Transneft's Donations Outweigh Dividends

Transneft, the state-controlled crude oil pipeline monopoly, gave 14 times more money to charity in the third quarter of last year than it paid in dividends to its private shareholders for all of 2006.

The expenditure raises concerns about Transneft's corporate governance, Renaissance Capital said in a research note to investors Friday. Transneft spokesman Mikhail Barkov was unavailable to comment on the donations because he was on a business trip, his secretary said by telephone.

Transneft spent 5.1 billion rubles ($214 million) on "charitable contributions" in the third quarter of 2007, the company said Thursday in a report posted on its web site. That equals 58 percent of the company's $370 million net profit for the quarter, as reported under international financial reporting standards. The company paid 351 million rubles in dividends on its preferred shares for 2006.

Higher charitable giving is a result of better management of the company's pipeline network, Transneft's former spokesman, Sergei Grigoryev, said by telephone Friday from Frankfurt, Germany.

Every quarter the company assumes a marginal loss of oil during operations. If losses are less than predicted, Transneft sells the "surplus oil" left in the network and gives the money to charity, he said.

Transneft earned 7.9 billion rubles from sales of surplus oil and gave 6.2 billion rubles to charity in the first nine months of 2007, according to the report.

The company's charitable giving has always been approved by the state-controlled board, Grigoryev said. The company has contributed to projects such as housing for veterans, he said, without commenting on what causes the current management supports.

Chief executive Nikolai Tokarev has said maximizing shareholder value is not a priority for the state-controlled company. "I don't care how much our shares cost," he said in an interview posted on the company's web site.

Renaissance maintained its "buy" recommendation for Transneft shares. "Transneft's fundamental value is driven by its invested capital and allowed returns, which do not depend on quarterly returns," Renaissance analyst Alexander Burgansky wrote in the research note.

Transneft's share price performance "has been negatively affected by poor corporate governance and the management's disregard of the interests of minority shareholders," Burgansky said.

Transneft preferred shares trade at a price of 3.18 times the company's earnings per share, according to Bloomberg data. The average for the dollar-denominated RTS Index is 10.55 times earnings per share.

Semyon Vainshtok, Transneft's former chief executive, left the company in September after President Vladimir Putin put him in charge of the country's preparations for the 2014 Sochi Winter Olympics. He announced his move on Sept. 11.

Transneft paid a total of 822 million rubles in dividends for 2006, including 472 million rubles on common shares, which are all owned by the state.