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Novatek Becoming Putin's Offensive Reconnaissance in the Market

Strengthening of the largest Russian independent gas company Novatek, one of whose owners is Gennady Timchenko (thought to be a 'friend' of Putin), may not but be noticed. By all appearances, it is Timchenko's organization that is to become the ram that will at last breach Gazprom's monopoly in Russia at first, and then Gazprom's exclusive right to fuel export. In 2012 alone, Novatek augmented its gas reserves by a factor of 8.5. Moreover, most of the assets acquired by the company during its rapid expansion were practically amicably given to it by Gazprom. Last Friday, at the celebration of the 20th anniversary of Gazprom, Putin delighted the 'national estate' by calling for sharing the access to the gas pipeline. Putin is often using Novatek for "offensive reconnaissance" at the energy market, thinks an expert of Director of the Energy Development Fund Sergey Pikin told about the developments in the industry.

Question: Sergey, are there any political motives behind the fact that a private gas company Novatek controlled by a billionaire Timchenko is being injected with resources while Gazprom's monopoly is being destroyed. Timchenko is known to be close to Putin, he is also deemed to support his new course towards nationalization of the elite (media recently reported that he returned to Russia bringing his assets with him), and Gazprom has been associated with Medvedev for several years.

Sergey Pikin: Certainly, there are political motives behind this. The fact that Novatek is close to the Kremlin is evident, but I would not go as far as saying that Gazprom is close to Medvedev or anybody else, for that matter. The fact that it is not trying to fight it or resist the changes and demonopolization means that the company does not have an active position. Therefore, you may be surprised but I would make a conclusion that, in my opinion, what we are dealing with here is natural selection, the survival of those who are taking a more active stance. Since Gazprom is huge as it is, it appears to be too inconvenient for it to engage in active action, and it doesn't even seem to be active enough to defend itself.

Question: Are you asserting that Novatek managed to expand its assets so quickly and effectively by itself without support from the government associates?

Sergey Pikin: No, you are right about this. Of course, it doesn't happen like this in Russia, or in the USA, for that matter; such things are done with the help from the government. Obviously, there are administrative resources which enable establishment of the second gas empire.

Question: It is not so obvious, though, why the country would need the second gas empire, what would be its function?

Sergey Pikin: It's function is that Novatek needs to diversify as much as possible to gain value in the market, and Novatek being a private company is more free in its actions. Much more so than Gazprom, which being under the jurisdiction of the state requires government directives to authorize all its decisions. Novatek can do more in this respect, and for it to be able to leverage its advantage in the market it is now being injected with resources. After the "injection" Novatek will be able to address more global tasks. What they may be is not yet evident: it may be either a global holding company accumulating the capital from the sale of natural resources, or there may be a task to move forward in some direction.

Question: Move where?

Sergey Pikin: Forward where? Possibly, beyond the Russian Federation, although it is associated with certain difficulties, and Novatek should perhaps remain in the role of some sort of internal empire.

Question: What was wrong with Gazprom being an internal empire?

Sergey Pikin: The best is the enemy of the good, you are right. The political landscape changes constantly, the competition among the elite groups springs up all the time, and in this case Gazprom as a national company may be challenged and is challenged by competition from time to time. Demonopolization is a red flag. Therefore, it is easier for some groups influencing Putin to have a more loyal, controlled private company at hand, then deal with a mega-monopoly encumbered by complicated political processes inside itself, not to mention its external policy.

Question: Still, what goals may be set before Novatek? Since we have established that the "injection" in the company is not happening by itself, therefore, it would be nice to understand whether it would serve some purpose of the state, or it is just a redistribution of the market in the interests of elite groups.

Sergey Pikin: I think the current goal is to gain maximum profitability from the available assets. Any development requires long-term investments only the state is usually capable of, therefore, such development projects will be tackled primarily by Gazprom, since it's a monopoly having huge resources, tariff income and the internal market. The development will be driven by Gazprom while the most attractive benefits from this may be captured by Novatek, which will be turning into a profit center of the gas industry.

Question: What in your opinion are the reasons for virtually emergency decision-making on demonopolization of LPG export?

Sergey Pikin: While time is wasted on negotiations, the need may disappear altogether. The market has become more flexible and agile. While before we could afford to ponder and develop something for five years, now the pace has increased twofold, and therefore it requires another level of speed and flexibility in decision making. That is why the decisions on demonopolization and LPG are being taken quickly without a lengthy approval process.

Certainly, Timchenko and Novatek happen to be in the right place at the right time, but it is unlikely to have been a plan devised in advance. It is simply that the tactics of "more loyalty, more flexibility" paid off, and the authorities decided to place their bets on Novatek.

Question: How would you evaluate the assets gained by Novatek last year?

Sergey Pikin: It think these are all good assets.

Question: So, is Gazprom being left with bad assets?

Sergey Pikin: No, you couldn't say that Gazprom is at a loosing end. Novatek gets what can be quickly and successfully turned into profit, money, and that's what they are doing. Gazprom also has good assets, although they require more development, more investments and capital. The companies are acting on different opportunities: one is ready to make quick profit political situation permitting, while the other is responsible for the stability of supply in the future. Therefore, Novatek is a kind of offensive reconnaissance in the energy market.