Same as the Kremlin after the gas conflict between Russia and Ukraine a year ago, Gazprom has hired a public relations firm to improve its image abroad. Here is a short list of problems complicating the PR campaign.

1. Gazprom blocks access to Central Asian gas but expects Ukraine, Belarus and other states located between Russia and major European markets to follow the principles of freedom of transit. Central Asian gas can be bought only through designated brokers whose service can be very expensive. For instance, Gazprom’s ZMB (Schweiz) AG buys Turkmen gas at $100 per 1000 cub m and resells it to Georgia at $235. If Georgia were able to buy gas directly, then after paying transit fees the cost of gas would have been about $130 per 1000 cub m.

2. According to numerous statements of Gazprom, Swiss broker Rosukrenergo AG was created as a financial tool for investment into expansion of pipeline capacity in Kazakhstan and Uzbekistan. So far, no money was invested, but Messrs D.Firtash and D.Fursin, half-owners of the Swiss broker, received $368 million in dividends for 2005 alone. The fact of dividends' payment of $735 million out of the reported 2005 profit of $742 million indicates that Rosukrenergo is far from being an investment tool. Financial reports of Gazprom show that Rosukrenergo profit came from two sources: (1) the low fixed price of Central Asian gas sold by Gazprom, and (2) re-exports of gas to Europe at free market price.

3. Former Gazprom CEOs Rem Vyakhirev, Viktor Chernomyrdin and their predecessors of the USSR Gas Ministry have never threatened neighbor countries by cutting off gas supplies. Public threats broadcasted by TV and other media have become a normal practice under CEO Aleksey Miller.

4. Gazprom's decision to change the priority destination of Shtokman gas from the USA to Germany was not motivated by profit. While LNG project and gas pipeline from the Barents Sea to Germany require roughly equal investment costs, LNG exports from Russia have huge tax advantage – they are free of export duty, which takes 30% of gross revenue of exports by pipeline. On top of that, the price of imported LNG in the U.S. is higher than the price of imported pipeline gas in the European Union. The choice of more risky and less profitable pipeline option indicates that Gazprom is Russia’s ministry for international energy affairs rather than a joint-stock company. It also shows that the major shareholder of Gazprom - the Russian Federation - considers tax collection a way more important than Gazprom's profit and capitalization.

5. Gazprom has started the PR campaign by rewriting the recent history. Interviewed by "Kommersant", Konstantin Chuichenko, head of legal department of Gazprom and executive director of Rosukrenergo, said that competition of Ukraine and Gazexport has caused an increase of price of Turkmen gas from $44 to $65 per 1000 cub m. This statement contradicts official reports of Gazprom. Financial report for Q3-2005 says that the average price of Central Asian gas sold by Gazprom to RUE was $43 per 1000 cub m (page 25). From January 2005, Rosukrenergo was the sole exporter of Turkmen gas to Ukraine (page 4 of "Management's Discussion"). According to the official press-release of December 29, 2005, the price of Turkmen gas was raised from January 2006. Ukraine was unable to compete with Gazprom at that time. The increase of Turkmen price to $65 and then to $100 was an adequate response to the change of Gazprom's pricing policy in the former Soviet Union.

To improve its reputation, Gazprom requires real actions. Camouflaging and playing with terminology would be a waste of money.

Mikhail Korchemkin

January 24, 2007