The end of Gazprom's monopoly - Kremlin setting the stage

The last week news from Moscow on the fate of Gazprom's monopoly foretell the last moves in the Endspiel that span over almost 15 years to reform a key pivot in Russia's energy policy. 

The change at the top of Gazpromexport where Elena Burmistrova replaces veteran Alexander Medvedev signals growing turbulence in the classic tradition - summer is always hot in Moscow. The official explanation offered was Soviet style simple - expanding business geography with Gazprom targeting Asian gas markets. 

While true, a second interpretation might hold more water, i.e. that Igor Sechin, the Rosneft boss, has succeeded in shifting the stalemate and has finally won President Putin's ear for what in the EC's jargon would sound as "third party access" to Gazprom's new gas export infrastructure - the Power of Siberia pipeline. It is inconceivable for one of the closest friends of Putin to publicly and openly challenge his boss, without receiving an advance nod of approval. Alexei Miller is obviously in a defensive mode amid growing signs that Gazprom will have to let other independent producers into its transport network. 

Igor Sechin never hid his ambition to consolidate under his control the main bits of the Russia's energy asset base. This became increasingly evident as he grabbed the Yukos assets, acquired Itera and other key gas assets across Russia. It has never been a risk free ride for him - while Sechin has found some new allies in his attempts to topple the export monopoly of Gazprom his insatiable appetite for energy assets building on privileged ties with the Kremlin boss have risen growing opposition and resentment in Russia's energy community. While his inclusion in the Ukraine sanctions list has certainly not expanded his power base abroad with limited effect at home, the pending ruling on a 100 billion dollar arbitration case brought by Yukos shareholders might deal a serious blow to his ambitions. 

It seems Mrs. Burmistrova's chances to strike a deal with Sechin are considered greater, sparing President Putin the effort to openly and personally intervene. Miller and Sechin are known to have been at odds for quite time and engaged in turf war recently with unfolding Ukrainian crisis and strategic deals with China tipping the balance in Rosneft's favor. The absence of Miller's name on the sanctions list has also added fresh ammunitions to the siloviki's expanding power base. Being on the sanctions' list these days is a mark of loyalty and a sign of belonging to the inner circle of Putin's entourage.

Gazprom has recently suffered serious blows on the home front following the aggressive line imposed by the siloviki and the geopolitical shifts in Ukraine. What might seem a bane for Gazprom - seeking to expand its presence and hold on to current market shares in Europe - for Igor Sechnin and the sanctioned circle could be considered a boon internally given the rise in nationalistic fervor and euphoria. Gazprom has taken direct hits affecting not only its cashflow streams but also the fate of critical projects like the South Stream, Blue Stream ad Opal. A mind boggling fine of 10 billion USD could follow this month at the end of the 5 year long anti-trust investigation of the European Commission, which too big a sum given the deteriotating sales forecasts. Gazprom not only is about to loose one of its largest customers - Naftogaz, embroiled in geopolitically motivated price dispute, but is forced to cover the piling up heap of unpaid gas bills or heavily subsidized gas prices for Russia's proxy regimes in Transdnestria, Abkhazia, South Ossetia and the Customs Union privileges for Belarus and Armenia. Suffice to say that the  gas debt of tiny Transdnestria of almost 4 billion USD exceeds by a substantial margin the debt of Ukraine. In practice these satellite regimes have ceased to pay their gas bills at all despite extremely low prices. The financial forecast for Gazprom is dipped further in doom and gloom by the poor track record of lost case in arbitration courts over price disputes, often with retroactive clauses and Ukraine is standing in line. We are watching systemic downward price revisions of virtually all contracts with EU customer. So even as physical export volumes remain high, the cash base has been depleting. 

As has been often said in the past - the fall of Gazprom's monopoly is inevitable - the difference today is that it has been made imminent with the new draft of the resolution of the Anti-Trust Agency in Russia and the pending decision of the government, that will add to the list of recently suffered administrative bruises after the lost monopoly in LNG exports. Although the disputed access to critical gas infrastructure has mainly concerned east bound export routes to China and the Far East - the Europe gas export routes will inevitably follow. We have continuously repeated a key theme: in the long run the Kremlin folks will be more interested in the absolute size of the cash inflows from energy exports than in sustaining the monopoly of Gazprom. Should the company prove that it is unable to meet the expectation - the independent gas producers would step in. 

Which makes an interesting match between the interest of the independent producers and the moves of the Anti-Trust authority in Russian and the prime line in the EC efforts to guarantee acceptance of the key provisions of the third energy package beyond the EU territory, 

The imminent fall of Gazprom's monopoly will be the most vivid casualty of the rising tension between Russia and Russia following the annexation of Crimea and a proof of the EU's growing influence on EU's energy policies on Russia's energy sector. In order to survive Putin's regime needs greater access to the EU market and a more versatile pool of levers than the battered Gazprom's monopoly and the oil indexed long term supply contracts can offer. 

Elene Burmistrova's appointment is just the first move in a chain of events that will mark some dramatic shifts on the energy scene in Russia. 

Worth watching closely developments on the South Stream front and the newswire from Brussels and Moscow these days.