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Gazprom’s $910 bn gaffe shows Putin economy eroding wealth

HALIA PAVLIVA and KSENIA GALOUCHKO

MOSCOW (Bloomberg) -- Back in April 2007, in the midst of the greatest commodities rally on record, Gazprom’s Deputy CEO, Alexander Medvedev, was talking big.

Russia’s natural-gas export monopoly aspired to be the world’s largest company, he said while offering up a prediction: its market value would quadruple to $1 tn in as little as seven years.

Medvedev was off by $910 bn. Since he made that forecast, no company among the world’s top 5,000 has suffered a bigger collapse in market capitalization than Gazprom, a $154 bn plunge that’s become emblematic of the malaise that has overtaken President Vladimir Putin’s economy. The state-run company has tumbled three straight years in the stock market as it stepped up spending on everything from the Olympic games in Sochi to projects in Siberia.

“Gazprom is a champion in value destruction,” Ian Hague, founding partner of New York-based Firebird Management, which manages $1.3 bn of assets, including Russian stocks, said by phone April 2. “It’s not just Gazprom that failed to achieve its goal of increasing market capitalization. It’s Russia who failed. It failed to create an environment where state-owned companies would function as shareholder-owned entities.”

Aliya Samigullina, a Moscow-based spokeswoman for Deputy Prime Minister Arkady Dvorkovich, who is in charge of the energy industry, declined to comment.

Sergei Kupriyanov, a Gazprom spokesman in Moscow, said that the $1 tn forecast “was taken out of context” because company officials were projecting a possible valuation if oil prices kept surging. He said the sanctions that the U.S. and Europe imposed on Russia following its takeover of Crimea last month have contributed to the slump in Gazprom’s share price, deepening its discount to global peers.

The stock is down 11% this year to $7.68 in New York trading. It rose 0.3%, matching the gain in a Bloomberg index of Russian shares traded in New York.

In an April 6, 2007, interview in Moscow, Medvedev said Gazprom wanted to be the “most capitalized company in the world” and that it would reach a $1 tn market value within seven to 10 years. He didn’t say the estimate was dependent on the price of oil, which is used as a benchmark reference price for the natural gas that Gazprom sells.

Oil traded at $104.79/bbl on the London-based ICE Futures Europe exchange, up from $68.24 the day before Medvedev spoke in 2007.

Russia’s benchmark Micex Index has dropped 19% over the past seven years, underperforming the MSCI Emerging Market measure’s 8.2% advance and the 10% gain in the MSCI World gauge of developed nations. The Micex entered a bear market on March 13 following Putin’s move to annex Crimea from Ukraine, triggering the worst standoff between Russian and the U.S. since the end of the Cold War.

The World Bank said that the crisis raises the risk of Russia falling into recession this year after growth slowed to 1.3 % in 2013, the weakest pace in four years.The economy will probably expand less than 1% this year, central bank Chairman Elvira Nabiullina said at a banking conference in Moscow.

Putin, who soon after coming to power in 1999 restored the music of the Soviet-era national anthem and later described the collapse of the Soviet Union as the greatest geopolitical catastrophe of the 20th century, has boosted the state’s role in the economy.

A decade ago, Rosneft took over Yukos Oil Co., after the government imprisoned the company’s founder, Mikhail Khodorkovsky. Last year, Rosneft purchased TNK-BP, a BP oil JV in Russia, for $55 bn.

“This is an issue of any Russian state company,” Oleg Popov, who helps manage $1 bn of securities for Allianz Investments in Moscow, said by email. “Gazprom is an active participant in the government’s foreign policy, social projects, where Gazprom incurs costs instead of the government, thus lifting the burden off the budget.”

Prosperity Capital sees value in Gazprom at these prices, saying the government’s new policy on dividends calculation may boost payouts to shareholders.

“If we thought Gazprom wasn’t attractive, we wouldn’t have owned it,” Mattias Westman, who oversees about $3.3 bn in Russian assets as CEO of Prosperity Capital, said in a phone interview from London.

Gazprom’s profit for the first nine months of last year calculated under Russian standards declined 9% to $13 bn. Income under international standards increased 4% to $242 bn. The company hasn’t disclosed its full-year earnings report.

With about $3 bn of spending earmarked for the Olympics and billions more on new gas transit routes to Europe bypassing Ukraine, Gazprom has said it doesn’t have sufficient funds to distribute more cash. At the same time, the government has frozen Gazprom’s domestic prices and increased taxes while Ukraine’s debt for gas supplies has grown to about $1.8 bn.

Gazprom “is not being managed as a profit-maximizing entity but rather for all sorts of other political agendas,” William Browder, the founder of Hermitage Capital Management said by phone on April 1.

04/03/2014

 

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