunity for Sechin. Excessive state control and interference have hobbled Russia's oil and gas sector. Upstream investments in particular have languished even as production has stagnated and threatens to fall. With prices softening globally, Russia can ill afford to see production and exports drop. Sechin's new job and his new responsibilities give him the chance to reverse this decline through much needed reforms.

8. (C) To date, Sechin has been out in front on some needed energy sector reforms. He has pushed for lower oil sector taxes (ref C) and championed incentives for green-field development. With Gazprom's gas production stagnating and Russia increasingly needing to import gas from Central Asia to meet its commitments, it is Sechin who is leading the charge to spur gas production by independents and oil companies by securing third-party access (TPA) to Gazprom's pipelines. Putin has been very public about the need to move Russia toward a more value-added economy, and in his sector Sechin is working towards more refining and oil product exports and correspondingly less crude exports.

9. (C) The failure to reform the sector could expose Sechin to a level of public criticism from which he has been previously immune. The Carnegie Moscow Center's lead senior energy researcher, Nina Poussakova, told us recently that while Sechin "was and is behind every conflict over major assets," he will now be held more accountable for the results of these conflicts. Political Analyst Dmitri Oreshkin told us recently that Sechin would have to become more of a politician, balancing competing interests, if he is to succeed. XXXXXXXXXXXX told us that Sechin's public exposure could result in his fall from power within a year or two. "Leaders sometimes do stupid things in public," he told us, adding he believes that Sechin is in over his head -- "the long-term game is not Sechin's strong suit."

OR TO STOP "THE GAZPROM STEAMROLLER"

10. (C) In assessing Sechin's potential as a reformer, many observers question his motives. They point especially to Sechin's long rivalry with Gazprom as the real explanation for his support of third-party access to Gazprom's pipelines. Although TPA is justified by economic considerations, in this view, Sechin is not driven by a sense of duty to improve the sector but by a desire to contain Gazprom and enhance his company's fortunes. Adding another layer to this is Sechin's well-known personal animosity toward Gazprom's leadership, especially its Chairman Alexey Miller.

11. (C) Many contacts with whom we spoke have noted Sechin's interest in containing Gazprom. XXXXXXXXXXXX told us he believes one of Sechin's goals as Deputy Premier is "to stop the Gazprom steamroller from taking over the entire industry," and that TPA is just one tactic. Foresman told us Sechin "hates Miller," but more importantly sees Gazprom and its leadership as threats to, rather than the source of, Russia's future prosperity.

12. (C) XXXXXXXXXXXX, however, told us he is convinced "one hundred percent that Sechin will lose this battle." Despite Oreshkin's suggestion that Sechin was put in the job because of his ability to "get things done" by the sheer power of his orders, XXXXXXXXXXXX discounts this ability in the case of TPA. According to Milov, Putin built up Gazprom as a system "immune to influence." He predicted a cadre of Gazprom officials will say TPA is not possible, citing technical and other reasons, and thus killing the idea.

COMMENT

13. (C) As is the case with his political role, the greater exposure that Sechin faces in his new duties may bring into greater focus his role in the energy sector. In that regard, Sechin's initial forays into energy sector reform efforts are laudable and necessary, and while his motivations may be suspect, reforming the sector probably requires tackling Gazprom's inefficient monopolistic practices. Entrenched state-owned monoliths such as Gazprom and Transneft are inconsistent with the dynamism needed to boost the productivity and efficiency of Russia's oil and gas sector. Presumably, Sechin has backing from Putin in this regard. (It would be the height of folly for him to tackle Gazprom without it.) Putin may have realized that Russia's energy sector is beginning to stumble and he may believe that Sechin is the man to get it back on track. Sechin may fail not because he lacks power, competency, or support but rather because those entrenched interests, especially Gazprom, are simply too powerful to reform from the outside and too corrupt to reform form within. If he does fail, it would mark the limits of Sechin's power and influence within the GOR. End Comment.
BEYRLE

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