Gazprom’s Move on Sibir Energy

putinmillersechin052309.jpgSometimes Russia’s state-run energy business seems to operate under the George Costanza strategy of “do the opposite” – if it makes good sense according to market logic, do something else.  Before the economic crisis, Gazprom figured among the top six largest energy companies in the world, but has since fallen to 11th by market capitalization.  Analysts in the banking sector are worried about reinvestment in production, while other experts think that the dwindling profits and rising debt are likely to sharpen energy politics between Russia and Europe as  the company could seek to renegotiate contracts.  Despite all these signs that spending should be tightened, Gazprom’s ongoing expansion acquisitions are increasing the company’s bloat, with the latest target being Sibir Energy.

It is a business transaction that, like so many others these days, highlights a number of systemic problems imposed upon the business sector in the absence of a functioning legal system.  Whether you are a foreigner or a local, when someone owes you a lot of money, there’s just not much local recourse outside of having the government step in to take ownership of the company.

OAO Gazprom Neft’s offer to the minority shareholders of the troubled Sibir Energy company is seen by many as a generous “exit option“- at 500p per share, it is a strong valuation over its last tradingprice at 167p three months ago (listed on the LSE). Trading of Sibir stocks was frozen over a massive corporate governance problem, in what was dubbed as “a corporate scandal of the first class“by fund manager Carl Merling last December. 

The problem originatedwith the financial problems experienced by one of the major Russianshareholders, Chalva Tchigirinsky, who required that Sibir bail him outby purchasing $340 worth of property developments (hotels and condos,not oil fields).  The solution, which caused Sibir Energy’s shares to lose 95% of their value in just five months,was the only way for the company to fend off the threat of “corporateraiders” who would’ve pillaged the shareholder structure of thecompany.  Sibir has since sued Tchigirinsky to recover $400 million, while the financing of the company has frozen (oddly, before all of these problems, Sibir was one of the best performing and operating energy companies for its size in Russia).  Henry Cameron, the former chief executive who was removedlast February said at the time, “Doing business in Russia has never been for the faint-hearted.

The board at Sibir appears to be eager to get out of the woods, and has published a press release on the offer on their website and will prepare the offering documents before 5PM this Thursday.  According to various media coverage, Gazprom Neft appears to be consolidating its position in order to bargain with Tchigirinsky and his partner Igor Kesaev to settle their debts, while others have told the Financial Times that eventually Gazprom will own the majority of Sibir outright.

It is interesting that it is Gazprom Neft which was used to carry out the offer for Sibir – though the company already owns more than 27% of shares (the offer will boost that by another 7.8%).  In order to resolve the corporate governance issues of another company, Gazprom is using an arm of the company that has its own issues which have been in the press.  Last month Gazprom finalized the complete acquisition of Gazprom Neft from shares held by the Italian energy companies Eni and Enel through a call option, who had in turn acquired these stakes from an illegal auction of Yukos assets (among myriad issues underscoring the illegality of the Kremlin’s seizure of these properties, it is illegal under Russian law to liquidate non-core assets first).  At the time of acquisition, the Italian companies denied that they were acting under instructions of Russian state-held companies, and insisted that they planned to maintain ownership of the new properties.  Although BP participated in one bid at an auction (allegedly to help it look more legal), Eni and Enel became the first and only foreign companies to purchase Yukos property … and now it has been taken away from them as was likely planned.  Now one stolen property is being used by Gazprom to acquire shares of a company that no one else could possibly buy.

There are a number of disappointing lessons to be drawn from the Sibir Energy experience.  One is that the flexibility necessary for Russia to escape the worst pains of the crisis is hampered by the fact that banks and lenders do not feel secure in the legal system to help make the necessary bailouts, which in turn places a great burden upon the state (just look at Oleg Deripaska, whose creditors cannot allow him to enter into bankruptcy for fear of never recovering any money).  If Russia had rule of law and stronger courts, then there never would have been any need for Sibir to allegedly use the property scheme to bail out one of its owners.  If these disputes had proper and reliable forums, other buyers would have rushed in to rescue the stock price of what is a very successful company.  There is also the recurring problem of state-owned companies like Gazprom having to step in to resolve almost any major business dispute – even the mess of TNK-BP.  It is frankly a mafia-like system of dispute resolution, with only the decision of the grand arbiter to settle disagreements between businesses, both foreign and local.

I wouldn’t even go so far as to suggest that this situation always serves the interests of those elements of state businesses hoping to enrich themselves and gobble up companies on the cheap.  There is a certain undesirable cost imposed upon the government by these weakened conditions for a private sector, and it is one that puts the country’s future economic sustainability in doubt.  Shareholders at Sibir may be relieved by the generous offer of 500p, but Gazprom may also soon find itself the new majority owner of a very valuable and underpriced oil company – all without any competition.

Try as I might, I can’t really understand a compelling reason for why anyone would want Russian business to work this way, and see the state forced to burden itself with dangerous exposure.

Photo: Russian Prime Minister Vladimir Putin (L) meets with head of Russian gas giant GazpromAlexei Miller (R) and Vice Prime Minister Igor Sechin (C) in Moscow onApril 16, 2009. Russian gas export monopoly Gazprom has threatened tofine Ukraine for not buying as much gas as stipulated in its contractfor the first quarter of 2009, a top Ukrainian official said. (Getty Images)