Foreign investors question Gazprom deals
Gazprom has transferred hundreds of millions of dollars in assets outside the company in recent years while signing
lucrative deals with a firm largely owned by Gazprom's current and former directors, executives and their relatives,
The moves have drawn criticism from foreign investors who fear that Gazprom's valuable assets -- it holds more than a fifth of the world's natural gas reserves -- are being shifted outside the company, or used for personal gain by company executives.
The questions about Gazprom, which is partly state owned, represent a challenge for President Vladimir Putin's pledges of economic reform. They go to the heart of a long-running but still unsettled debate: Will Russia's economy become an open, transparent market in which property and shareholder rights are protected, as Putin has promised, or will it be dominated by suspicious deals and political risk, as it is today?
Foreign investors have questioned whether there is a conflict of interest in deals that Gazprom has made with Stroitransgaz, a pipeline design and construction firm that has received $ 1 bn in contracts from Gazprom. Two sons of former prime minister Viktor Chernomyrdin are major shareholders in Stroitransgaz, as is the daughter of Gazprom's CEO, Rem Vyakhirev. Chernomyrdin was previously CEO of Gazprom.
The foreign investors have also alleged that hundreds of millions of dollars ' worth of Gazprom assets, mostly rich gas fields, have been transferred to another fast-growing Russian gas company, Itera, either without adequate compensation for Gazprom or in questionable stock deals.
Russian financial specialists have long suggested that Gazprom or its executives may have holdings in Itera. Both
companies have denied that such cross-ownership exists and said their contracts are mutually beneficial.
Boris Fyodorov, a former Russian finance minister who represents foreign investors, raised questions about the business deals during a meeting of Gazprom's board Dec. 9. Fyodorov said his questions were not answered fully.
"We would like to get answers," Fyodorov said, "because the main problem of my work in Gazprom is obtaining openness. Openness, openness, openness -- and once again openness, that Gazprom, one of the biggest companies in Russia, unfortunately lacks."
Gazprom, which employs 298,000 people and supplies 25.7 % of Europe's gas, is often described as a "state within a
state" for its powerful, quasi-independent status. The state owns 38.4 % of the company, which is also one of
Russia's largest sources of tax revenue.
This stake could be a gold mine for Russia, but foreign investors say the company's value has suffered badly because of questions about management activities and doubts about overall risks of doing business in Russia. For example, Gazprom's current market capitalization -- the value of all its stock -- is about $ 6.2 bn.
By comparison, Exxon Mobil's market capitalization is $ 302 bn. Gazprom has approximately six times the energy reserves of Exxon Mobil but, per unit of energy, the value of Gazprom stock is worth a fraction of Exxon Mobil's. The reason is not energy, but the risks perceived by investors in both Gazprom and Russia.
Putin has attempted in recent months to impose more control over the vast company. Dmitri Medvedev, 35, a first
deputy head of the presidential staff, has been installed as chairman. Medvedev recently acknowledged that Gazprom's
market capitalization is "monstrously low" and suggested the company might be worth "hundreds of billions of
However, the Kremlin appears to be moving slowly to change management and may wait until Vyakhirev's contract expires next year. The Washington Post obtained documents detailing Gazprom's dealings with Stroitransgaz and Itera in part from Fyodorov, who distributed them after the December board meeting, and in part from records of the Russian Federal Commission on the Securities Market.
Fyodorov has suggested a possible conflict of interest in Gazprom's dealings with Stroitransgaz. Stroitransgaz has $ 1.2 bn in orders on its books, and has said in reports to the securities commission that 81 % of its business is from Gazprom.
According to Fyodorov and documents filed with the securities commission, more than 50 % of Stroitransgaz stock is owned by Gazprom board members, executives and former executives, or by their children and other relatives.
These include Vyakhirev, whose daughter, Tatyana Dedikova, owns 6.4 % of Stroitransgaz; Chernomyrdin's sons Vitaly and Andrei, each of whom owns 5.96 %; and three children of Arngolt Bekker, who is president of Stroitransgaz and a board member of Gazprom. Bekker owns 20 % outright, and his children own between 2.6 % and 6.9 % each. A relative of yet another Gazprom board member and deputy CEO, Vyacheslav Sheremet, owns another 6.4 % of Stroitransgaz.
Chernomyrdin, a one-time Soviet gas minister, became the first chairman of Gazprom when it was privatised, served as
Russian prime minister from 1992 to 1998 and later returned to Gazprom as chairman before resigning the post this
year. He is now a member of the lower house of parliament, the State Duma.
Fyodorov, in written questions posed to Gazprom, asked how the relatives of Gazprom executives came into possession of their holdings in Stroitransgaz. According to documents filed with the securities commission, Stroitransgaz appears to have received favourable treatment in a 1995 stock deal in which it purchased 4.8 % of Gazprom's stock.. Although the market value of the stock at the time was $ 191 mm, Gazprom sold the shares for $ 2.5 mm, the documents show.
One investor called the transaction a huge "gift" from Gazprom. Fyodorov said the deal was "another example of strange cooperation" with Gazprom in which Stroitransgaz benefited. Bekker, the Stroitransgaz president, was quoted as saying that the shares were payment for contract work.
Questions surrounding the relationship between Gazprom and Itera involve control over lucrative Gazprom assets,
primarily natural gas fields. Itera was founded by Igor Makarov, a former world-class cyclist from Turkmenistan, who
got his start with barter deals. In the 1990s, Itera became a broker between Gazprom and customers who often failed
to pay their bills.
More recently, Itera has been edging into the Russian domestic natural gas market. Itera's president, Valery Otchertsov, told investors in Boston recently that Itera planned to produce 18 bn cm of gas this year, making it Russia's second-largest producer. The company has 7,000 employees in 24 countries, including an office in Jacksonville, Florida.
According to Fyodorov, Itera has become one of the largest natural gas companies in the world in just three years, with 1.2 tcm of reserves, somewhat less than Kuwait with 1.49 tcm but larger than Norway with 1.17 tcm. Fyodorov and other investors have asked how Itera managed to expand so rapidly. They have alleged that hundreds of millions of dollars ' worth of assets have been transferred to Itera from Gazprom on questionable terms.
Fyodorov said it was agreed at the Gazprom board meeting that the government's economics minister, German Gref, who also serves on the board, would collect all the outstanding questions about Itera for a possible investigation. "It is obvious that shareholders have the right to ask these questions, because it can easily be seen what sorrowful condition Gazprom finds itself in comparison with Russian companies," Fyodorov told. "These are questions which raise certain doubts, and we need to do away with them." Itera has denied that it has been stripping assets from Gazprom.
Otchertsov said that Itera had invested $ 400 mm in profits and loans into its gas fields. "This fact annuls all the
accusations of 'asset stripping' of Gazprom, he said. "What assets are we talking about?" However, Fyodorov said that
Itera had received $ 472.5 mm in credits guaranteed by Gazprom from 1997 to 2000. "This shows that, factually,
Gazprom is financing all the 'investment' of the Itera group," Fyodorov wrote in a document titled "Itera: Myth and
An Itera vice president, Vladimir Martynenko, said Itera had repaid its debts to Gazprom and was no longer relying on the gas giant for loans. Fyodorov said that Itera received all of its assets either directly or indirectly from Gazprom. These include holdings in four of Itera's Russian gas subsidiary companies: Rospan, with 247 bn cm of reserves; Sibneftegaz, with 353 bn; Purgaz, with 399 bn; and Tarkosaleneftegaz, with 231 bn.
Fyodorov and others have questioned why Gazprom allowed its share of these valuable assets to shrink. For example, he said, 51 % of Rospan was sold to Itera for its nominal value, about $ 286, at a time when Gazprom's own securities department estimated that the company was valued at $ 104 mm. Rospan was deeply in debt, largely to Gazprom, at the time.
In another example, Tarkosaleneftegaz, a gas company based in the Tyumen region of western Siberia, was 46 % owned by Gazprom in 1994. But then the company issued more stock in a series of transactions, and in the process, Gazprom's holding was reduced to 24 % while Itera's grew to 30 %, as of 1998. Since then, Gazprom's share has dropped to 8 %. Itera's share appears to have been reduced, whereas another company, TNG Holding, now has 48 %.
The securities records show there were five issues of stock and stock splits between March 1994 and April of this year. The records indicate that Gazprom did not use opportunities to maintain its percentage share of Tarkosaleneftegaz, when it would have been relatively inexpensive to do so. In at least one instance, however, it bought additional shares at a comparatively high price.
In a transaction in November 1997, Gazprom's holding declined from 46 % to 27 %, although it would have cost Gazprom
just $ 175,000 to preserve its ownership share. In February 1998, Gazprom boosted its share back to 40 % by paying $
65.5 mm in promissory notes for the new shares.
In August 1998, Gazprom's percentage declined again to 24 %, when Itera apparently bought shares of the subsidiary. Gazprom's holding went down further, to 19 %, in June 1999 during another transaction, although it would have cost it only $ 1.3 mm to keep its holding intact.
In April of this year, another transaction left Gazprom's share at 8 %, when it would have cost $ 6.6 mm to keep its holdings intact. In a separate case, Gazprom held 45 % of a subsidiary, Sibneftegaz, in 1995, records show. The company has a large field, Beregovoye, in north-western Siberia.
Two stock transactions in 1997 and 1999 have reduced Gazprom's ownership to 21 % of the company, records show. Itera now has about 38 %, according to Martynenko. Fyodorov said he was not levelling charges at Itera, but posing questions for Gazprom. "We see one company growing," he said of the two companies, "and the other shrinking."