08 June 2004 04:35
Gazprom Leaking Billions, Report Says
Gazprom appears to have hemorrhaged more than $2 billion last year via a massive increase in miscellaneous expenses
and staff costs, as well as from lost sales to key European export markets granted to a middleman with a murky
background, according to a new study.
The study, which is to be released Tuesday, was conducted as part of an attempt by a key minority shareholder in
Gazprom, Hermitage Capital Management, to get its research director, Vadim Kleiner, on the gas giant's board of
directors in a vote at the company's annual general meeting later this month.
Hermitage's questions over possible corporate mismanagement at Gazprom come at a time when the company needs all
the money it can get for a $100 billion expansion into new gas fields over the next 15 years -- vital for the company to
maintain production at current levels and keep global market share.
Gazprom CEO Alexei Miller has pledged to put an end to the egregious mismanagement at the company under his
predecessor, Rem Vyakhirev, when up to $3 billion per year was squirreled away into crony companies, investors alleged.
But despite successes in returning some lost assets and in keeping down costs, Miller oversaw a "significant
deterioration" last year, Hermitage says.
"The situation looked like it was getting better in the early post-Vyakhirev years," said William Browder,
CEO of Hermitage Capital Management, which manages some $1.5 billion in assets on the Russian stock market. "Now,
however, it seems to be quickly deteriorating."
Gazprom, however, said it has done much to improve transparency over the last few years. "Soon we shall be so
transparent you won't even be able to see us," Gazprom spokesman Sergei Kupriyanov said.
Hermitage and other market analysts say some key figures suggest otherwise.
One of the most alarming headline indicators, Hermitage says, is a huge 92 percent increase in "other"
costs last year. This vague line item climbed $720 million from the third quarter of 2002 to reach $1.5 billion in the
third quarter of last year, Hermitage says, citing the most recently published financial results for the company.
Kupriyanov said the hike had come as a result of changes in accounting practices combined with the start up of a
equipment leasing program last year and higher spending on pension reserves, insurance and telecommunications. He said
the company is ready to provide a breakdown of how the $1.5 billion was spent to any shareholder who asks. "To say
that we are hiding things is absurd."
Some analysts were not convinced. "This is a huge increase, and the company cannot explain fully where the money
is going," said Oleg Maximov, oil and gas analyst at Troika Dialog. "This raises a lot of questions.
"All the good results we have seen from the company over the past three to four years have all come on the back
of high gas prices and domestic tariff increases." he said. "We have not seen enough moves to improve the
company's efficiency. This makes the company very much dependent on an external environment that it cannot
control."
Investors are also questioning Gazprom's logistical and financial support for Eural Trans Gas, an obscure energy
trader that has risen to become the first entity to break into Gazprom's closely guarded monopoly on gas exports
from the former Soviet Union.
With 5.2 billion cubic meters in sales to Germany, Slovakia and Poland and 7.7 bcm to Ukraine last year, Hermitage
estimates ETG earned $767 million in net income that, it says, should have gone to Gazprom.
Gazprom had pledged to regain control of sales to the former Soviet Union's most lucrative market, Ukraine, but
in December 2002 it signed a deal to let newcomer ETG take control of 36 bcm in annual sales from Turkmenistan to
Ukraine.
Gazprom's control of the pipeline network from Turkmenistan to Ukraine should have put it in position to take
control of the lucrative sales, Hermitage says. "Without Gazprom, nobody could do any business," Browder said.
"Eural Trans Gas has no obvious role."
Gazprom said it had to go along with Ukraine's choice of ETG because it was bound by an intergovernmental
agreement and Ukraine could retaliate by raising tariffs on Gazprom's exports.
More questions about the relationship were raised by revelations last year that Gazprom provided financial backing to
ETG by issuing loans and guarantees worth $297 million and by providing $130 million in transportation services.
Gazprom had earlier said ETG was chosen as an agent because it could pay those transit fees in full. But as of the
third quarter of 2003, ETG had still not paid the $130 million, according to Gazprom's own financial results, said
Hermitage's Kleiner. Kleiner serves as minority shareholder on the board of Sberbank, where he has gained a
reputation for asking difficult questions about its financial and corporate practices.
Gazprom issued the loans and guarantees to make sure ETG could pay its transit fees to Gazprom on time, Kupriyanov
said.
"This does not make any commercial sense," Kleiner said. "Why doesn't Gazprom issue a couple of
loans to Ukraine to make sure it can pay all its debts on time as well?"
With Gazprom also lending a helping hand to ETG in conducting gas sales to Europe via its export arm Gazexport, which
is acting as an agent for all ETG's foreign sales, questions are being raised about whether Gazprom has closer ties
to the company than had previously been disclosed. Gazprom strongly denies any ties to the company. It says
Gazexport's handling of ETG's foreign sales is aimed at giving it crucial leverage over exports it says it
cannot stem.
ETG was bought earlier this year by a trio of foreign-based companies amid much fanfare for the boost in transparency
that the new ownership structure appeared to bring to the company. Before the sale, it was owned, at least on paper, by
three Romanians with no business experience and an Israeli citizen with alleged ties to one of the FBI's
most-wanted mobsters, Semyon Mogilevich. ETG denies links with Mogilevich.
But despite having former British Gas chairman Cedric Brown as its new chairman and names like Dutch-registered JKX
Gas BV, British-registered Atlantic Caspian Resources and Austria's DEG Handels as its new official owners,
it's still impossible to say who the company's beneficial owners are.
The paper trail for ownership of the companies appears to stop in Cyprus with two front companies, Dema Trustees Ltd.
and Dema Nominees Ltd., Hermitage found.
Other reports have claimed two British citizens, David Brown and Robert Shetler-Jones, are the eventual beneficiaries
of the scheme. Calls to Brown and Shetler-Jones, who reportedly was previously the CEO of a Ukrainian port, were not
returned.
Questions over corporate practices do not stop there. Hermitage noted that electricity costs at Gazprom jumped 60
percent last year while tariffs for industrial users increased just 17 percent.
Also catching Hermitage's attention was a jump in staff costs, which shot up 39 percent from the third quarter
of 2002 to the third quarter of 2003 -- an increase way above average salary hikes of 25 percent over the same period in
Russia. "This is off the scale," Browder said.
Kupriyanov said Gazprom was forced to raise wages so much because it has to compete with major oil companies for a
very specialized workforce.
Wage increases at major oil companies Sibneft and Surgutneftegaz were 20 percent and 13 percent, respectively, over
2003, however.
Other analysts said that overall, Gazprom's corporate governance performance has much improved. "[Hermitage
is] doing the right thing in drawing attention to spheres of Gazprom's sprawling empire that appear to be acting
dishonestly and in seeking bigger disclosure," said Adam Landes, oil and gas analyst at Renaissance Capital.
"But in general, Gazprom appears to be operating more honestly than it ever was."
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[The Moscow Times] |
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