Gazprom Belies State-Run Tag as Russia Can’t Get Answers

March 12, 2013 JRL Russia List Corruption, Law, Police, Courts, Crime, Economy, Business, Investment, Trade, Oil, Gas, Energy

(Bloomberg – bloomberg.com – Scott Rose – March 11, 2013)

OAO Gazprom, Russia’s natural gas export monopoly, is thwarting efforts to boost oversight of its $28.9 billion in capital spending as the state seeks to improve investment, Deputy Economy Minister Sergei Belyakov said.

“Despite the fact that it’s a state company, even we, to put it mildly, can’t always see where, how much, and why so much money is being spent,” Belyakov, who oversees investment policy at the ministry, said in an interview. “We can write letters, call, ask them something. And that’s where it ends.”

The economy and energy ministries want to create a committee that would have detailed access to investment plans of Gazprom, which owns and maintains the national gas-pipeline network, he said. The move is needed after the government removed most officials from state companies’ boards in an attempt to improve governance by making room for additional independent directors, according to Belyakov.

Russia, the world’s largest energy exporter, is limited in its ability to fund projects to replace aging infrastructure after Vladimir Putin’s government raised social spending during 2008 and 2009. Putin, 60, pledged further increases in the run- up to his third election as president last year. OAO Russian Railways and Federal Grid Co. (FEES), also called natural monopolies for their ownership of national infrastructure, have made their investment programs more open, Belyakov said.

‘Another Story’

“With Russian Railways, I can ask any question, and someone at the rank of around vice president will come see me” to defend or revise costs, he said in Moscow on March 7. “Gazprom is another story.”

In October, Gazprom’s board approved a revised capital expenditures program of 890 billion rubles ($28.9 billion), up from 709.6 billion rubles approved in December 2011. In December, the board, which traditionally increases investment plans in the second half of the year, approved capital spending of 658.5 billion rubles for 2013.

Russian Railways invested 482 billion rubles last year, 22 percent more than planned, and estimates spending at 411 billion rubles this year, according to the company.

State-led spending, whether directly from the budget or through companies, accounts for a “significant” percentage of Russia’s fixed-capital investment, according to Belyakov. As a share of the total, government spending has grown in recent years because of outlays for projects including the 2014 Sochi Winter Olympics and the 2018 World Cup, he said.

Investment Shortfall

Putin ordered his ministers in May to ensure that investment is 25 percent of economic output by 2015. The figure rose to 21.8 percent last year from 21.4 percent in 2011, according to Belyakov. Gross domestic product was 62.4 trillion rubles in 2012, according to preliminary data from the statistics service.

Foreign direct investment was $46 billion last year, or 12 percent of fixed capital investment, Economy Minister Andrei Belousov said at a government meeting March 7. Russia was targeting a level of $70 billion for 2012, he said in June.

Russia needs about $75 billion in foreign investment annually to meet the government’s goals of modernizing the economy, Belyakov said.

Putin, who has vowed to fight wasteful spending and pushed for investigations into graft at power utilities, urged Gazprom at its 20th anniversary party at the Kremlin last month to “eliminate anything that is dragging the company down,” improve transparency and minimize expenses.

Gazprom Slump

Gazprom is planning a $45 billion project to develop fields in remote eastern Siberian regions, construct pipelines to the coast and build a liquefied natural gas plant targeting Asian markets. The cost of its planned South Stream pipeline to Europe, where demand has stagnated, is estimated at $39 billion, including expansion of the Russian transportation system.

Gazprom’s shares have languished over the past year, falling 31 percent in Moscow, compared with a 6.2 percent drop in the 50-stock Micex Index (INDEXCF) over the same period. The shares rose 2.2 percent to 136.53 rubles by the close in Moscow, remaining 63 percent below a May 2008 peak of 367.54 rubles.

One of the most vocal critics of Gazprom spending in the 1990s and the early 2000s, Hermitage Capital Management Ltd. founder William Browder, faces charges for illegally buying stock in the company at a time when foreign investors were barred from directly owning local shares, and seeking financial information, according to a March 7 statement on the Interior Ministry’s website.

Investor Prosecution

Investors shouldn’t be concerned that Browder’s prosecution will set a precedent, Belyakov said. “It’s not certain that they’ll find legal violations,” Belyakov said.

Hermitage’s investment in Gazprom shares had the acceptance of Russian authorities and the company at the time, Browder said last week in response to the allegations, adding that its actions were “entirely legal.”

The government is taking steps to improve business conditions, Belyakov said. It’s easing customs administration and cutting the cost of connecting to infrastructure grids, which should attract new long-term investors to Russia, he said.

Russia also hired Goldman Sachs Group Inc. (GS) to reach out to investors and attract new pools of capital.

Economic expansion slowed to 1.6 percent in January from a year earlier after industrial production contracted on an annual basis for the first time in more than three years. Policy makers are waiting for February data, which tend to be less volatile, he said.

No ‘Shocks’

“I’m not expecting any shocks here, to be honest,” Belyakov said. “The government’s economic strategy, which can be criticized of course, is fairly clear and stable. We’ve announced our priorities and are working on them.”

The government will continue to move ahead with state asset sales to cut its sway over the economy, although time lines may be corrected at the advice of the investment banks that are consulting on specific deals, he said.

“That’s normal when you’re facing a changing market,” Belyakov said. “You can’t sell when it’s falling. Maybe you can buy, but selling isn’t great.”