The Magazine

Putin's Power Politics

Rebuilding Russian clout, one natural-gas pipeline at a time.

Jan 16, 2006, Vol. 11, No. 17 • By DANIEL TWINING
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Breathless investors may want to take a close look: Gazprom's business operations often reflect not market principles but the interests of Mother Russia. "If the Kremlin had a stock-exchange listing, Gazprom would be it," says a Western banker in Moscow. "Many observers wonder whether Gazprom . . . is really a company at all," writes the Economist. "Often, it seems more like an arm of the state," pursuing "the Kremlin's ambitions as well as its own."

Gazprom's chairman is Dmitri Medvedev, Russia's first deputy prime minister. He previously served as Kremlin chief of staff and is perhaps President Putin's most trusted aide. Medvedev is the leading candidate to replace Putin in 2008.

Although primarily a natural-gas giant, Gazprom also controls significant oil reserves. It owns several large Russian oil companies. One that it doesn't own is Rosneft, the state oil giant that acquired the biggest production unit of what had been the largest private oil company in Russia, Yukos, when the government arrested that firm's chief executive, Mikhail Khodorkovsky, and banished him to prison camp in Siberia for daring to fund opposition political parties.

Rosneft's chairman is Putin's powerful deputy chief of staff, Igor Sechin. From the Kremlin, he is reported to have masterminded the attack on Yukos's leadership--from which Rosneft benefited handsomely. Sechin leads the siloviki faction in the Kremlin composed of former military and secret police officers. According to the Financial Times, Rosneft is viewed in Russia as "the oil company of the siloviki," of which Putin and the other leading candidate to replace him as president, second deputy prime minister Sergei Ivanov, are themselves members.

Medvedev and Sechin, both senior government officials at the head of Russian energy giants, are among Russia's "new oligarchs." In a systematic, Kremlin-directed reversal of the rushed privatizations of the 1990s that coincided with Putin's rise to power, the Russian state has coopted or destroyed the independent tycoons of the 1990s who controlled Russia's vast natural resource base--and who represented centers of financial and political power beyond Kremlin control--and replaced them with its own loyal servants. According to the Russian newspaper Nezavisimaya Gazeta and the Christian Science Monitor, seven people from President Putin's inner circle now control nine state companies with total assets equal to 40 percent of Russia's GDP.

Political power in Russia today is predicated upon strategic control over Russian energy supplies--and the ability to wield their delivery to foreign markets as an instrument of national policy.

SENIOR RUSSIAN LEADERS believe that their country--poor, vast, and surrounded by powerful neighbors--can ultimately punch far above its weight internationally by systematically increasing both its allies' and its adversaries' dependence on Russian energy supplies and distribution networks. Thanks to its mineral wealth, "Russia has joined the countries needed by the world," says a propagandist on Gazprom's television channel, NTV. Or as President Putin puts it, Russia's energy resources "create favorable conditions for us to pursue a more independent foreign policy."

Putin long ago identified Russia's ability to develop its natural riches as the key to the country's revitalization. He wrote a doctoral dissertation in the 1990s in which he championed the creation of public-private "financial-industrial corporations" to exploit Russia's mineral wealth, fueling an economy built on natural resources. He argued that state-directed natural resource companies could not only raise the people's standard of living but also protect Russia's position as a great power.

Putin's Russia is actively playing its energy card by entrenching its role as a vital supplier to Western nations, whose markets are the key to Russia's renewal. And Russia's energy exports are critical to its customers' economic health. Europe currently relies on Russia for nearly half its natural gas and a third of its oil. Some countries are more dependent, especially on Russian gas: Russia supplies 40 percent of total demand in Germany, 65 percent in Poland and Bulgaria, 70 percent in Hungary, and 80 percent in the Czech Republic. Austria, Slovakia, and the Baltic states are almost totally dependent on Russia for natural gas.

At an E.U.-Russia summit in October, Putin baldly asserted Russia's geopolitical importance on the basis of its status as Europe's leading energy supplier: "I'll remind you that some European countries, members of the European Union, cover 90 percent of their gas needs with Russian hydrocarbons. Ninety percent! And no one's complained so far."