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. Last Updated: 07/27/2016

This Leaky Sieve Is No American Bubble

Last week, Business Week magazine labeled Gazprom "Russia's Enron" based on the fact that Gazprom's auditors, Pricewaterhouse-Coopers, signed off on some truly unbelievable deals in its audits. PwC found nothing remarkable, for example, in Gazprom's sale of 32 percent of Purgaz, a huge natural gas-producing subsidiary, to Itera for $1,200. The true value of that 32 percent stake was at least $400 million.

Gazprom had no money to develop Purgaz, the auditor maintained, although at the same time, Gazprom did scrape together a $616 million financial assistance package for Itera.

The assertion that Gazprom is Russia's Enron testifies to a basic misunderstanding of how the economy works in this country.

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A Russian manager doesn't inflate the profits of his company in the hopes of boosting the value of his stock options. He suppresses the company's profits. Enron executives concealed millions of dollars in losses in its subsidiaries; Gazprom executives poured millions of dollars in assets into its subsidiaries.

And the Russian market, which is more or less immune to lies, barely reacts to financial indicators. In 2000, the three largest metals producers -- Magnitogorsk, Novolipetsk and Cherepovetsk -- reported profits of 9 billion, 13 billion and 24 billion rubles, respectively. Yet their sales volumes were practically identical.

It's not hard to imagine how Western markets would have reacted to these figures. But in Russia, they elicit no reaction at all. The shares of these three companies are valued pretty much the same.

And then there's Severstal. Eighty-six percent of the company's stock belongs to general director Alexei Mordashov. Severstal recently reported amazing profits in order to boost its share price before the stock was floated on Western markets -- a strategy suggested by the company's wise Western advisers. The presence of Western shareholders was supposed to serve as added security in case of a takeover bid by the Urals Mining and Metals Company. And the money received from stock sales was to finance the purchase of shares in Magnitogorsk, which had also been targeted by the Urals Mining and Metals Company.

The result? Mordashov paid a whopping tax bill and Severstal's huge profits were perceived by the market as a sign that Mordashov was in for some serious problems.

One more thing. Enron was the product of a long evolution in corporate bookkeeping. Then again, that evolution was moving in the direction of practices mastered in the 1970s by the directors of Soviet state cotton farms, who achieved fictional harvests and real awards with the help of extremely creative accounting.

Gazprom is, above all, a primitive and ignorant organism. A friend of mine once sold a small factory to Gazprom. In negotiations with a high-ranking Gazprom executive, my friend laid out two options for working the deal. Both were entirely legal, but one would cost Gazprom one-third as much in taxes. The Gazprom exec asked for clarification. My friend obliged. Then the exec, unable to understand the basic tax calculations involved, asked my friend to draw the plan on paper. My friend did so, using euphemisms such as "Object A" and "Object B" rather than real names. The Gazprom exec studied the scheme, mulled it over, then scribbled an order in the right-hand corner and sent it off with his secretary.

When the deal was concluded, my friend was given a copy of the paper. The executive's command read: "Coordinate the tax-evasion scheme with the accounting department."

Russian managers do not inflate the performance indicators of their companies in order to pass the stock off on an unwitting public. They steal from their companies behind the public's back, and the state's. So the problems of America's bubble really have nothing to do with Russia's leaky sieve.

Yulia Latynina is a journalist with ORT.