DEVELOPMENT STRATEGIES AND STATE-OWNED ENERGY COMPANIES: RUSSIA AND GAZPROM

1. DEVELOPMENT STRATEGIES ANDSTATE-OWNED ENERGY COMPANIES: RUSSIA AND GAZPROM Rafael Fernández and Clara García Grupo de Investigación sobre Economía Política de la Mundialización (EPM) Instituto Complutense de Estudios Internacionales Universidad Complutense de Madrid

2. Our research project deals with the internationalization strategies of Russian and Chinese state-owned energy companies. • Our main research questions are whether these companies’ strategies follow business or political criteria, and whether(and how) they play a role in public economic development strategies. • For a deeper understanding of this issue, we study the goals and modus operandi of different companies. • Our first case study looks at Gazprom and its role in the Russian development strategy.

3. It is often said that, since Putin, the Russian economy has been sliding into a rentier model increasingly dependent on revenues from oil and gas, more vulnerable to endemic problems characteristic of resource-abundant countries. • Increasing state intervention in the energy sector and the 2009 collapse in following the drop of oil prices seems to confirm this approach. Even so, this paper argues that the balance of Putin’s energy policy has been broadly positive. • The state has put an end to the disorder of the 1990s, which threatened the sustainability of a sector of great strategic importance; and it has succeeded in improving its mechanisms for the collection and redistribution of energy revenues. • This laying of groundwork for the energy sector, a source of rapid enrichment for executives, politicians, and large landowners, also serves as a lever to assist development strategy.

4. Laying down three evaluation criteria: a) ability of the state to control, via national companies, key aspects in the dynamics of the energy sector (reserves replacement, production rates, large investment projects, export orientation, domestic prices, etc.); b) state capacity to collect and redistribute a majority of the revenues generated by energy companies, public or private; c) capacity of the state to profitably use these revenues in political, social, and economic terms. • We can establish three categories of developing economiesrich in energy resources: • 1) export enclaves, which do not satisfy a), b), or c) • 2) rentier states, which satisfy a) and b) • 3) developmental states, which satisfy a), b), and c)

5. Following this typology, the Russian model can be divided intotwo stages: • In the first, the institutional framework that emerged from liberalization /privatization processes (undertaken in the 1990s) brought together a mix of features unlike those seen in a competitive market, but very close in many respects to the most predatory models. • The second stage began as a result of the strategic shift following Vladimir Putin’s rise to the Russian presidency. Since then, a new institutional framework with distinctive features of the former model as well as, increasingly, features characteristic of developmental states has been developed.

6. In the current energy model, the state enjoys a much greater political autonomy and has gained effective control over two key issues: i) the strategic direction of the energy sector, and ii) management of the income this sector generates. • First, the strategic reorientation of the overall sector is reflected in the increasing role of state enterprises (Gazprom and Rosneft), which since 2005 have embarked on ambitious expansion projects, both inside and outside Russia. • Both have received political and financial support from the Russian government to develop these expansion strategies. • After strengthening their leadership within Russia, they began to transform into global firms able to compete and cooperate with large TOCs (Transnational Oil Companies) and foreign NOGCs (National Oil and Gas Companies). • Given this objective, geopolitical interests and the short-term maximization of energy revenues are goals of minor importance.

7. This is clearly the case of Gazprom, whose performance has combined management of large upstream projects (gas exploration and exploitation in Russia) with midstream endeavors (new long-distance pipelines, plans to install LNG plants). • At the same time, Gazprom has entered the EU downstream market, diversified to Asian markets, and invested upstream in other producing countries. • Therefore, in very little time, this Russian company has become a global player that integrates all phases of the gas cycle and participates in various areas of energy business.

8. Investment projects inside Russia have sought to increase and diversify the exportable supply, putting into operation new production regions in remote areas. • These are costly and risky investments which have sometimes required the participation of foreign capital, but joint ventures have always been led by the Russian state-ownedcompany. • This expansion and diversification of Gazprom’s productive base has been strengthened by investments in other producing countries in Asia, America, and Africa.

9. Upstream investments accompanied by a strategy for expansion and diversification of the transport infrastructure, with new gas pipelines into Europe and Asia, and plans to construct several LNG plants. • Asia: • Objectives: • To join Sakhalin to Pacific market. • Connecting Siberia to China and Korea. • Via: LNG (Sakhalin) and pipelines. • Routes: Altai and WE. • Partners: price conflict. • Europe: • Objectives: • Connecting new producing regions to European markets; • avoiding bottle-necks; and • above all, transit dependence on Ukraine. • Via: pipelines and LNG. • Routes: Nordstream and Southstream. • Partners: E.On, ENI, large European companies.

11. At the same time, Gazprom has heavily invested overseas in downstream projects, mostly in the European Union. • The aim is to achieve direct access to the European final consumer, whether electric companies, industries, or households. • To do so, Gazprom has: a) created subsidiaries, fully linked to its business group, which act as trader into the EU domestic market; b) purchased equity stakes in small "national champions" of those countries most dependent on gas imports from Russia; c) allied with the largest European wholesale intermediaries. • In this way, Gazprom buys security of demand and gains a playing role in highly profitablenew business areas.

12. New producing regions Upstream Pipelines and LNGs Midstream Downstream EUROPE Asia América Largest EU Co. Large domestic Cos. Gazprom Traders Gas equities Strategic alliances Stakes Spot Africa and Latin America Households Industry Power Households

13. Our analysis leads to the conclusion that Gazprom has pursued a strategy guided by long-term goals and followed these goals by implementing business methods and criteria consistent with the current functioning of the international gas market. • In other words, the scope, methods, and goals of Gazprom’s internationalization does not support the idea that expansion has been primarily to serve the geopolitical interests of the Russian government. • Neither does the magnitude of the projects undertaken suggest a main purpose of maximizing short-term income.

14. Gazprom’s recent transformation into a vertically integrated global company with multiple interests and partnerships with various gas companies in different countries shows that it is a state company moving away from models common to the NOGCs of predatory states (where companies act as tax collectors)or of rentier-producing states (where companies are focused on maintaining a monopoly over the production-export cycle). • Gazprom instead comes closer to the kind of NOGC present in certain Southeast Asian countries that are also abundant in natural resources but along with a “developmental” political state.