A Fired Analyst Got Too Close to Gazprom's Truth

(Bloomberg Opinion) -- The analyst report on Russian giant Gazprom that got its co-author fired should be required reading for Western politicians trying to figure out how to fight “dirty Russian money.”

Headlined “Gazprom: Performing As Designed,” the report, authored by two analysts at state-owned bank Sberbank, Alex Fak and Anna Kotelnikova, advances a maverick theory: that Russia’s natural gas monopoly isn’t badly run, as many minority shareholders assume from its enormous capital expenditures and slow-growing revenues; but simply performing for a different group of stakeholders — namely, Gazprom’s contractors. The contractors and the company, they write, “are united in their desire to promote any and all boondoggles, at least within the boundaries of Russia, where their activities will face less scrutiny. Moreover, they are thought to be better connected to the ultimate node of power in Russia than anyone who might possibly be interested in running Gazprom for shareholders.”

The report goes on to argue that all of Gazprom’s major projects — the $55 billion Power of Siberia pipeline to China, the $20 billion Turkish Stream one to Turkey and the Nord Stream 2 pipeline to Germany, requiring $17 billion in Gazprom capital expenditure — only make sense from the contractors’ perspective.

The Chinese pipeline, according to Fak’s analysis, makes far less economic sense than an alternative route that was discarded for its sake. The other two create overcapacity where the Ukrainian transit route would have served perfectly well. Turkish Stream, according to Fak, won’t be profitable for 50 years, Nord Stream 2 for 20. One might assume these projects are driven by geopolitical motives, but that’s not necessarily so. Fak estimates that half of Turkish Stream’s capital expenditure would be for the Russian onshore part of the pipeline, handled by the gas monopoly’s big local contractors. As for Nord Stream 2, it, too, requires an expansion of Russia’s onshore transit system, and a firm called Stroytransneftegaz recently won that contract without a tender.

Stroytransneftegaz is partially owned by Gennady Timchenko, a billionaire friend of President Vladimir Putin, and so is another Gazprom contractor, Stroytransgaz, which is working on the main portion of Power of Siberia. The other major builder of the China pipeline is Stroygazmontazh, founded by Arkady Rotenberg, another Putin crony. A recently built factory, the Zagorsk Pipe Plant, in which Putin’s university classmate Nikolai Yegorov is a major shareholder, is increasing its share of large-diameter pipes supplied to Gazprom as it builds new pipelines and begins to replace aging ones.

Gazprom, according to Fak, also tends to abandon those projects that don’t benefit the domestic contractors much, such as the Arctic offshore Shtokman field that it planned to develop with France’s Total and Norway’s Statoil. 

That Gazprom is being run for its Putin-linked contractors, not for its shareholders or even the Kremlin’s geopolitical interests, isn’t a novel theory: It’s been around since the mid-2000s, when Putin’s cronies began to emerge as billionaires after getting fat contracts from the government and state-controlled companies. Yet Fak’s pithy exposition, distributed by a state-controlled institution, must have touched a nerve.

In a report on Rosneft, the state-controlled oil giant, last year, Fak criticized the greedy acquisitiveness and careless borrowing of Chief Executive Officer Igor Sechin. Sberbank withdrew the report and reissued it with redactions, removing the Sechin part, but Fak kept his job. This time around, he wasn’t so lucky: His superiors deemed the Gazprom report “unprofessional” and fired him effective immediately.

This story holds important lessons to Western architects of Russia sanctions. A report issued by the U.K. parliament this week, titled “Moscow’s Gold: Russian Corruption in the U.K.” takes issue with the sales of Russian debt (including Gazprom bonds) and equity in London. And indeed, why help companies controlled by Russian billionaires or the Russian government raise money and attract investors in London if the end beneficiaries of the investment are individuals linked to Putin, pillars of his autocratic regime?

There’s another way to look at it, though. Companies such as Gazprom, Rosneft and Sberbank are stores of value for millions of ordinary Russians. These companies are the Russian national wealth. They also employ hundreds of thousands of people. Is the West interested in undermining them or the Putin-linked interests that milk them for their own profit? 

The answer could be both if you’re an advocate of the sledgehammer approach: Anything that’s bad for Russia is good for the West. I’d argue, however, that, for the long term, surgery would make much more sense than devastation. The big public companies, properly reformed and independently led, will be necessary to rebuild Russia after Putin. And the Putin-linked interests that milk these companies now can be reached separately.

Here’s how. Anyone who is interested in designing meaningful sanctions should study Russia’s government procurement databases and follow the news on how big state-owned firms award contracts. Then, revenue from these contracts — often distributed without any public scrutiny or competition — should be tracked to Western assets through the offshore entities used to channel them. Making this wealth impossible to export would be a much smarter move, both for the West and for Russia’s post-Putin future, than hitting out at relatively transparent public companies whose openness to the world is the only guarantee, though a weak one, that they won’t be sucked dry by politically connected individuals.

There’s plenty of analysis out there for those interested in how to do that; watch Fak, for example, once he gets a new job.

©2018 Bloomberg L.P.