Kremlin's ever tightening grip

Moscow: Call it PetroKremlin. A vast state-run energy conglomerate has been assembled over the past year, some experts say, to fuel Russia's bid to revive Soviet-style great power status.

To date, the Kremlin has effectively renationalised almost a third of the formerly private oil and gas sector. Other developments also point to growing state ambitions:

A $15-billion Siberian pipeline, due to begin pumping in 2008, will shift Russian crude exports to Asia, particularly China, where Moscow is cultivating fresh strategic relationships.

A 737-mile gas line being laid under the Baltic Sea will cut out middlemen Ukraine and Poland, whose relations with Moscow have recently soured, while locking in Russia as Western Europe's key energy supplier.

State-run Gazprom has teamed up with several foreign partners to develop a vast Barents Sea gas field whose production, converted to liquefied natural gas (LNG), could begin supplying the US market by 2010.

A long-delayed law on subsoil resources, to be passed by the Duma next year, is expected to ban foreign-owned companies from exploring or developing Russian oil fields and other key mineral resources.

"Amazing changes are happening swiftly, because Putin has understood that energy is Russia's key card to play at the international table," says Michael Heath, a political analyst with Aton, a Russian brokerage.

"Instead of the military force the Soviet Union used to project its power, Russia is using oil as a major tool of foreign policy."

Russia is the world's second-largest producer of petroleum - about eight million barrels of crude per day - which accounts for nearly 40 per cent of the country's GDP.

Spiking global oil prices over the past five years have wafted state budgets into the black, fuelled a modest economic boom, and enabled the Central Bank to rack up reserves of $170 billion (Dh624 billion). But far beyond taxing windfall energy profits, the Kremlin has moved to take over the industry.

"Now the state directly controls about 30 per cent of petroleum production in Russia and the big question is, how much more will it take?" says Valery Nesterov, an energy expert with Troika Dialogue, a Russian investment bank.

"This is a big cause of concern for Russian and foreign oil investors." In the short run, the Kremlin's oil grab may have damaged Russia's energy prospects, Nesterov says.

Growth in oil production has plunged from an average 9 per cent in Putin's early years to just 3 per cent this year. Exploration has virtually ground to a halt, as both foreign and domestic investors wait to see what the new rules of the game will be.

Tightened state control could prove good news for foreign investors who want a piece of Russia's oil pie but don't insist on controlling rights.

Up to 49 per cent of Rosneft may soon be sold to outside investors, to raise cash to repay $7.5 billion the state borrowed to acquire a majority stake in Gazprom.

Experts say the Kremlin aims to blunt international criticism of its takeover of the energy sector by offering a few symbolic management positions to prominent foreigners such as former German Chancellor Gerhard Schröder, who has reportedly agreed to head the new North European gas pipeline project, which will carry Russian gas directly to Germany.

Putin has appointed some of his top aides to run the Kremlin's newly acquired empire. The daily Nezavisimaya Gazeta estimates seven people from Putin's inner circle now control nine state companies with total assets of $222 billion.

If the Kremlin is demonstrating that energy supplies can be dangled like a carrot, it has also realised they can be wielded like a stick.

Ukraine, which broke free of Moscow's orbit in last year's was hit last month with more than a quadruple price hike for natural gas supplies - from $50 per 1,000 cubic metres to $230.

Kiev has protested that it cannot adjust to such a rapid price hike, but Gazprom has threatened to shut down gas deliveries to Ukraine on New Year's Day if it doesn't comply.

Ukraine announced Tuesday an agreement had been reached but a Gazprom spokesman in Moscow denied the claim.

Meanwhile Belarus, Moscow's most loyal former Soviet ally, has contracted with Gazprom to pay just $46 per 1,000 cubic metres of gas.