At Putin’s behest, nonetheless, it is continuing to pursue hugely overpriced projects for political ends that are unlikely ever to pay for themselves. Foremost among them are two ambitious undersea pipelines to Europe, justified neither by demand nor by supply.
This is standard procedure for Gazprom, a $119 billion company. A phenomenally profitable monopoly up to now, it has been a prime source of funds for the Kremlin’s pet projects. It spreads its export earnings throughout favored sectors of the Russian economy — propping up rail-car builders, for instance, with orders for more freight cars than the railroad can haul — and dramatically overpays for the privilege. A mile of pipeline in Russia costs about three times as much as one in Germany.
It is a company that has devised intricate means to cover its tracks and keep billions of profits off its books, to divert cash and reward Putin’s favorites, but it has paid so little attention to the changing realities of the actual gas business that, some analysts say, it is spending its way into insolvency.
Big earner, big spender
Gazprom was set up in the Soviet era to export gas to Europe. After the collapse of communism in 1991, Russia broke up its oil monopoly — oil prices were very low at the time — but held on to Gazprom, its chief earner and its chief spender.
When Putin took the presidency in 2000, he told the oligarchs he would protect their businesses as long as they stayed out of politics. Clifford Gaddy of the Brookings Institution calls this “Putin’s protection racket.”
But Gazprom, in which the state at that time had a minority share, was in a different category. It wasn’t just a business. Putin moved carefully in the beginning, because it was too valuable an asset to pick a fight over. First, he replaced the board chairman with his St. Petersburg friend Dmitry Medvedev, whom he was to anoint as Russian president in 2008. A year after installing Medvedev, he engineered the appointment of Alexei Miller, an old associate from St. Petersburg, as CEO.
The state arranged to take on a majority stake in the company. As Gazprom became the chief means of rewarding Putin’s inner circle — men who were elbowing the first generation of oligarchs aside — Putin installed another longtime associate, Viktor Zubkov, as chairman. Zubkov is the keeper of meticulously collected and undoubtedly compromising information on each of the oldtime oligarchs, Gaddy and Barry Ickes, an economist at Penn State, assert.