And today Russia is offered for sale...
Will shares of Kremlin Inc. stock be offered for sale? Carl:
www.nytimes.com/2006/04/24/world/europe/24gazprom.html?_r=1&oref=login&pagewanted=print NY TIMES
April 24, 2006
Workers' Paradise Is Rebranded as Kremlin Inc.
By ANDREW E. KRAMER and STEVEN LEE MYERS
KRASNAYA POLYANA, Russia - Here in the Caucasus, above Sochi, Russia's only
subtropical city, an elite ski resort is rising beside the Layura River. The
resort, a multimillion-dollar project with a hotel and conference center,
cottages, six lifts and miles of trails, is a centerpiece of Sochi's improbable
bid for the Winter Olympic Games of 2014.
Even more improbable is the project's developer: Russia's state gas monopoly,
Gazprom.
Gazprom is a vast and powerful energy giant, a company now worth more than $240
billion, having gained $10 billion in value in one week in April alone. Ranked
by the value of its stock, Gazprom is the fifth-largest corporation in the
world, having in the last year leaped over Wal-Mart, Toyota and Citigroup. Its
executives vow to make it the biggest.
It has become something else, too: the leading model of a new Russian capitalism
that has emerged since President Vladimir V. Putin came to power in 2000. It is
an economic system increasingly built around huge state-owned or state-directed
companies that are open to investors' dollars and euros but remain tightly
controlled, like much else here in business and politics, by Mr. Putin's
Kremlin.
As the project at Krasnaya Polyana shows, Gazprom is not just a lucrative
state-owned monopoly, but also a powerful instrument of Kremlin policy at home
and abroad. It has undertaken an array of projects that have little to do with
its stated corporate interests, but much to do with politics - from bidding for
the Olympics to buying up independent media, from sustaining unprofitable farms
to subsidizing Russian industries with cheap energy.
It has also been at the center of Russia's foreign policy, used as a cudgel in
recent disputes over gas prices with Ukraine and other neighbors. Its chief
executive, Aleksei B. Miller, recently warned Europe not to block its further
expansion into European markets, lest it decide to sell its natural gas
elsewhere.
Andrei N. Illarionov, a former economic adviser to Mr. Putin who has become an
increasingly outspoken critic since being dismissed last December, called
Russia's economy today a form of "corporate state."
He described a coterie of highly placed officials who control big business
through their government posts, using those posts to make not just policy, but
profit. Some have dual hats: Gazprom's chairman is Dmitri A. Medvedev, the
former Kremlin chief of staff, the current first deputy prime minister and a man
widely viewed as a possible successor to Mr. Putin.
"They look not like state business," he said of Gazprom's projects and those of
other state-controlled companies, "but the business part of the state."
Mr. Putin's Kremlin, in this view, is not renationalizing industries sold off in
the 1990's as much as redistributing the assets to a new group of tycoons,
enriching favored investors and even, critics say, members of his own
administration, while ensuring that the Kremlin itself has influence over the
most important parts of Russia's economy.
Mr. Putin's efforts initially appeared limited to imposing state control over
the country's natural resources.
In recent months, however, the Kremlin has orchestrated the consolidation of
several struggling state and private aircraft manufacturers into a newly created
Unified Aircraft Corporation under the supervision of Mr. Putin's appointed
prime minister. The Kremlin has appointed its own directors from the country's
military export arm to oversee the largest automaker, Avtovaz. [The government
disclosed April 21 that it was considering consolidating various airlines under
the state-controlled Aeroflot.]
"Instead of properly regulating the economy, the state owns the economy," said
Aleksandr Y. Lebedev, a billionaire whose own investments, he said, are now
under pressure from the state.
These large companies are continuing to absorb smaller ones, accumulating even
greater wealth and power. The state oil company Rosneft, for example, acquired
the main subsidiary of Yukos in December 2004 after a prosecutorial assault
against its former chairman, Mikhail B. Khodorkovsky, now serving an eight-year
sentence in a Siberian jail on charges of fraud and tax evasion that many say
were politically motivated.
Allies Become Insiders
The man most often linked to the Kremlin's campaign against Yukos is Igor I.
Sechin, the deputy chief of Mr. Putin's administration. In the midst of the
legal battle over Yukos, Mr. Putin appointed him the chairman of Rosneft, a
company now valued at $57 billion.
In 2004, before the demise of Yukos, Rosneft was worth an estimated $8.6
billion.
Sergei M. Guriyev, a professor at the New Economic School in Moscow, said
estimates based on World Bank studies indicated that the government share of
industrial output and employment had grown to 40 percent, from about 30 percent
in 2003.
"The feeling is actually much worse," he said, "as even private owners know that
their property rights are contingent on their relationships with the Kremlin."
Last year, for example, state and private oil companies reached a deal with the
Kremlin - presented as a voluntary agreement - to cap prices on gasoline.
To his supporters, and there are many, Mr. Putin has simply tamed Gazprom and
other big businesses that actively undermined state authority in the turbulent
transition that followed the collapse of the Soviet command economy.
In the case of Gazprom, he turned an unwieldy and corrupted gas monopoly into a
gleaming example of the wealth to be had from energy exports, a company now
nearly as valuable as Citigroup, with export ambitions that include China and
the United States.
He has done so by appointing to top positions associates from his days in St.
Petersburg and dictating moves in meetings with a small circle of advisers "in
the Kremlin or at Putin's dacha," according to Olga V. Kryshtanovskaya, a
sociologist who has written extensively on the Kremlin's hierarchy.
Gazprom is now run not by mere Kremlin appointees, but by government ministers
and members of Mr. Putin's administration itself.
Buoyed by rising energy prices, the economy under Mr. Putin has boomed, and
investors have responded positively, even as the United States and other
governments express concern about the Kremlin's consolidation of political and
economic power.
By the end of April, Gazprom is expected to announce its international partners
in developing a huge gas field in the Barents Sea, one that holds seven times
the amount of gas that Europe uses each year.
Gazprom's suitors include Chevron and ConocoPhillips from the United States,
Statoil and Norsk Hydro from Norway and Total from France.
But even as Gazprom closes in on BP, now the world's second-largest energy
company after Exxon Mobil, critics say it is hardly a model for Russia's future.
"This is not why we had reforms in the 1990s," said Yevgeny G. Yasin, a former
minister of economy. "This is a little like the Soviet Union."
He added, "This is a questionable solution because the government will dictate
political and not economic decisions."
A Gas Company's Sidelines
Gazprom emerged in the early 1990's from the former Soviet Ministry of the Gas
Industry - privatized in part, but still under state control - and inherited
more than the ministry's core operations. It also inherited its piece of the
Soviet Union's paternalistic economy, in towns and settlements stretching from
the Arctic gas fields to those along the maze of pipelines leading south.
Gazprom employs 330,000 people at major divisions for exploration, pipelines and
export sales, as well as a division for its newly acquired oil company, Sibneft,
a banking arm, a media company and hundreds of subsidiaries. It generated
profits of $4.6 billion on revenue of $28 billion in 2004, the last year for
which audited results are available.
From its newly built headquarters in a blue-and-tan high-rise south of Moscow's
city center, the company's managers poured billions into dying industries in the
1990's, made quick profits on construction and other projects and spawned great
corruption in the form of shady, insider deals. All the while, Gazprom expanded
its power in economic and political life, while richly rewarding investors from
the proceeds of its energy sales.
Gazprom built homes, roads and sports centers. It even guaranteed that groceries
would be available in the stores by forming its own agricultural holdings. As
once-proud Soviet collective farms failed and foreign imports overwhelmed
Russia's domestic production, Gazprom stepped in with financing and became the
biggest single owner of agricultural land in Russia.
The company's footprint has grown even beyond farms to include a manufacturer of
mining equipment, banks, a porcelain factory and, as of mid-April, a new radio
station called Relax FM, playing easy-listening pop and rock from the West.
It now holds $14 billion worth of assets not related to oil and gas; and 38
percent of its employees still work outside the core business, like those now
clearing the slopes of pine trees for the new ski runs high above Sochi.
While executives say they intend to shed the company of noncore assets and other
Soviet-era burdens, Gazprom continues to make investments that seem to have a
political motive more than a corporate one.
Last year, for example, it expanded its media holdings with the acquisition of
Izvestia, one of the most influential national newspapers. It also bought a
soccer team, Zenit, in St. Petersburg and announced recently that it would move
the headquarters of Sibneft, the oil company once slated to merge with Yukos but
now absorbed into Gazprom, to St. Petersburg, the former capital. The latter
move fit into a stated policy to step up investment in St. Petersburg, where Mr.
Putin and many of his closest aides once lived and worked.
[Its media arm is now in talks to buy one of the largest-circulation newspapers,
Komsomolskaya Pravda, and an associated publishing house for as much as $300
million, Vedomosti, a Russian business daily, reported April 20.]
"The Russian government has a track record of pressuring state-owned companies
to undertake large and risky projects and significant acquisitions financed
mainly by new corporate debt," Standard & Poor's, the international credit
rating agency, wrote in a report in April.
Asked about political pressure, Gazprom's chief spokesman, Sergei V. Kupriyanov,
noted last year's freeze on gasoline prices, saying that both private and state
companies often acted in the national interest.
"There are decisions made in the interest of the people or the state, regardless
of whether government ministers are on the board," he said in an interview.
A Gamble on the Olympics
While the Russian Olympic Committee is relentlessly upbeat about Sochi's bid for
2014, promising a games where visitors can ski during the day and lounge under
palms in the evening, Gazprom has a checkered history with similar investments.
Its noncore employee costs were $1.4 billion in 2004, the latest full-year
figures available. Those employees worked in businesses that, all told,
generated a loss of $350 million that year, according to a report by Hermitage
Capital Management, the largest foreign investor in Gazprom.
Those losses underscore the burdens on Gazprom to support companies not to make
profits, but to sustain struggling industries, to dispense patronage and to
wield political influence.
What is striking, however, is that even after 15 years of market transition it
continues to expand those holdings and investments, increasingly using its
monopolistic, politically favored position at the top of Russia's economy to
absorb other companies at discounted prices.
"Gazprom has the pick of buying what it wants to buy because no one else is
allowed to do it," said William F. Browder, a British citizen who is the chief
executive of Hermitage.
In an incident emblematic of the blurring of state and corporate power here, Mr.
Browder's visa was revoked in November, ostensibly on the grounds that he posed
an unspecified threat to national security. He is the largest foreign investor
in the Russian stock market, but he has also criticized Gazprom, Rosneft and
other large state-owned or controlled companies.
"When you're talking about strategic enterprises," he said, "business is
government."
Many investors, including foreigners, criticize Gazprom, but they buy in anyway.
Although official figures are not available, more than a quarter of Gazprom's
shares are estimated to be owned by foreigners, including Hermitage and E.ON
Ruhrgas of Germany. With a lifting of restrictions on foreign shares, called the
"ring fence," foreign ownership is now allowed to be as high as 49.9 percent.
Mr. Browder, in particular, has waged a crusade to press Gazprom to shed its
noncore assets and politically motivated projects and to become more transparent
and professional. At the same time, however, he argues that the losses from
those nonessential projects are dwarfed by the money to be made in the company.
The investment case made by Mr. Browder and others rests on the company's huge
reserves at a time of tight global supplies of oil and gas.
With reserves of 116 billion barrels of oil or barrels-equivalent in natural
gas, it has more than any publicly traded company. Exxon Mobil, by comparison,
has reserves of 73.2 billion barrels.
Gazprom's total energy reserves trail only Saudi Arabia's (263 billion barrels)
and Iran's (133 billion barrels).
Likewise, the Standard & Poor's report warned that there was "a risk powerful
vested-interest groups will use government-owned companies to strengthen their
political or economic positions," but concluded that state ownership was
"generally positive" and left unchanged its rating at BB, already higher than
other Russian energy companies.
For now, understanding Gazprom's internal workings recalls the task of
Kremlinologists who once tried to divine the Soviet Union's leadership shuffles.
Gazprom holds regular board meetings and yearly stockholder gatherings, but its
decisions are still made within a tight, informal circle around the president
and relayed through Mr. Medvedev, the chairman and first deputy prime minister,
according to Ms. Kryshtanovskaya, a sociologist who studies the Russian business
and political elite.
Mr. Putin's role in Gazprom is so great that many have speculated he would take
over the company when his second and, constitutionally, last term ends in 2008.
In January, he jokingly brushed aside the question, saying, "I am not a
businessman, either by character or by previous life experience."
An Atmosphere of Secrecy
When it comes to projects like Krasnaya Polyana, Gazprom operates in almost
complete secrecy. Company officials refused to discuss the development above
Sochi, the decision to build the resort, whether they expected to make a profit
or even how much it would cost.
Gazprom's courting of foreign capital has brought pressure to become more
transparent. That could force Gazprom to start justifying its corporate
decisions, like the investment in Krasnaya Polyana, for example, or its control
over a mysterious energy trader, RosUkrEnergo, at the center of the deal with
Ukraine to resolve the New Year's dispute over natural gas prices.
Gazprom could also face more pressure to invest where analysts say it should:
developing new gas fields to replace deposits nearing depletion where production
is already declining.
Gazprom cannot currently meet internal demand and export commitments solely from
its primary fields in Siberia, and has been forced to purchase natural gas from
Central Asian countries, according to a report by Cambridge Energy Research
Associates.
At peak demand during a bitter cold spell in January, its entire pipeline
network came dangerously close to losing pressure, which would have forced it to
ration gas by shutting off supplies to some large industries.
In Sochi, however, Gazprom is fueling Olympic dreams. In a sign of the
intersection between state and corporate interests, a new road is being built
straight to the new resort, which is as yet unnamed, while Sochi's airport is
undergoing an expansion.
"Only monopolies," Sochi's deputy mayor, Andrei P. Platonov, said on a tour of
Krasnaya Polyana, "can afford to carry out projects like this."
