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. Last Updated: 07/27/2016

Expat Exec Takes Gas Protest to Kremlin

An outspoken Moscow-based foreign investor is taking his gripes about Gazprom's past business activities to the presidential administration, where he hopes to win its confidence -- as well as its votes.

William Browder, managing director of Hermitage Capital Management, plans to show the Kremlin's economic department and several Cabinet ministers on Monday how a Big Five auditing firm failed to see how the gas monopoly's relationship with a gas trader sapped shareholder value.

"I have a 5-year-old son, and even he can see that PricewaterhouseCoopers whitewashed the audit of Gazprom and Itera," Browder said in an interview Tuesday.

The audit results -- released to Gazprom's board of directors last summer -- suggest Gazprom did not suffer from a series of transactions with Itera, a Florida-registered company that has grown from an obscure gas trader to the world's fourth-largest natural gas producer.

At the time, however, market analysts paid scant attention, saying the Gazprom-Itera audit -- conducted by PricewaterhouseCoopers, or PwC -- meant little because PwC also audits Gazprom's annual financial results.

Hermitage's presentation for the Kremlin -- a copy of which was obtained by The Moscow Times -- is fresh ammunition in the war between Gazprom shareholders and former Gazprom managers, many of whom have been accused of stripping assets from the gas giant and transferring them to personal investment vehicles.

In appointing Alexei Miller as Gazprom CEO last year, President Vladimir Putin reasserted control over the government's 38 percent stake. Browder, a candidate for Gazprom's board, may not need those shares to get elected, but some agenda items he submitted for this year's shareholders meeting require 51 percent of the votes to be approved.

Those items include appointing Deloitte & Touche as Gazprom's new auditor and adopting the corporate governance code freshly minted by the Federal Securities Commission, as well as new standards for the board.

Hermitage obtained a copy of the audit results last fall and, instead of tossing it in the wastebasket as many investors may have, embarked on an analysis of each of PwC's conclusions. Hermitage claims to have found a slew of contradictions in the PwC report and challenged PwC's explanations with its own figures and those supplied by a State Audit Chamber review of Gazprom's activities.

For one, there was the controversial arrangement between Gazprom and the tax authorities of the Yamal-Nenets autonomous region. Between 1997 and 2000, Gazprom paid taxes in natural gas at the conversion rate of $2 to $4 per 1,000 cubic meters. In turn, the regional tax authorities sold the gas to Itera for about the same price, and Itera then sold the gas abroad for $30 to $90 per 1,000 cubic meters.

In its audit, PwC wrote that "Gazprom benefited from this arrangement by saving its scarce cash resources. Otherwise, this lack of cash would have forced Gazprom to attract financing at a time when credit was extended at an annual percentage rate of 50 percent."

Hermitage concluded that during these four years, Gazprom gave up $5.5 billion in profits in a scheme to pay $341 million in taxes. Gazprom's payment method only would have made sense if interest rates were 1,620 percent, the fund said.

Neither Gazprom nor PwC officials could be reached for comment Tuesday. PwC partner Keith Rowden told Business Week in a Feb. 18 article that "nobody has ever demonstrated anything" that proves management sold assets to Itera for below-market prices or engaged in other practices that destroyed value.

According to Hermitage, Gazprom ceded control of 2.9 trillion cubic meters of reserves through transactions that involved subsidiaries Purgaz, Rospan International, Tarkosaleneftegaz, Sibneftegaz, Achimneftegaz, VostokGas and Severneftgazprom. This is equivalent to 9.65 percent of Gazprom's audited reserves and is worth more than $200 billion at international prices.

Browder, of course, personally stands to benefit if the government decides to back him.

"The market now values Gazprom as if 99 percent of assets has been stolen when in fact only 9.65 percent has been," Browder said. "After we realized that, we doubled our holding."

While Browder declined to reveal Hermitage's stake, industry analysts estimate that the fund holds about 2 percent. That makes him a contender for Boris Fyodorov's seat on the board. Fyodorov, a former finance minister who is now head of the United Financial Group brokerage, represents minority shareholders and has been a vocal advocate for greater transparency at Gazprom.

Browder and Fyodorov locked horns over a Sberbank share emission that was approved in December 2000. Against Browder's urging, Fyodorov voted for the share emission that subsequently diluted the stakes of many foreign investors.

Last month, the Federal Securities Commission announced that Sberbank had been registered as a dealer for the UFG-managed Petr Stolypin mutual fund. This agreement between fund manager UFG Invest and Sberbank was without precedent, and Browder believes Fyodorov cut himself a deal when he voted with the Sberbank board.

Many foreign investors with Gazprom shares also hold Sberbank stock, and Browder says they have lost faith in Fyodorov.

"Why should we trust someone who sent us down the river last time?" Browder said.

Fyodorov, in a written reply to questions, pointed out that Sberbank shares have performed strongly in the last year.

A review of the Russian Trading System shows that Sberbank shares have shot up from $25 on Feb. 12, 2001, to $87 to $89 this week, seeing a 52-week high of $92.50 and low of $22.70.

"Profiteers who hung back in the shadows at a time when they should have been struggling against Gazprom's old guard sometimes forget that they're not the only shareholders in the company," Fyodorov said. "I'd like to remind Browder that I don't work for him and that he didn't vote for me. So he can keep his comments to himself. He needs to advertise himself less and spent more time on investing."