Gazprom to Revamp Former Soviet State Operations

In a move to win back markets lost to a controversial natural gas trader, Gazprom yesterday said it was revamping the way it sells gas to former Soviet states.

Exports to the Baltics and Central Asian countries will be coordinated by Mezhregiongaz, a wholly owned subsidiary of Gazprom that is currently in charge of domestic sales, said Gazprom CEO Alexei Miller.

"The appearance of Mezhregiongaz on these markets -- and they are large and important markets -- is a serious step," Miller said in a press release. "We have begun to analyze contractual arrangements, as well as their potential development, in the region."

During the 1990s, Florida-registered gas trader Itera encroached on markets traditionally held by Gazprom, which was the Soviet Union's and is now Russia's monopoly gas supplier. Gazprom was hardest hit in Georgia, Armenia and Kazakhstan, where it lost almost the entire market.

Some analysts estimate that the gas giant lost about a billion dollars to Itera, although others argue that Gazprom's inability to collect cash payments from cash-strapped but politically important neighbors was the cause of the retreat.

If Gazprom can negotiate terms similar to Itera's, then its re-entry to the region will reap profits, said Jonathan Stern, an expert on Russian gas at the London-based Royal Institute of International Affairs.

"More importantly, Itera seems to be having trouble maintaining supplies," Stern said.

After President Vladimir Putin anointed him CEO last year, Miller embarked on a campaign to regain control of lucrative gas fields funneled out of the company by former management. Some of these assets ended up in Itera's hands. In April, Gazprom took back control of this field, which had accounted for a majority of Itera's production.

Itera, however, sees no threat in Gazprom's planned moves into the trading company's strongholds.

"We have our market share, and they have theirs," said Itera spokesman Nikolai Semenenko. "We're partners, and I don't see how today's announcement contradicts that."

Itera's indifference may be well justified. The company is politically well connected to many Central Asian governments, especially to that of gas exporter Turkmenistan.

"We'll have to wait and see whether Gazprom will succeed in reclaiming the region," Stern said.

Until now, exports to the Baltics and Commonwealth of Independent States were handled by the aptly named "department of exports to the near-abroad."

Mezhregiongaz's new role will eliminate the need for such a department, leaving Gazexport overseeing exports to Europe.

While Gazprom's loss of market share to Itera is considered scandalous, so is Mezhregiongaz's reputation. The subsidiary was created in 1997 to collect payments from Russia's gas consumers, and it succeeded in increasing the percent of payments made in cash from 3 percent to 85 percent by 2001.

Asset stripping -- in this case, ownership of gas retailers -- also took place at Mezhregiongaz under the watch of former general director Valentin Nikishin.

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