Gazprom Embezzlement Eyed, Liberalization Seen Likely, Set To Cause Inflation
CEP20021218000187 Moscow Stringer News Agency WWW-Text in Russian 18 Dec 02
[Article by Lavrentiy Pavlov: "The Secret of Gazprom Promissory Notes: 'Where Is the Money, MIL?'" -- taken from HTML version of source provided by ISP]
[FBIS Translated Text]
A few months after his appointment as head of the Gazprom OAO [open joint-stock company] management body, Aleksey Miller had an unpleasant conversation in the Kremlin. With his immediate boss back from the Petersburg City Hall Foreign Relations Committee, Vladimir Putin.
Looking at his loyal fellow fighter and in a quiet voice Putin politely inquired, "Where is the money?"
Miller became ill at ease. "We will investigate it and report back," he hastened, not fully realizing the scale and difficulty of the task that had been set.
The episode was about the difference between the price of Russian gas for foreign consumers and the price used to record receipts from selling it in the revenue side of the budget. All the signs are that the difference, and a very respectable one at that, was pocketed by intermediaries. But would it that this were the only hole through which enormous amounts of money have leaked away from the state out of the gas sector!
In the era of Boris Yeltsin's rule, the sector was handed into the responsibility of two hardened managers, Viktor Chernomyrdin and Rem Vyakhirev. In the frenzy of Yeltsin's NEP [New Economic Policy], during which state supervision of the use of natural resources was considered improper, this duo marshaled Gazprom's activity on the basis of their own ideas of good and evil.
Their patrimony was called an empire not only because of its strength and wealth but also because it was a monopolist on the internal market. And even in the nonpayment chaos of the 1990s, a monopolist like this always had the opportunity to force its buyers to pay for gas in full in line with clear-cut and explicit payment schemes. But the chiefs and those close to them preferred a different route.
The schemes for the movement of Gazprom funds immediately began to become more complicated, financial flows bifurcated many times and were quickly hidden in the shadows. Barter deals, bogus firms, and little-know accounts in hundreds of banks were used as camouflage.
When there was a need to pay contractors for work they had done, for example, Gazprom transferred "ready" money to one of its own companies. Over a billion dollars a year was pumped into the Stroytransgaz firm, which was owned by relatives of the gas sectors bosses, on pipeline construction contracts, say. Stroytransgaz paid the contractors but only with promissory notes. If someone had done a million rubles' worth of construction work, for example, he would get that million ... in securities.
But the laborers needed not securities but real working funds. So they went to redeem the promissory notes at firms and banks close to Gazprom. But they only bought the securities at a discount, one that reached as much as 20-30%. The contractor actually received the same percentage less for his work, even though he had to pay tax and VAT on the virtual million he had been given in promissory notes!
Knowing these ruses, some farsighted industrialists increased the projected cost of the work in advance in order to get what was theirs in the end. Gazprom did not lose anything either but the discount money generally skipped the accounts and taxation. There were many such operations and they still continue.
Similar tricks were played with all the financial instruments that found themselves at Gazprom's disposal. Particularly willing use was made of debt liabilities, moreover to the mutual benefit of both borrowers and lenders.
So the emergence and artificial pumping up of a number of CIS countries' debts for Russian gas supplies were a real gift to those who did not turn their noses up at any way to make money.
Secret recordings of a conversation between President Leonid Kuchma and those close to him, allegedly made by Major Melnychenko who later bolted to the West, were recently published in Ukraine, which owes Russia at least $3 billion for gas.
In these recordings, Kuchma said that at Russia's request they had paid $50 million or $60 million into the gas debt account: "They told me they had reckoned on ... multiplying it by five. We settled up through Itera, in order not to go through Gazprom -- it is too visible that it is less there. It was immediately siphoned off through offshore zones."
The Ukrainians thus had an opportunity to greatly reduce their official debt while "our people" could be glad of getting hard cash not recorded by the treasury.
Indeed, where is this shadowy money now? Has anyone tried to check? Yeltsin's times have gone so would it not seem possible now?
An Optical Illusion
Foreigners have always taken Russian citizens' and businesspeople's solicitous attitude toward Gazprom with an ironic smile. For them, our fuel empire's main characteristic was and still is its sheer murkiness. Or more precisely, the opacity of its financial records.
In this connection, Gazprom's minority shareholders, chiefly German banks, were plain indignant at the choice of the company's auditor back in early 2002. And demanded that PriceWaterhouseCoopers, which had been too cosseted by our gasmen, not be allowed to inspect Gazprom's finances.
The Western press also tried to unsentimentally investigate Gazprom's problems. The respectable French newspaper Le Monde raised the alarm a year ago. "Having built up debts that have reached $12 billion and being unable to halt the fall in output, Gazprom has regularly been subjected to criticism for the 'opacity' of the conduct of its affairs. This diplomatic formulation conceals group bosses' regular embezzlement of money from the major Russian company's funds. Rem Vyakhirev and his closest comrades-in-arms and Former Prime Minister Viktor Chernomyrdin, who headed up the privatization, organized a division of the empire by transferring assets or handing the most profitable enterprises to companies that are their friendly with them or which they own. It is chiefly a question of relations between Gazprom and the Itera group.["]
Alas, whereas the private company Itera used to be considered just a "back-up option" for gas king R. Vyakhirev, its role in Gazprom's financial difficulties is now more evident. The Wall Street Journal, which is influential in US business circles, reported: "Audit checks showed that the previous bosses had given interest-free loans to outside firms, spent millions on buying luxury hotels and aquariums, and sold major gas fields to third parties at below market prices.... Gazprom has announced that it has bought back a 32% shareholding in a gas field that the corporation's former bosses sold to the outside Itera company in 1999 for 32,000 rubles ($1,025). Gazprom investors believe the corporation's former managers enriched themselves on deals with Itera although both parties deny it."
Germany's Frankfurter Rudschau newspaper has published documents about how multi-billion assets were sold to relatives of the corporation bosses. The Interprokom company, registered in Budapest, allegedly handed the Horhat company completely free 90% of shares bought in 1998 by Chernomyrdin's son and Vyakhirev's daughters and his aide Sheremet for $2.50 (two and a half dollars!).
It is easy to gather whole volumes of such facts and pieces of evidence both abroad and in our native fatherland. A complete "optical illusion" based on the effect of "opacity." Having become familiar with even a small part of this dossier, one painfully wants to understand the following.
Why did President V. Putin in fact put the question of where the Gazprom money had gone to Aleksey Miller and not his imposing predecessors in the company leadership? Why is V. Chernomyrdin briskly "steering" Ukraine's very profitable gas debt as Russian ambassador and not giving evidence in very official Moscow offices at least?
You can argue as much as you like about how the top-level bosses' strenuous labor was incentivized in Gazprom but it is clear that it has long been time to answer for the results of this labor.
Gazprom currently owes creditors over $15 billion, which is comparable in size to its most successful annual revenue. Moreover, around $7 billion is short-term debt that must at least be refinanced in 2003.
That is to say, it will be necessary to get loans again. But foreigners are in no rush to give money to Gazprom because of the company's ongoing "opacity." Gazprom owes its own [fellow Russian companies] a decent amount too: It has borrowed a total of around $2 billion from Sberbank and Vneshtorgbank, an amount the Central Bank believes exceeds the lending norms established for Russian credit organizations.
It is probably for that reason that such a bustle has arisen over getting back CIS countries' debts for the export of Russian gas. But "relieving" neighbors here and there of a hundred million dollars each will not solve the problems. So far the main debtor, Ukraine, does not even want to hear about settling. People are not yet talking out loud about Gazprom going bankrupt but the eternal Russian question of "What is to be done?" is arising increasingly often the offices of its current bosses.
Take a Third Tablet!
One prescription has already been written. Back when he was appointed, A. Miller was given carte blanche for a major cadre purge in the company and he set about it with enthusiasm. Native Petersburgers, even ones that had been far from the gas sector in their previous lives, were appointed to key posts. Gazprom control was restored over some subsidiary companies that had previously been practically given to Itera. They are also trying to greatly curb the export appetites of Itera itself.
But these steps have not affected the gas empire's economic parameters.
In the first six months of 2002, Gazprom spent $900 million more than it received. Over the same period, revenue from internal sales fell by 150 million "greenbacks" on 2001, and that is while maintaining supply volumes and with a 20% increase in Russian gas tariffs. This is evidence that even more money is leaking past Gazprom's cash tills than before Putin's time. And is proof that the situation in the company cannot be solved with just a purge of top managers.
The flaws of "opacity" and the shadow economy have penetrated deep into Gazprom structures over the last ten years and have infected them on a genetic level. So firing a couple of dozen top bosses will not cure hundreds of others.
In these conditions, making a fundamental change in the gas empire management system is tantamount to rebuilding a multi-story apartment block without evicting the residents, each of which will be able to "reach an agreement" with the foreman not to touch his privatized apartment.
Break It Up! And Hang the Parts!
Another route is radical Gazprom reform. The government is already discussing the possibility of breaking it up at least into extraction and transport parts. It is true that the management would change radically with this. But a there is a major calamity lying in wait here too.
Experts know that when a company is broken up, there is a sharp fall in its capitalization, that is to say the overall value of its share capital. And our Gazprom's capitalization is extremely low as it is, only $19 billion, even though it should be much higher. A fall in capitalization would entail a train of economic problems capable of suffocating the firm for good.
Well understanding the doomed nature of both options, the current Gazprom leadership has to all appearances decided to choose a third remedy. Through tamed media, they have begun to inure society and the authorities on all levels to the idea of liberalizing the internal gas market. That is to say, Russians will gradually be sold gas not at fixed prices but at increasingly free ones. Meaning high ones.
No, no, not the population the Gazprom people swear, only industrial enterprises for now. Glossing over the fact that the new gas price will increase the cost price of products and most Russian goods are bound to become more expensive. And inflation will go up sharply.
A group of VIPs has labored strenuously, relieving the Gazprom stores of respectable amounts and at the same time having undermined one of the bulwarks of our economy. In order to rescue this bulwark, we the country's millions of citizens now have to compensate the monopolist out of our starvation wages for the money that disappeared without trace into the pockets of a few dozen daring managers. That is all there is to it. In our country, it is now called the particular nature of the Russian market.
[Description of Source: Moscow Stringer News Agency WWW-Text in Russian -- Website devoted to compromat and exposes of politicians; reportedly supported by former Yeltsin bodyguard Korzhakov and the Yukos oil company.]
Document ID: CEP20021219000108
Entry Date: 12/19/2002
Version Number: 01