Don´t be afraid to see what you see
Wednesday, 12 June 2013
The demise of Gazprom has a silver lining: It will also be the end of Vladimir Putin's corrupt regime
Many sad stories have a silver lining. The silver lining in the more and more likely demise of Gazprom, the world's most corrupt and mismanaged energy company, is that it also will be the end of the corrupt Putin regime.
The Swedish Economist Anders Åslund, probably the leading western expert on Gazprom, does not have much positive to say about the company that has helped to finance Putin's mafia state:
No large company in the world has been so spectacularly mismanaged as Russia’s state-dominated natural-gas corporation Gazprom OAO. (GAZP) In the last decade, its management has made every conceivable mistake.
Even so, Russian President Vladimir Putin denies the very existence of a crisis and maintains his support for Alexei Miller, the chief executive officer since 2001. Gazprom’s situation is serious not only because it is Russia’s biggest company by market value, but because Putin is its real chairman. Where Gazprom goes, so does Russia and the Putin government.
In May 2008, Gazprom was one of the world’s most valuable companies with a market capitalization of $369 billion. Miller boasted that it would be the first global company to reach $1 trillion. Today, its market value has plummeted to $83 billion and the decline continues. Although it claimed the largest net income of any global company in 2011 at $44.5 billion and still at $38 billion in 2012, its price-earnings ratio has dropped to a fatally low 2.4 for 2013. It has no credibility with shareholders.
At the heart of Gazprom’s mismanagement lies extreme inertia; reluctance to absorb new information; corruption and outlandish arrogance. Its managers are used to exercising Soviet-style monopoly over consumers, not having realized that the market has taken over. The company has traditionally varied prices by countries for opaque reasons. For example,Lithuania pays 15 percent more for Gazprom gas than neighboring Latvia. --
Analysts at the state-controlled Sberbank (SBER) assess that Gazprom would need $11 billion a year for its gas production, but in 2011 its capital expenditure soared from an originally planned level of $27 billion to $53 billion. It stopped at $43.2 billion last year.
The analysts call this excess expenditure “value destruction,” which is their euphemism for waste and corruption, amounting to $30 billion to $40 billion a year. Investment analysts in Moscow suggest privately that two-thirds of this might be sheer corruption, while the rest is wasteful overinvestment. Corruption at that level may explain the poor management of the company’s official business.
Rather than reducing capital investment, however, Putin comes up with ever more expensive projects. Last October, he decided that Gazprom should develop the giant virgin Chayadinsk field in Yakutia in eastern Siberia, building a pipeline to Vladivostok on the Pacific Coast and an LNG plant there for export to China.
Officially, this project is supposed to be completed by 2017 and cost $40 billion, but Sberbank analysts assessed it at $65 billion. This production would be too expensive for it ever to be profitable, and Russia has no supply contract with China. This is as white an elephant as there ever was.
Last December, Gazprom went ahead with its South Stream pipeline through the Black Sea to the Balkans. It was supposed to cost $21 billion, but in February Gazprom announced it would cost $39 billion. In April, Putin and Miller decided to build a second pipeline from the Yamal field in northwestern Siberia to Europe. (The project, which was supposed to go through Poland, was immediately repudiated by Polish Prime Minister Donald Tusk.)
In addition, Gazprom has plans to build two more superfluous Nord Stream pipes through the Baltic Sea at a cost of probably $20 billion. They have the single purpose of replacing the existing pipeline through Ukraine that Putin wants to abandon. None adds any value. --