Gazprom will be steering different course after its annual general meeting

Jul 11, 2000 02:00 AM

by Ben Aris

The results of Gazprom's annual general meeting exceeded minority investors' best hopes. Minority shareholders increased their representation on the gas company's board from one seat to two. At the same time, reform-oriented government representatives strengthened their hand.
The main event at the AGM was the management's loss of their majority on the board of directors. During the board elections, this entrenched camp, which previously held six out of the eleven board seats, saw its representation fell to four.
The government camp, meanwhile, kept its five seats on the board, but one of its members acceded to the post of chairman. Viktor Chernomyrdin, Gazprom's chairman and one of the group that founded the company in 1991, resigned, clearing the way for Dmitry Medvedev-a key member of President Putin's election campaign team and deputy head of the presidential administration-to replace him.
This not altogether unexpected development will strengthen Putin's control over the company. Moreover, putting Medvedev at the head of Russia's biggest company will make it possible to reform Gazprom sooner rather than later.

The entrance of the new government team suggests that the Putin administration has become more concerned with making Gazprom accountable. During Boris Yeltsin's term in office, by contrast, it was run as a state within the state. The point is underscored by that fact that German Gref's economic plan -- which was finally approved last week -- singles out Gazprom for reform and greater transparency. (Note that Gref was also elected to a seat on the gas company's board.)
And the government could soon increase its control further. A change to the charter that would have let Rem Vyakhirev, Gazprom's already entrenched CEO, consolidate his position on the board was heavily defeated. The current charter requires that the board -- which includes the CEO -- vote unanimously for the CEO's dismissal! The proposed new charter removes this anomaly, but it does contravene the Law on Joint-Stock Companies, which says that a simple majority is sufficient to sack a CEO.
If the government were to decide that the Law on Joint-Stock Companies takes precedence over the charter with regard to dismissing the CEO, Vyakhirev could find himself out on his ear soon. If this happens, then Medvedev could be first in line to succeed him.
At the same meeting, two seats went to representatives independent of both government and management for the first time in the company's history. The minority faction elected Boris Fyodorov, one of Russia's true economic reformers, with more votes than any other candidate. This was the most surprising AGM event and is a positive development. Yet minority protection at Gazprom is secondary in importance to improving domestic market discipline.

Early this week, Fyodorov kicked off his new role in Gazprom by announcing that his top priority would be to topple the so-called ring-fence around Gazprom local shares. At present, foreigners cannot (in theory, at least) buy local shares in the company and are restricted to holding American Depository Receipts (ADRs), or proxy shares. The ring fence also effectively prevents the government from privatising more stakes in the company.
Opposition to the ring fence is gathering momentum. An unnamed but senior source in the government was quoted as saying that the Kremlin is considering removing the ring fence in preparation for a privatisation of the part of the company. But the government says it is in no rush.
State Property Minister Farit Gazizullin, meanwhile, said that Moscow would wait until the market was ready to offer $ 1.0-1.2 bn for a 2.5% stake in Gazprom slated for privatisation. He said the price it would fetch now would be only $ 500-550 mm. "We shall not sell Gazprom shares this year, that is for sure," said Gazizullin. "Probably not next year. Gazprom is such a blue chip ... Why should we hurry? We are going to think about what to do with Gazprom."

The ring fence is a long-term problem, but Fyodorov's presence on the board should also serve to improve Gazprom's corporate governance and increase transparency. Fyodorov has indicated that he wants to address the matter of Gazprom's murky relation with Itera, a private company that has acted as Gazprom's trading partner in the CIS. Relations between the two gas companies have been dogged by accusations of corporate governance violations by Gazprom management. (Itera, for its part, announced on June 5 of this year that it was jumping on the ADR bandwagon and was also planning a float on NYSE).
The other minority shareholder elected was Burckhard Bergman of Ruhrgas, which owns 3.5% of Gazprom and is their biggest European customer. His election also strengthens the government's hand as in case of conflict between the management and government, Bergman is likely to abstain.
Despite the good news, the main challenge the company faces is to improve market discipline. Its record on bill collection is miserable, and non-payments for domestic deliveries of gas remain a major headache. It is politically impossible to cut off customers, as the population of entire regions could easily freeze to death during Russia's long winter. But the onus of forcing through reforms will now fall as much to the government as the company's management.

Source: NewsBase
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