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. Last Updated: 07/27/2016

Miller Opening Gazprom Books

Gazprom shareholders are cautiously optimistic: After a decade of fierce resistance and two weeks of a new boss, the gas giant's books are slowly being pried open.

Paradoxically, analysts and investors are calling this both a good and a bad thing. Good because the world's largest gas company is trying to improve its reputation of being a secretive asset-stripping corporate juggernaut powered by nepotism. And bad because this new transparency campaign is revealing, in the words of one brokerage, just how badly the company's finances were run by the old management team.

Alexei Miller, who replaced long-serving CEO Rem Vyakhirev in a boardroom coup orchestrated by President Vladimir Putin, took the unusual step last week of presenting Gazprom shareholders with a breakdown of some $2.6 billion in loans the company has guaranteed — many to companies owned or controlled by family members of top Gazprom management.

Stroitransgaz, for example, received guarantees worth 5.8 billion rubles ($200 million) last year. The company is headed by Gazprom board member Arngolt Bekker and co-owners include Vyakhirev's daughter, Tatyana Dedikova, and the sons of Bekker and Viktor Chernomyrdin, Vyakhirev's predecessor.

Another company, Interprocom, received guarantees of 14.36 billion rubles. Its owners include relatives of Vyakhirev and board member Vyacheslav Sheremet.

"It's depressing to watch how Gazprom is desperately seeking money on international financial markets while at the same time giving guarantees to companies that belong to the children of Gazprom management," William Browder, managing director of Gazprom shareholder Hermitage Capital Management, told Vedomosti.

Despite the embarrassing revelations, Miller is trying to ensure shareholders ahead of the annual meeting June 29 that Gazprom's dark days are over.

"We will try to raise the company's market capitalization and make the cost structure transparent," Miller said, adding that a detailed breakdown of the cost structure would be delivered at the annual meeting.

Miller is also expected to present a report by PricewaterhouseCoopers on Gazprom's links to Itera, an offshore vehicle that rapidly acquired huge assets that once belonged to Gazprom. Top Gazprom managers have always denied any links to Itera. But if that is so, why would management guarantee 5.5 billion rubles in loans to a competitor, shareholders are asking.

As investors anxiously await the results of the Itera audit, some other long-awaited data has been released.

This week, the head of Gazprom's price department, Yelena Karpel, revealed some of the details of the company's cost structure for the first time. She said the cost of gas extraction for export and domestic supplies were 55 rubles and 150 rubles per thousand cubic meters, respectively, while the cost of transporting 1,000 cubic meters averages 10.3 rubles per 100 kilometers.

And during a weeklong PR push, Miller and other Gazprom officials — chief financial officer Sergei Dubinin, head of investor relations Alexander Semenyaka, top strategist Vladimir Rezunenko and sales chief Alexander Nemudrov — disclosed a slew of other operational figures.

Miller also ordered his underlings to get the company's financials audited according to international accounting standards by June 29, one day ahead of the date specified in a contract with PricewaterhouseCoopers. Gazprom said last week that the financials could be released as early as June 25.

"This is a major shift in the company's policy," said Dmitry Avdeyev, oil and gas analyst with United Financial Group. "But transparency requires more than just talking to journalists."

"The company is transparent only when its shareholders are informed of the costs, profits and profits distribution," said Valery Nesterov, oil and gas analyst with Troika Dialog.

"The main task that Miller faces now is to increase transparency for the company's main shareholder — the government," said James Henderson, head of research with Renaissance Capital.

The government, which owns 38.37 percent, is keen to put its hands on the company's cashflows, which remained mostly out of its reach for much of the last decade.

In the past it was thought that only a couple of Gazprom board members, including Vyakhirev, were allowed to peep into the company's registrar, which holds the complete list of shareholders.

One of the stories that made headlines in the mid-1990s was that then-Prime Minister Chernomyrdin owned more than 5 percent of the company and had amassed a fortune of about $5 billion from his links to the gas monopoly. Although technically no longer with the company, Chernomyrdin, recently appointed ambassador to Ukraine, is again on the list of candidates to the board.

Chernomyrdin denied the allegations, which were never proved. But he also never sued over the reports, which contributed to the belief that they were true and perpetuated Gazprom's reputation of being a Russian chaebol — a large South Korean corporation with diverse interests in various fields and famous for opacity, red tape and reliance on personal connections.

"Miller has to get an idea first of how Gazprom's operations are being managed," Henderson said.

So it is unlikely that major shifts, save for some personnel changes, will take place in the next 12 months, he said.

There was speculation that Vyakhirev and his team would resist Miller's reforms, but Vyakhirev himself acknowledged Wednesday that the dissolution of his team is imminent.

"There are old men in the company who will leave," he said, adding that Putin made "an intelligent decision" in removing him.