On May 15, Gazprom stashed an announcement of vast proportions in the banal text of a published bond prospectus when it reported that the proposed merger of Gazprom and state oil firm Rosneft was "unlikely" to go through. The collapse of the deal indicates there is change afoot inside the Kremlin as power struggles within the government over power and wealth come to the fore. Once the Kremlin realized the Khodorkovsky affair gave it the opportunity to take large chunks of Yukos — if not all the chunks — under its control to enhance the government's role in the economy and add to its coffers, a world of new possibilities came within reach. By gaining a majority stake in Gazprom and adding state oil firm Rosneft along with prime Yukos subsidiary Yuganskneftegaz, the Russian state would have the largest energy company in the world. These acquisitions would allow it to project influence not only within Russia, but far beyond Russia's borders once again. STRATFOR has reported for months that the idea enjoyed broad support in the Kremlin, making the conclusion appear foregone. As the effort to make a super-Gazprom got under way, everything pointed in this direction; but things quickly changed in the past few months. The new merger's failure has nothing to do with financial complications or Russia's national interests, but with the rise and fall of political fortunes inside the Kremlin. The very public displays of former Yukos CEO Mikhail Khodorkovsky sitting behind bars seems to have cowed the country's private industry oligarchs, who have kept a relatively low profile lately. Promises from Russian President Vladimir Putin that he would safeguard their interests by legally ensuring that 95 percent of their privatizations would never be revisited in exchange for their political support has established relative peace between the Kremlin and this group of oligarchs. While Putin has solidified an alliance on one front, however, he has been dealing with fierce competition among some of the country's state-industry oligarchs as they have battled for control over the vital energy sector. Specifically, Gazprom CEO Alexei Miller and Rosneft CEO Sergei Bogdanchikov have struggled over the fate of their respective companies — with Yuganskneftegaz caught in the middle — for the last several months. Both Miller and Bogdanchikov come from the St. Petersburg clan that represents Putin's main support base; this group has formed a relatively cohesive unit within the Kremlin since Putin came to power. The Yukos affair and plans to expand Gazprom, however, changed everything. Bogdanchikov has never wished to turn control of Rosneft over to Miller, particularly after the bungled Gazprom effort to acquire Yuganskneftegaz landed Yukos' crown jewel squarely in Bogdanchikov's lap. As the head of Russia's largest company, however, Miller has far more political and economic resources at his disposal, which created the appearance that Bogdanchikov would in time give in. It turns out, however, that Bogdanchikov was not playing this game alone, and that his allies have tipped the balance in his favor. Sources inside the presidential administration say Bogdanchikov for some time has worked closely with Igor Sechin, a native of St. Petersburg and deputy head of the presidential administration who has long been touted as a possible chairman of Rosneft. His title may not appear sufficient to be shifting the balance of power in the Kremlin, but Putin engineered it that way. Sources say Putin gave the head of the presidential administration, Dmitri Medvedev, who has sided with Miller on the merger issue, his position to appease competing political elements inside the Kremlin. But it is Sechin who truly heads the Putin administration. Sechin represents a near mirror image of Putin in terms of views and background. A pragmatist who favors Westernization, he is willing to make geopolitical concessions to the West while Russia tries to get back on its feet. Sechin also is a member of the siloviki, the national security establishment, with a background in the KGB and the successor Federal Security Service, like Putin — though Sechin's ties to the siloviki are not as prominent. Similar to Putin, Sechin wants to see Russia regain its footing, but at the same time, he also wants to profit financially from his position — as does nearly everyone in the Kremlin. For Putin, Sechin represents an ideal partner, and throughout Putin's term, Sechin has increasingly acquired Putin's ear. Bogdanchikov is an oligarch, which would lead to the expectation that he and Sechin would have opposing interests given the ongoing competition between the more conservative and nationalist siloviki and more liberal, reform-minded oligarchs over Russia's future. But the two share financial interests, sources say. Given their business interests, Sechin and Bogdanchikov did not want to see Miller become Russia's most powerful businessman — and thereby also one of its most powerful politicians — at the cost of their potential fortunes and power. Their interests led them to join forces in trying to convince Putin that it would be dangerous for the Kremlin to put all of its eggs in Miller's basket — a concern that has been progressively building in Putin's own mind recently according to administration sources. Gazprom's behavior has upset Putin of late. Putin sees Miller using his position to move the company closer to Western firms while denying opportunities to Russian firms. This is to be expected from Miller, considering that Russian firms want to end Gazprom's monopoly over natural-gas production and transport, and foreign firms have the investment capital that Gazprom so desperately needs to modernize operations and become more competitive globally. Those objectives, however, are not in line with Putin's goals of broadening Russia's economic base. In Central Asia for example, Gazprom was embroiled for months in a standoff with Turkmenistan over natural gas contracts, which Putin saw as detrimental to Russia's national interests. As the standoff progressed, Turkmen President Saparmurat Niyazov began flirting with the West and Western firms and talking about redirecting his natural gas deliveries toward Europe and away from Russia — something Putin certainly does not want to happen. In doing so, Miller also made it difficult for other Russian companies to make deals with the Turkmen government — and expanding Russian business influence in Central Asia is one of Putin's economic objectives. Miller's behavior, then, gave Putin cause to pause before creating the world's largest energy firm under Miller's control. Sechin and Bogdanchikov not only preyed upon Putin's hesitation to block the merger with Rosneft, they took it one step further when sources say they proposed building their own energy major to compete with Gazprom and give them — and Putin — their own reliable source of economic and political influence. Putin's growing closeness with Sechin and worries about the Gazprom strategy seem to have landed him on their side, though sources report that he is not yet fully sold on denying Miller control over Rosneft. With the merger likely dead, Rosneft instantly becomes a major oil firm wholly owned by the Russian government, thanks to its acquisition of Yuganskneftegaz. Rosneft and Yuganskneftegaz have a combined output of 1.45 million barrels per day (bpd) — roughly the same amount pumped daily by Algeria. The story does not end there, though, as Rosneft is likely to win control of the rest of Yukos' subsidiaries, adding another 500,000 bpd to 600,000 bpd of production, which would make Rosneft Russia's largest oil company in terms of output and the world's seventh-largest after BP Amoco PLC. On May 13, a Moscow court ruled in favor of Rosneft in a $2.2 billion case over profits allegedly owed Yuganskneftegaz by Yukos for oil deliveries made in the second half of 2004. As Rosneft is suing Yukos for a total of $13 billion on behalf of Yuganskneftegaz for unpaid taxes, undelivered oil and lost profits, Rosneft will eventually get the remainder of Yukos once the courts rule in its favor and reject Yukos' appellate efforts. In a span of a few months, then, a new oil major in Russia has been constructed essentially from its own ashes in a manner exemplifying the extent to which factions within the Kremlin are competing over the country's wealth and power as fortunes rise and fall behind closed doors. This, however, represents only one part of the story. The struggle over Rosneft's future reveals a great deal not only about Russian internal political dynamics, but about its geopolitical future as well — something STRATFOR will address in the next chapter of this story.