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. Last Updated: 07/27/2016

THE ANALYST: Gazprom Could Do With A Change of Leadership




Rem Vyakhirev should go. It is time he did Gazprom shareholders a favor and handed in his resignation. Thanks to CEO Vyakhirev's unimaginative, ministerial style of management, all the value in Gazprom equity has been bitten off and spit on the floor, so that what is left for those who would dare consider buying the stock is akin to the dinosaur in the foyer of the British Museum: all bone and no meat.


Brokers and analysts themselves admit this in private conversations, though never will they openly discuss it, lest they spoil the aura of "enigma and prestige" often associated with this amazing company. Read any brokerage report on Gazprom and it will, in so many words, state: Gazprom is, unfortunately, still run like a ministry. This is true, but what is equally unfortunate is that analysts don't bother to analyze their own statement.


What does it mean to be run like a ministry?


First, it means that there is no bottom-line motivation. There is no need to improve financial performance from year-to-year, and profits are largely disregarded. Recall, for instance, Gazprom's $6 billion loss last year. Instead of earnings, the company/ministry's priorities become political acquiescence and personal advantage. Keep the government happy, and keep oneself happy. Make sure the bureaucrats get what they want, and then we can horde the rest. Shareholders are written off just like any other bad investment.


Second, "managed like a ministry" means that new, grandiose projects must constantly be on the drawing and executive boards, regardless of their strategic significance or financial feasibility. Vyakhirev and Co. have dreamed up projects such as Yamal-Europe, Blue Stream, Nordic Link and South Pars in Iran. Bored with natural gas, Vyakhirev has led Gazprom into tires, chemicals, tractors, media, recreation (why all the hotels and resorts?) and even satellite communications. It is as if Vyakhirev has to own a part of every business he deals with. But then again, that's another facet of the ministerial mind-set, isn't it?


Vyakhirev's adventures in the banking industry alone are reason enough for his retirement. Look at what happened to Bank Imperial. To this day, Gazprom executives have failed to answer for the decision to buy 12.5 percent of Inkombank, despite the fact that the bank owned up to 30 percent of all forward contracts. Bank of Moscow, even though it was offered incentives from the Central Bank, had the sense to back out of rescuing Tokobank once the extent of the latter's forward contract exposure became clear. So what was Vyakhirev thinking with Inkombank? Did he have shareholders' interests in mind?


Third, the ministry mentality denotes that there is no micro-management. Ambitious plans galore exist, even as the company can't cope with the ABCs of running its core business. Vyakhirev still can't get more than one-fourth of Gazprom's domestic deliveries in cash. Assuming you are a Gazprom shareholder, what would worry you most: a pipeline under the Black Sea, or more cash-in-hand at home? Under Vyakhirev, you will get the underwater steel pipe. Meanwhile, the company's crucial problems - collecting revenues, cracking down on moribund clients, lobbying for higher domestic gas prices - are handled with the sleepy approach of a bureaucrat with lifelong tenure.


Recently, Vyakhirev all but admitted failure in his efforts to shore up Gazprom's $5 billion in receivables when he proposed creating an OPEC-like organization for natural gas exporters. In other words, he wants to subsidize his financial catastrophe at home with higher gas prices abroad - the same way in 1996 he "subsidized" cheap domestic Gazprom shares with an American Depository Receipt. The only instrument foreigners interested in owning part of Gazprom can buy, ADRs cost several times more than regular Gazprom stock.


Finally, ministry-managed equates to inefficiency. Yes, Gazprom produced 533 billion cubic meters of gas last year - more than the next 10 companies combined - but on a per-employee basis, the company would be far behind all its international competitors. Six years on and Vyakhirev has failed to take a single lesson in efficiency from his colleagues at Royal Dutch, British Petroleum and Exxon. Gazprom still has more than 350,000 workers, and Vyakhirev has so far proven incapable of realizing the company's 1997 plan to cut 100,000 over the next several years.


At this point, the only thing worse than Vyakhirev for Gazprom shareholders is a Gazprom beholden to the "Kremlin clan," which includes Boris Berezovsky and Fuel and Energy Minister Viktor Kalyuzhny. Given this possible risk, Vyakhirev should be left on board until the next shareholders' meeting at the end of June 2000. By then, the presidential elections will be over. Then later, sometime in mid-summer 2001, when Gazprom releases its 2000 financials and analysts can figure out how badly the behemoth was bled by political marauders, investors can consider once again buying a piece of what should be - but has yet failed to become - Russia's greatest company.