It appears that Alan Johnson, Secretary of State for Trade and Industry, has created a delightful (if concerning) example of political irony, the consequences of which could have been stolen from the script of the forthcoming movie version of "Dallas".
Three weeks ago the European Commission launched a swathe of legal proceedings aimed at loosening the sclerotic nature of the European internal energy market. Mr Johnson saw this as an opportunity to note Britain’s “sanguine” attitude towards foreign mergers and takeovers and warn of the risks that Europe would be left behind by globalisation if they did not mimic our position. Two weeks passed and Mr. Johnson was proven right. The threat that protectionism poses has been made explicit. On April 19th Alexei Miller, CEO of Russian energy monopoly Gazprom, emerged from a meeting with EU ambassadors and stated that: “Attempts to limit Gazprom’s activities in the European market and politicise questions of gas supply, which in fact are of an entirely economic nature, will not lead to good results.” The thinly veiled threat continued: “It should not be forgotten we are actively seeking new markets such as North America and China.”
As if this bald threat to Europe’s gas supply was not enough, yesterday, Semyon Vainshtok, President of Transneft, which is to oil pipelines what Gazprom is to natural gas, followed up with a proclamation that Russia should also cut oil supplies to an ‘overfed’ Europe. “We have overfed Europe with crude. And every single economic manual says that excessive supplies depress prices…as soon as we divert to China, South Korea, Australia and Japan it will immediately take away crude from our European colleagues.” The irony is that what provoked this belligerence from the Russians was, unfortunately, a Financial Times revelation that Alan Johnson and other ministers were briefed in February about the legality of blocking a rumoured takeover by Gazprom of Centrica, parent company of British Gas. Ah. So much for sanguine, however full marks for sense.
Channel 4 news commented on the following backlash thus: “Gazprom, the state-owned Russian giant, [is] testing the limits of Britain’s liberal attitude to foreign takeovers.” And whilst some people might protest, it really is, by forcing a redefinition of where the boundaries of acceptable protectionism lie. The meetings that provoked the response from Moscow showcase the point: the debate fell around whether or not loopholes allowing ministerial intervention in cases of national security could be extended to the energy sector. In the case of Gazprom then this is a legitimate query and one that is every bit as pertinent as the Dubai Ports crisis was in the United States.
Gazprom, which is the fifth-largest corporation in the world, having this year leapfrogged Wal-Mart, Toyota and Citigroup, is 51% state owned and is vital to the Russian economy. It accounts for a full 20% of federal government tax revenue; its media arm is in talks to buy one of Russia’s largest-circulation newspapers, the Komosomolskaya Pravda; 38% of its employees work outside of its core business area; and it is the chief developer for the site of Russia’s 2014 winter Olympic bid. Its chairman, Dmitri Medvedev, is the former Kremlin chief of staff, the current first deputy prime minister and a man whom many believe could succeed Putin to the Presidency. It is also a phenomenal club in Russian foreign policy, and one that Russia does not seem averse to swinging. It was Gazprom, after all, that turned off the taps to the Ukraine in January, in what has widely been seen as political retribution for the Orange Revolution, and put energy supply firmly near the top of the EU political agenda.
The US is concerned by the growing Gazprom monopoly, which has been an enormous benefactor of Vladimir Putin’s reforms of the sector. It is expected that this week Condoleeza Rice will attempt to dissuade Greece from allowing Gazprom to become a partner in a planned Greco-Turkish pipeline. One of the reasons why such concern exists is the astonishing gains made by the company from the dismantling of Yukos and the highly politicised trial of its chairman Mikhail Khordokovsky. Take for example the merger (the largest in Russian history) last October between Gazprom and oil company Sibneft, formerly owned by Chelsea FC owner Roman Abramovich. Sibneft had previously announced, in April 2003, that it would be merging with Yukos – a deal that happily fell apart as a result of the controversial prosecution of Khorokovsky for tax evasion!
The opacity of the company’s working practices also has the international community concerned. A report released this month by the NGO Global Witness reveals dozens of questions marks over the relationship between Gazprom, Naftohaz Ukrainy (Ukraine’s primary gas supplier) and intermediary companies in the Turkmen-Ukraine gas trade. Corruption allegations concerning the resolution of the January crisis and focussing on RosUkrEnergo (the intermediary company) helped to stimulate a crisis within the Ukrainian government. Gazprom owns 50% of RosUkrEnergo and Global Witness report traces the other half to clandestine beneficiaries and umbrella companies across Europe (including one holding company called Highrock Oil rather implausibly operating out of an old people’s home in Tiverton, Devon!) RosUkrEnergo’s auditors – big four firm KPMG – resigned in November over questions as to the company’s ownership structure that might present “an unacceptable risk to KPMG’s reputation”. With a 50% stake in the company and considering the opaque nature of the Ukrainian compromise (the final contract was merely 2 pages long and the rationale doesn’t make clear sense), there seems little doubt that Gazprom is aware of, if not complicit in, corruption within the company. Whilst Miller was brought into Gazprom to clean up its working practices and has doubtlessly met with some success, it seems that the legacy of shady connections, front companies and insider dealing is both long and enduring. It will be interesting to watch what happens to Ukrainian gas prices over the next year.
So is Britain right to resist the takeover of Centrica, a major national energy supplier, by a company with shady, clandestine and even potentially criminal working practices? Arguably not, the market will deal with such behaviour itself and government interference is not necessary or desirable. However once you factor in quite how intrinsically linked this company is with the Kremlin, intervention seems only sensible. The Ukrainian gas crisis in January revealed how Gazprom could be used as a powerful piece in the Russian political chess game. The Global Witness report and subsequent resignation of KPMG from auditing RosUkrEnergo show also the shady and questionable nature of dealings that Gazprom is involved with. Even the backlash against the FT revelation of the government discussions, with the threats emerging from Russia concerning the sanctity of European energy supply, show how powerful and how fickle Gazprom can be. With energy supplies shortening and with Europe attempting to diversify sources away from Russia, a takeover of Centrica by Gazprom is obviously contrary to national interest and could pose a credible future risk to national energy security. There is a limit to liberal market economics and it is here. Our loss of sanguinity (and face) may well prevent a future loss of something more serious.