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. Last Updated: 07/27/2016

Gazprom Reports a Profit of $10Bln

Gazprom puzzled the market Wednesday, reporting a whopping net profit of $10 billion for 2000 — by far the largest ever reported by a Russian company.

Consolidated results under International Accounting Standards, which the gas giant released for the first time since 1997, showed net profits of 286 billion rubles ($10.2 billion) on sales of 540 billion, an astonishing turnaround to last year's net loss of 95 billion rubles from sales of 400 billion rubles.

Already the nation's largest taxpayer, Gazprom is now also the nation's most profitable company, more than tripling the previous record set last month by oil major Yukos, which posted a $3.3 billion profit under U.S. Generally Accepted Accounting Principles.

A careful look at Gazprom's books, however, shows a different picture.

"These profits are entirely due to changes in the taxable base," said Derek Weaving, an analyst with Deutsche Bank in London. "Gazprom is still a very healthy business [by all standards], but its performance should be assessed after deferred tax figures are taken out."

Such adjustment being made, Gazprom's profits shrink to about $2 billion, a rather unimpressive figure given that 2000 was a period of abnormally high oil prices, which fueled a growth in sales for all power producers.

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The difference between the $10 billion figure and the $2 billion figure are a result of Gazprom revaluing its assets upward, giving it the right to deduct more from taxable profits for depreciation. That move alone added 98 billion rubles — more than a third of the total — to its net profit figure.

In addition to this $3.3 billion in deferred taxes, Gazprom gained another $4 billion in paper profit from inflation and fluctuations in the ruble-dollar rate.

Inflation stood at 20.2 percent in 2000, while the ruble lost a meager 4.3 percent against the dollar, appreciating in real terms. As a result, Gazprom's ruble-denominated assets became much more expensive in dollar terms, while liabilities, including some $10 billion in hard currency loans, remained virtually unchanged in ruble terms.

"What Gazprom showed is mostly a paper profit," said an analyst at one Western investment bank, who asked not to be named.

In 1998-99, when the ruble dropped faster than inflation rose, Gazprom's dollar-denominated liabilities distorted the picture in the opposite direction, leading to losses of 147 billion rubles and 79 billion rubles, respectively.

"Normally, IAS figures should be lower than those reported under Russian Accounting Standards," said Gennady Krasovsky, oil and gas analyst from NIKoil. "But this time everything is upside down."

Under domestic accounting rules, some expenses are deductible; so net profit figures are bloated by expenses already incurred. As a result, IAS results are usually more modest.

Gazprom reported a profit of 60.7 billion rubles under Russian Accounting Standards at its annual shareholder meeting last week, and management said the IAS results would be similar.

But although slightly misleading, Gazprom's figures still show the company made some progress last year. Gazprom enjoyed record energy prices, which bloated its export revenues 55 percent to $14 billion.

"What impresses is Gazprom's ability to curb costs," said Krasovsky.

The company's operating expenses were up by just $1 billion in 2000.

Despite a record financial result, the company's stock barely reacted, edging up just 2.2 percent to 17.17 rubles on the Moscow Stock Exchange.

"In the past, when Gazprom reported losses its shares barely suffered as a result," said Weaving, adding that the company's valuations were not affected by monetary gains but were based first of all on operational results.

Most analysts wouldn't venture a forecast for Gazprom's 2001 figures.

"In many ways Gazprom is still a black box," said Krasovsky.

Late Wednesday, Gazprom announced it was terminating the monopoly enjoyed by the Moscow Stock Exchange on the trading of its shares.