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Gazprom and Itera: A Case Study in Russian Corporate Misgovernance

"I'm going to tell you a war story-my war story," opened Browder. " It's one that involves Gazprom, Itera, and PricewaterhouseCoopers. But I'm not a diplomat so this won't be diplomatic," he cautioned. As an investor, he says he looks to find companies whose stock is cheap, and Gazprom is "by far the cheapest oil and gas company in the world," if one divides the value of the company by its total reserves. Because the market discounts virtually the entire value of Gazprom with the assumption that 99% of its assets are stolen, Gazprom's reserves trade at 10 cents for energy equivalent to one barrel of oil. (Exxon Mobil's reserves, by way of comparison, trade at $13.80 per barrel.) Eighteen months ago, deciding he needed a better understanding of the factors underpinning Gazprom's undervaluation, Browder dug around a bit using public information and found that the stealing was "so brazen" that Former CEOs Rem Vyakhirev and Viktor Chernomyrdin and others transferred assets openly to members of their family. "The arrogance was so extreme that there was no cover-up whatsoever," Browder remarked. "But that was helpful to us, because it enabled us to paint a very accurate picture of what had been stolen." In October 2000, Browder's investigation pinpointed seven dubious transactions that stripped enormous value away from Gazprom. These seven companies - Purgaz, Rospan, Tarkosaleneftegaz, Sibneftegaz, Achimneftegaz, Vostokgaz, and Severneftegazprom - were worth $5,805 million to Gazprom, but were sold away for a total of $325 million between 1997 and 2001, a lost value of 5,480 million dollars. In losing these assets, Gazprom lost just under 10% of its total reserves, a quantity comparable in size to Exxon-Mobil's entire reserves worldwide. So, Browder discovered that though the markets perceived that 99% of Gazprom's assets had been stolen, in reality only 10% had been. Browder said he was impatient "for perception to catch up with reality," since the good news was likely to increase Gazprom's share value and decided to speed along the process. His findings were published and shared with other Gazprom shareholders, with members of the Gazprom board, as well as with journalists from five publications [Business Week, The New York Times, Financial Times, The Wall Street Journal, and The Washington Post], each of whom went on to run stories between October 2000 and February 2001 exposing large scale graft by the company's managers and their relatives. Mobilized by the ensuing public outrage, Gazprom investors in December 2000 called for an independent audit to examine the evidence of asset stripping and to assess the murky relationship between Gazprom and Itera, a Florida-registered gas trading company. The investors further proposed that an outside firm, Deloitte and Touche, be given the task, rather than Gazprom's internal auditor, PricewaterhouseCoopers (PwC). Incensed, Gazprom management rejected the call for an independent audit and consented only to a confidential PwC audit. That audit was presented to the company's board alone in June 2001, though the report was subsequently leaked. Using excerpts from that report, Browder gave five examples to illustrate the patent misconduct by Gazprom executives for the benefit of Itera, whose assets ultimately must have accrued to the executives themselves, as well as the absurdity of PwC's economic evaluations. A BLISTERING REVIEW

1. The Purgaz Joint Venture
Gazprom, in 1998, had put 381 billion m3 of reserves into Purgaz, a joint venture with Itera, which received a 49% stake in return for nothing concrete, only the promise to contribute future funding. The next year, Gazprom sold an additional 32% in Purgaz to Itera for the ridiculously low price of $1,200. In its report, PwC valued Purgaz at $1,768 million, meaning 32% of that would be worth $566 million--exponentially more than the price Itera paid. PwC,...
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