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Cablegate: Gazprom Official Describes the Company As a Socialist Rent-Seeking Monopolist

VZCZCXRO6521
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2816/01 2630748
ZNY CCCCC ZZH
P 190748Z SEP 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 0052
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 SECTION 01 OF 02 MOSCOW 002816

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: 09/15/2018
TAGS: EPET ENRG ECON PREL PINR RS
SUBJECT: GAZPROM OFFICIAL DESCRIBES THE COMPANY AS A SOCIALIST RENT-SEEKING MONOPOLIST

REF: MOSCOW 2802

Classified By: Econ MC Eric T. Schultz for Reasons 1.4 (b/d)

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SUMMARY
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1. (C) Gazprom's Director of Foreign Relations, Ivan Zolotov,
told us September 12 that the company's top three priorities
are to: fulfill domestic gas demand, fulfill "social
obligations," and to maximize control over domestic and
international oil and gas resources. Zolotov expressed
confidence that control of resources would eventually restore
the $200 billion in shareholder value losses the company has
recently sustained. He said Gazprom is steadfastly against
other Russian companies competing on gas exports to Europe,
which could lead to lower prices. Zolotov was unapologetic
about the difficulty in meeting with its senior officials,
noting that most of them were ill-suited to interacting with
foreign officials but that the company had no intention of
hiring people for that purpose. Finally, he expressed
optimism that there would be no difficulties this winter with
Ukraine. End summary.

-------------------
THE MINISTRY OF GAS
-------------------

2. (C) During a lengthy meeting at Gazprom's elaborate
headquarters, a city within a city as Zolotov described it,
we asked Gazprom's main interlocutor with Western Embassies
and officials to identify Gazprom's top two or three
corporate priorities. In an unusually frank response,
Zolotov said Gazprom had two basic functions: to fulfill the
gas needs of domestic industrial and residential consumers,
and to fulfill its "social obligations," which include a
variety of, in effect, charitable projects throughout the
country.

3. (C) When we suggested that most major global companies in
the West would likely have cited maximizing shareholder value
or market share as corporate goals, Zolotov added a third
priority -- to maximize control over global energy resources.
He suggested that this control over resources is on par with
maximizing shareholder value, in that it raises the value of
a company's asset base, which is the key to its long-term
profitability.

4. (C) Zolotov acknowledged that the steep slide in the
Russian stock markets since May, and especially since August
7, had taken a toll on Gazprom's shareholder value. The
company was valued at more than $380 billion at its peak a
few months ago and is now worth less than $150 billion -- a
stunning loss of over $200 billion of the company's market
capitalization. Zolotov expressed confidence that the
company's control of gas and oil reserves would ultimately
restore that lost value.

-----------------------------
MONOPOLY PROTECTS HIGH PRICES
-----------------------------

5. (C) In describing its priorities, Zolotov seemed to
appreciate that Gazprom is not a normal company, noting that
it had not yet completed the transition from its predecessor,
the Ministry of Gas. He was equally frank is discussing how
Gazprom's monopoly powers work in practice. For instance,
when asked about recent efforts (ref A) to force Gazprom to
allow third-party access (TPA) to its pipelines, Zolotov said
that access in itself is not a problem. Indeed, he suggested
that in 15-20 years, some 30% of gas production in Russia
will come from independents.

6. (C) Zolotov added, however, that Gazprom draws a redline
against sharing access, through monetary compensation or
physical connection, to export markets. He explained that
Gazprom's export monopoly is necessary to protect the high
prices charged to European consumers. He said TPA could
never apply to exports "because we can't let Russian gas
compete against Russian gas; that would cause prices in
Europe to drop."

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MOSCOW 00002816 002 of 002


ONLY TWO INTERLOCUTORS; AND THEY'RE BUSY
----------------------------------------

7. (C) Zolotov also touched on the reason it is so difficult
to get meetings with the company for high-level visitors.
According to Zolotov, in a company with over 400,000
employees, only two -- CEO Alexey Miller, Deputy CEO
Alexander Medvedev -- would be appropriate for such meetings.
He said few others, if any, would have the requisite
knowledge, authority, and diplomatic skills for such
meetings.

8. (C) Moreover, Zolotov said, both men were constantly
traveling, and hard to schedule; even scheduled meetings were
subject to sudden cancellations. By way of example, Zolotov
noted the recent visit to Moscow by Quebec's Energy Minister.
Despite Gazprom's desire to do a deal in Quebec, he could
not get a meeting for the Minister with either Miller or
Medvedev. Zolotov, however, brushed off the need for staff
to conduct such outreach saying "we're not going to hire
someone just to meet with Energy Minister of Quebec."

-------
UKRAINE
-------

9. (C) On Ukraine, Zolotov expressed optimism that there
would be "no problems" this year in price and contract
negotiations. He said there was even hope for a multi-year
contract to prevent the annual hand-wringing over the
Russia-Ukraine gas trade.

-------
COMMENT
-------

10. (C) Our own observations of Gazprom track with Zolotov's
candid description -- a rent-seeking monopolist, looking to
control resources wherever possible, and with a relatively
simplistic sense of responsibility to shareholders other than
the state. Perhaps the best hope for moving Gazprom toward a
model more compatible with modern definitions of a
competitive global business is continued and expanded
interaction with western partners. End comment.
Beyrle

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