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Skip Navigation LinksHome :: Back Issues :: Gazprom goes under the knife

July 2001

Gazprom goes under the knife





       
Bill Browder
It was a pleasant and unexpected surprise. On May 30 in a boardroom showdown between president Vladimir Putin and Rem Vyakhirev, the chief executive officer of Gazprom - Russia's gas monopoly and what the Russian press likes to call a state-within-the-state - Putin ousted what one investor calls "one of the more encrusted of Russia's vested interests".
"It was not just a fundamental victory, but a symbolic one," says Dmitry Abdayev, an oil and gas analyst with United Financial Group, a Moscow brokerage. "It shows that the government is not going to tolerate the corporate governance abuses in Russia's big companies any more."
Investors welcomed what they are calling a "landmark decision", A change at the top of Gazprom is more than welcome. Although Putin has been pushing through numerous reform measures this year, they have mainly dealt with such nuts-and-bolts issues as deregulation and the customs code. Reforming Russia's powerful natural monopolies got bogged down in political infighting at the end of last year, and little progress has been made until recently.
Ousting Vyakhirev from his seat at the biggest company in the country - Gazprom accounts for 8% of GDP and a quarter of state tax revenues - was a major coup and sends a strong message that Putin is committed to reform. Its was widely thought that Putin would fluff his first real trial of strength since he slapped down the oligarchs, the well-connected businessmen of the Yeltsin era, last summer.
But breaking the hold of incumbent management at Gazprom only brings the company to the very first square of the reform process. Now Putin needs to follow through with making changes at the company as well just the personnel.
Alexei Miller is the new CEO, charged to carry out reform of Gazprom. A colleague of Putin's from his St Petersburg days, his major recommendation to the job is loyalty to Putin. Some have wondered if Miller is up to the task, having been catapulted into national-level politics from the relatively obscure post of deputy energy minister.
"You cannot underestimate how powerful the CEO [at Gazprom] is," says Bill Browder, the director of Hermitage Capital Management, a $475 million Russia fund. "As a first step all it takes to help the company is to stop all those there who were actively hurting it. It doesn't take a gas expert to make a difference in this respect."
Arkady Dvorkovich, adviser to German Gref, minister of economic development and trade and now himself deputy minister, said a year ago: "[Gazprom] is completely opaque, even to us. The first job of reforming Gazprom will be working out what it is and how the money flows around it."
Miller got off to a fast start. On the job barely two weeks, in June he cracked open Gazprom's books and for the first time placed them under the media spotlight. A breakdown of some $2.8 billion in loan guarantees was released, which showed management had been handing out money to companies controlled by their children and direct competitors.
Stroitransgaz is the most notorious example, its connections to Gazprom's management well known. Gazprom board member Arngolt Bekker heads the company and co-owners include Vyakhirev's daughter, Tatyana Dedikova, and the sons of Bekker and ex-prime minster Viktor Chernomyrdin, Vyakhirev's predecessor.
Last year Stroitransgaz received guarantees worth R5.8 billion ($200 million) from Gazprom.
Miller also requested the Federal Securities Commission, the stock market watchdog, to start an investigation into a number of share transactions that took place between 1993 and 1996 where Stroitransgaz bought Gazprom shares at a fraction of market rates.
More intriguing was Miller's revelation that Gazprom had given Itera - a US-registered gas trader - R5.5billion in loan guarantees last year, despite the fact that Itera is nominally a direct competitor of Gazprom's. It is widely assumed that Gazprom's management controls Itera, although they strongly deny the accusations.
       
Rem Vyakhirev
In addition to stoking scandal, Miller also released some of the company's operating data that had never before seen the light of day. Operations manager Yelena Karpel says the cost of extracting for domestic and export markets was R55 and R150 per thousand cubic metres respectively, and the cost of transporting it was R10.30 per 100km.
Letting some fresh air into Gazprom's musty corridors is a good start but it will take Miller months to unravel the Gazprom riddle. Putin has said little about what he wants to do with the company, other than increase transparency and do something about ring-fence regulations that prevent foreigners from buying locally traded shares.
The size of the task is underscored by prime minister Kasyanov's comment that government will not even start to think how to begin transforming the company until the autumn. Speaking to the press in June he said: "We cannot be in a hurry to reform the gas industry, the most sensitive of all our monopolies."
Progress on reforming the natural monopolies is going slowly. Rail, telecoms and electricity sectors have partial plans, all of which have raised the ire of minority shareholders. When Gref drew up the reform plan, the section dealing with the natural monopolies was terse. Of 11 key points only one has been implemented - a list of state consumers of power and gas that can't be cut off for non-payment of bills has been approved. This hardly counts as progress.
But progress is needed. Anatoly Chubais, the CEO of national grid operator United Energy Systems, says Russia could suffer a power shortage if UES doesn't attract significant investment by 2005. Chubais showcased the government plan to reform UES at an investment conference in Moscow in June, but many questions remain and the government missed its deadline to confirm the tentative version of this plan as wrangling continued between the liberal camp and Gref.
The argument is over who controls the grid that will be separated from the regional power producers in the first phase running until 2004. Currently the regional energos own and operate everything at a regional level. Other questions, such as how owners of UES shares are going to be compensated on break-up and what form the new companies will take, have to be answered.
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