(continuation)

In the issue #63 we began to publish the non-government report by Vladimir Milov and Boris Nemtsov titled “Putin and Gazrpom”. In Part I the gas concern was considered as a personal project by the previous Russian President, comparable in status to a football. Now the authors will tell what dividends people close to Vladimir Putin might have got out of that “personal” project.    

<…> Initially, Putin was engaged actively in returning to Gazprom the assets withdrawn from the company to outside structures at Rem Vyahirev (former head of Gazprom). <…> However, after major part of assets was returned, in most cases same assets began to be estranged from Gazprom again. The fundamental change occurred after Putin was elected President for the second term. 

<…> The lost due to all shady transactions tens billions of dollars could have been directed into investment into gas production and overcoming the crisis in the gas supplies in our country, but that failed to be done. 

Manipulations with Gazprom shares

At the early 2000s the return of Gazprom shares, taken away at Rem Vyahirev, was one of the celebrated projects by Putin. In particular, a story of return of 4.8% of Gazprom shares from Stroitransgaz drew a wide response.   

However, after returning the shares to Gazprom balance, they began to disappear in a strange way. The process being gradual, still all those who wish they can see it looking at quarterly financial statements by Gazprom made under IAS; each of such a report contains information about the number of Gazprom shares that are on the assets register of its daughter companies.    

So, as of 31 March 2003, according to the financial statement under IAS, at the first quarter of 2003 the Gazprom daughters controlled 17.4% of its stock. And as of 31 December 2007 the number was only 0.3%. Along with that, in 2005, 10.7% of stock was bought by state-owned Rosneftegaz.   

But, 17.4% – 10.7% – 0.3% = 6.4%. Thus, starting from 2003 6.4% of stock disappeared from Gazprom balance. And the major part of that disappearance could be seen during the year of 2007: as of 1st January Gazprom daughters controlled 3.4% of stock and at the end of year only 0.3%.    

Apparently, part of shares was excluded from the register in relation to removal of the accounting of pension fund Gazfond (headed by Putin’s friend Kovalchuk) from the consolidated financial statements by Gazprom. The Company also explains that it buys and sells its own shares in the market periodically. 

However, it is not known where a rather big shareholding of Gazprom disappeared from the balance of its daughter companies within 5 last years.   <…> This is the second in size block of shares in Gazprom after the one belonging to the state. Its share is equal to that belonging to the German Company E.ON-Ruhrgas. The dividend out of such a quantity of shares, proceeding from Gazprom dividends in 2007, is $170 millions per year. And if we proceed from a level of dividend payment in Russian private companies, this would be $1.1-1.7 bn. The owner of such a block of shares can count on having one’s own candidate to be present among the 11 members of the Gazprom board.    

It is difficult to comprehend how such a share holding can have gone away from the direct state control. <…>
If those 6.4% of stock were sold at the open biddings today, Gazprom could get up to $20 bn, which could be used for development of the gas production. 

Another fraud with Gazprom shares is also worth mentioning. That’s about buying by the state 10.7% of stock in summer 2005 with the purpose of getting controlling interest by the state in Gazprom.   

<…> Factually, the state could have regained control with relatively small money, transferring the shares from the Gazprom daughters balance to the parent company and redeeming it as treasury stock. In that case the state would have been able to increase its block of shares from 39.3% to almost 48%, just for free. The rest of 2% could have been bought in the market (in 2003 it would have cost no more than $500-700 millions). 

Similar suggestions were discussed in the Russian government as far back as 2000. From economic point of view, repurchasing of the Gazprom shares and paying money from the budget was not reasonable. Wouldn’t it have been better to spend that means for overcoming the deficit of the pension Fund? The state, however, preferred, first, waiting till the market capitalization of Gazprom increased and the purchased shares went up. Second, instead of non-cost-based redeeming of the treasury stock, the 10.7% of the Gazprom shares was bought for big money in 2005. That purchase took $7.2 bn which was ten times as much as the money that might have been spent on buying 2% of the Gazprom stock in market in 2003. Well, a couple of months after, in September 2005 that money was used for payment of the purchase of the oil company Sibneft from Roman Abramovich.   

<…> The budget lost at least $6.5 bn on that deal. It’s interesting to know whether such a “deal” may be defined as “embezzlement of the budget means”?

Incidentally, “purchased” in 2005 10.7% of the shares did not become the property of the Russian Federation, remaining to “hang about” on the balance of Rosneftgaz.

Purchase of Sibneft

In September-November 2005 Gazprom bought 75% of Sibneft stock from Millhouse Capital that is considered to belong to Roman Abramovich (though, we noted in our report “Putin.Itogi” that the real owners are not known).  

We have written in details about that deal and how the price of Sibneft was artificially warmed up in the market (“Vedomosti” issue of 28 September 2005). At the beginning of 2005 the shares cost $3 per piece and by the moment of the deal concluded the price was $4.   

Now, three years after the deal about Sibneft, one may conclude for sure that entering the management of the oil market by Gazprom has proved to be a failure. The average daily oil production by Sibneft has fallen from 95.8 thousands tons in September 2005 to 84.7 thousands tons in June 2008, which is 11.5% in less than three years. Gazprom has invested $13.7 bn into a failed project, from the point of view of output, and it has obviously overpaid to the structures of Roman Abramovich. V.Putin in person was the curator of that deal. And no one has been held responsible for useless and failed project of purchasing the Sibneft.    

Sogaz

Selling Sogaz was the first example of passing the Gazprom assets to management by Putin’s friends. Sogaz – Insurance Company of the gas industry – is one of the largest insurance bodies in Russia. In 2004 Sogaz held the 6th place in the rating of the Russian insurance companies with the size of insurance premium of about $500 millions.

<…> Sogaz was sold by Gazprom <…> to a consortium composed of the Evrofinans Mosnarbank, Severstal-group and the Rossia Bank. Studying the statement by Sogaz for the first quarter in 2005, it becomes clear that 51% of Sogaz stock was later sold to a 100% daughter company of the Rossia Bank, that’s the Abros firm. Another 12.5% got under control of the Aksept Company, holding 3.93% of the Rossia Bank.  

According to the Russian media, the 99.99% of Aksept Company belongs to Mikhail Shelomov, the son of a cousin sister of Vladimir Putin. 
The Rossia Bank was founded in 1990. Its main depositor was the Affairs Department for the Leningrad oblast committee of CPSU. According to the Russian media, the President of the Bank, Yuri Kovalchuk, is also one the Bank’s largest stockholders, and is one of the closest to Vladimir Putin businessmen, with whom he has been acquainted since his period of working in St Petersburg.  <…>

That way Gazprom lost control over the largest insurance company. After being passed under control of the Rossia Bank, the Sogaz business began to grow rapidly: the insurance premium went up from $500 millions in 2004 to almost $1.5 bn in 2007. According to estimation by the Russian media**, the main factor of the premium increase was signing the agreement with large state companies (including Rosenergoatom, Russian Railroads and others). <…>

According to estimation by the management of the Rossia Bank***, the purchase of Sogaz cost it about $120 millions, while at the time being the value of the company may be $1.5-2 bn. <…>

Gazfond and Gazprom Bank

In August 2006 Sogaz, already belonging to the Rossia Bank, bought 75% plus 1 share of the Lider Company’s stock. That Company managed the pension fund of Gazprom, named Gazfond. Gazfond is the largest non-state pension fund in the country. Its pension reserves amounted to over $6 bn as of 1 July 2006. Those means do not belong to the pension fund and managing it Lider Company. However, they may be invested into any projects under a decision by the Steering Committee. By the moment of purchasing the management company Lider, the owners of the Rossia Bank had prepared for getting control over the pension fund. In the end of 2005 Yuri Shamalov, the son of Nikolai Shamalov who was the shareholder of the Rossia Bank since the end of 2004, became the President of Gazfond.   

The controlling interest of the Gazprombank, one of the largest banks in the country, was bought exactly with Gazfond money. <…>.

At the end of 2006 the board of Gazprom approved of alienation of part of Gazprombank shares not for money but in exchange for a block of shares of Mosenergo. Gazprom could have kept Mosenergo or have sold the shares of this electric energy company and Gazprombank itself. However, it was decided to do that “exchange” which resulted in that controlling interest of Gazprombank had been consolidated by Gazfond by April 2007 (which was reported by Gazprombank press service). Gazprombank, with its market value estimated by a number of experts to be $25 bn, just came out of the control by Gazprom, and Gazprom did not get a kopeck of solid money for that valuable asset.    

Gazprom media

After a series of numerous inside exchanges of assets it happened that the largest Russian media holding, Gazprom media, got out of direct control by the company. Gazprom media is formed with TV stations NTV, TNT and other media assets. The shares of the holding had been passed to the Gazprombank register even before the controlling interests of the bank went to Gazfond, i.e. got to the business empire of the Rossia Bank and Yuri Kovalchuk. When in July 2005 the shares of the Gazprom media Group and NTV and TNT were passed to Gazprombank (that time it was still a common inside deal within the Gazprom group), Gazprom got for that the assets from Gazprombank worth only $166 millions.

However, two years after, when Gazprom media as part of Gazprombank assets was passed under control by the Rossia Bank, that-time deputy prime minister Dmitry Medvedev voiced the information about Gazprom-media assets value which was estimated to be $7.5 bn. So it turns out that Gazprom gave those assets with the price tens times less (or $7.3 bn less) of its real value!  

Along with Gazprom-media, the Rossia Bank got in possession of other large media assets – REN TV and the St Petersburg’s the 5th Channel, also the most widely read newspaper Komsomolskaya Pravda, and tens of TV and radio stations and newspapers. In 2005-2007 this media group won the tender for the right of broadcasting in 41 regions in Russia; later it got frequencies in other 29 regions. The loss of profit by Gazprom out of losing control over Gazprom media is more than $7.3 bn.    

Rosukrenergo

The doubtful scheme of using non-transparent mediators for re-selling the Turkmen gas to Ukraine and further re-export of part of that gas to Europe was created by Putin’s group in 2002. At Rem Vyahirev’s time in Gazprom, similar doubtful operations were conducted by Itera Company. <…>

At the beginning of the Putin’s presidency there were serious hopes that this kind of mediators would disappear from the relations within the triangle Turkmenistan-Russia-Ukraine, and Gazprom would be getting direct profit out of participation in those relations. However, in 2003 the favored by Rem Vyahirev Itera was substituted with a mediatory company of EuralTRansGas, registered in Hungary by four physical persons in 2002. In 2004, according to estimation by Vadim Kleiner**** from the investment fund Hermitage Capital Management (afterwards, the head of this fund was refused Russian visa, while its employees got persecuted), the shareholder in Gazprom, attempting to protest against withdrawal of the means from the company, Gazprom gifted the mediator EuralTransGas $767 millions of profits out of operations of reselling the Turkmen gas to Ukraine and its further re-export.   

Starting from 2005, the EuralTransGas gave in its mediatory role in the triangle Turkmenistan-Russia-Ukraine to Rosukrenergo registered in Switzerland and given the exclusive right of reselling the Turkmen gas to Ukraine. The Gazprombank (with a share of 50%) and some unknown persons acted as founders of Rosukrenergo. It has been voiced repeatedly the suspicions of involvement by criminal authorities in the activities by Rosukrenergo and EuralTransGas. Afterwards, the businessmen Dmitry Firtash and Ivan Fursin admitted to having a share in those companies. Despite the fact that now Gazprom was getting its share of profits through Gazprombank out of reselling the Turkmen gas to Ukraine and its further re-export to Ukraine, still the amount of $478 millions of profits passed by Gazprom and came to unknown persons. Thus, in 2004-2005 Gazprom just gifted to unclear mediators $1.25 bn out of trading with Turkmen gas to Ukraine.      

Moreover, the role by Rosukrenergo extended with time. After the sadly known Russia-Ukraine gas agreement of 4 January 2006, Rosukrenergo got exclusive rights of reselling all the Russian and Central Asian gas to Ukraine. With that agreement, all the direct contractual relationship between Gazprom and “Naftogas of Ukraine” were liquidated. As it will be shown below, that scheme was no commercial success for Gazprom. 

At the end of 2006, right before Gazprombank being passed under control by the Rossia Bank, Gazprom purchased from it 50% of stock of Rosukrenergo, for €2.3 bn (which was about $3.5 bn). Besides, shortly before that Gazprombank and private shareholders of Rosukrenergo got dividend at the amount of $730 millions. Thus, before passing Gazprombank to the Rossia Bank, Gazprom had inflated it additionally with billions of solid money that became the property of the Rossia Bank.      

In exchange, Gazprom got a share in an obscure mediator, that was created out of nothing, and whose destiny is not decided clearly. If tomorrow a decision is taken about exclusion of Rosukrenergo from the scheme of selling gas to Ukraine, it would turn out that Gazprom wasted about $3.5 bn paid for the stock of shares of that company.    

On the aggregate, counting all the losses of means due to the use of mediators in previous years about supplies of the Turkmen gas to Ukraine, the general loss by Gazprom out of “mediator” affairs has been about $5 bn. <…>

Sibur

The story of attempt on selling the oil and gas chemical holding Sibur to private persons in 2008 seems to have been the most audacious example of actions intended for taking the Gazprom assets away in recent years. Sibur is the largest oil and gas company in the country. Its turnover in 2007 was $6 bn while the operating income was $1.2 bn. 

In 2002-2003 the story of return of Sibur, after an attempt of taking it out of control by Gazprom, an attempt made by the former Sibur President Yakov Goldovsky, was one of the celebrated episodes of the propagandist campaign by Putin about returning the assets lost at Rem Vyahirev. <…>

However, it turned out that Sibur was returned just to be passed to certain private persons. <…>. First, after a series of manipulations Sibur was taken out of control by Gazprom and got to Gazprombank (70% of stock plus 1 share) and Gazfond (25% plus 1 share), which later went to the Rossia Bank (as mentioned above). Along with that, in 2005 Gazprom wrote off the debt of Sibur in the amount of 40 bn rubles.  

<…> 22 April 2008 the President of Sibur Dmitry Konov and other 4 top managers informed the board about intention to start talks with Gazprombank about back purchase of the Sibur’s controlling interest to the name of belonging to them Cyprus-based off-shore company Hidron Holdings Limited. Five days after, the parties came to agreement about the price and about preliminary terms of the transaction. According to the Russian media, Hidron will purchase from Gazprombank all the 70% of the Sibur’s stock, proceeding from preliminary estimation of the company of $3.8 bn.  

At the same time, according to some experts, the real value of Sibur is no less than $6.5 bn.   

Almost half of the amount to be paid by Sibur’s top managers to Gazprombank under the terms of the transaction (25 bn rubles out 53.5 bn rubles) will be borrowed from Gazprombank again with a credit given for three years. In fact, Gazprombank is going to finance the deal for the buyers! Besides, after back purchasing of Sibur, its new owners would be able to sell to Gazprom again the Sibur’s daughter businesses – Sibur-Russkie Shiny and Sibur-Minudobrenia – which will be probably done with price markup. 

It is not clear what kind of merits can be an explanation for such a generous gift made to 5 top managers of Sibur that have been working in the company just for a few years. <…> Besides, it is not clear who the real beneficiary of the Cyprus Hidron Holdings Ltd. is. Judging from the speed and fantastic terms of the deal, one may conclude it’s not Konov&Co, but a certain top ranking official who is possibly going to be awarded that way for his hard working.     

On the whole, in this story with Sibur Gazprom may lose no less than $3 bn dollars.  

Buncoes with Gazprom assets: conclusions 

In the late years, as a result of shady transactions related to taking away of Gazprom assets, the company lost control over assets with the total value of over $60 bn (6.4% of its own shares, block of shares in Gazprombank, Sogaz, Sibur, Gazprom-media, assets of the largest non-state pension fund Gazfond) and means in the amount of almost $20 bn taken from the company under the pretext of purchasing the shares from Sibneft and through scheming with the trader Rosukrenergo.

According to our estimation, the size of the lost profits by Gazprom out of those deals is equal to the cost of exploration of Stockmanovskoe, Bovanenkovskoe and a number of other gas fields, taken one with another. Those means could have been spent on development of the gas producing industry and securing the reliable gas service to the Russian consumers. 

Instead of that, we have only seen efforts intended for strengthening of the business empire by the Rossia Bank that was built on the assets taken from Gazprom (see the figure).  

(to be continued)

*Considering 0,9% of stock belonging to state-controlled Rosgazifikazia Company. 

**For more details see Vedomosti, the issue of 24 July 2008. 

***Interview with the President of the Rossia Bank D.Lebedev. / Vedomosti, the issue of 17 June 2008.  

****The source: presentation titled “How Should Gazprom Be Managed in Russia’s National Interests and the Interests of Its Shareholders”. Vadim Kleiner, Gazprom Board Candidate, июнь 2005 г.