gazprom

Gazprom is a major Russian company and the biggest natural gas extractor, with over € 18 billion sales in 2002, it accounts for about 90% of Russian and 23% of world natural gas production (with reserves of 17,800 km³). Gazprom supplies almost all the gas needs of central Europe and the former Soviet Union.

History

1989-1992: Inception

Due to large natural gas reserves discovered in Siberia, in the Urals and in the Volga region in the 1970s and 1980s, the Soviet Union became a major gas producer. Gas exploration, development and distribution were centralized in a state ministry. In July 1989, as part of his economic reforms, President Mikhail Gorbachev combined the ministries for oil and gas, and later carved out Gazprom as the entity responsible for gas production, distribution and sales. Viktor Chernomyrdin was made head of the operation. After the break-up of the Soviet Union in 1991, Gazprom lost a large part of its assets outside of Russia - one third of its pipelines and one fourth of its compression capacity.

1993-1997: Privatization

After the new Russian President Boris Yeltsin appointed Chernomirdin to be his Prime Minister in December 1992, the political influence of Gazprom increased markedly. As the new government was committed to economic reform, Gazprom began to be privatized, becoming a joint-stock company in November 1992, and starting to distribute shares under the voucher method, where every Russian citizen received vouchers to purchase shares of formerly state-owned companies. However, trading these shares was extremely heavily regulated and the by-laws of the company prohibited foreigners to own more than 9% of the shares. Gazprom slowly established credibility in the western capital markets with an offering of 1% of its equity to foreigners in October 1996 in the form of London Depository Receipts and a successful large bond issue of $2.5 billion in 1997.

1998-2000: Scandals

In 1998 Chernomyrdin was fired from his position as Russia's Prime Minister by Boris Yeltsin. At the same time, the Russian government suddenly started demanding billions of dollars in back taxes from Gazprom. When tax prosecutors started to seize assets of Gazprom, the company had to give in and pay. Furthermore, the company's records started showing a loss for the first time at this point in time. The reasons were not clear and were explained either by an aging pipeline network, by a management that was becoming increasingly corrupt or by pre-existing losses that appeared because of more transparent accounting policies. Gazprom conducted dubious transactions with Florida-based gas-trading company Itera and and a Gazprom/Itera joint-venture, Purgaz, in the late 1990s, which allegedly benefited various management members and their relatives. Additionally, large-scale asset-stripping of Gazprom was going on by corrupt management and board members through various transactions involving the Gazprom daughter Stroitansgaz and the regional gas company Sibneftegaz. The Gazprom auditor PwC apparently had signed off and covered these transactions. The investment fund Hermitage Capital Management, a minority shareholder of Gazprom, reported on the scandals in October 2000: "Investors are valuing this company as if 99 percent of its assets have been stolen. The real figure is around 10 percent so that's good news."

2001-2002: Reform years

Vladimir Putin's reform attempts
Shareholder activism by Hermitage CEO William Bowder and former Russian finance minister Boris Fyodorov

Current Structure

In 2003 the Russian government held a 38.37% stake in the company, and had a majority on the companys board of directors. Gazprom provides 25% of all Russian tax revenues (averaging over $4 billion annually between 1993-2003) and accounts for 8% of the nations gross domestic product. Non-Russian investors may legally buy Gazprom shares only through American Depositary Shares, which cost more than locally traded shares. Gazprom is acquiring Rosneft.