Hermitage Capital Management has issued a report highly critical of the management of the Gazprom, Russia’s largest company. Hermitage, a minority shareholder in Gazprom, wants Vadim Kleiner, research director of Hermitage, to be elected to the Gazprom board. Scrutinizing last year’s accounts, Hermitage found a suspicious US$1.5 billion increase in miscellaneous costs, such as electricity and salaries. Hermitage also questioned the role of the Eural Trans Gas (ETG) company, which earned US$770 million in 2003 handling Turkmenistan’s gas sales — via Gazprom pipelines, and with Gazprom loans — to Ukraine and Germany. The Moscow Times (June 8) reports that the paper trail for ownership of ETG appears to stop in Cyprus with two front companies.
The Hermitage report comes just one week after a conference of the great and the good gathered in Moscow to urge the adoption of best practices in corporate governance. The June 3-4 conference was sponsored by the World Bank, the Organization for Economic Cooperation and Development (OECD) and the National Council on Corporate Governance, a body headed by Vladimir Potanin, head of Interros, a major Russian financial and industrial group. A report prepared for the conference by Aleksander Astapovich documents the pervasiveness of bad business practices, including lack of information about the ownership structure, asset-stripping and dilution of shares, diversion of revenues, and the absence of independent boards of directors (www.nccg.ru). Prime Minister Mikhail Fradkov told the gathering that “many companies, including large ones, do not disclose their real owners, do not disclose an exhaustive list of affiliated firms and people, and continue to act, not always legally, through offshore zones” (Interfax, June 4).
According to economic theory, now that assets have been privatized, the new owners should adopt good governance practices, including transparency of accounts and responsiveness to minority shareholder interests. In return these practices will facilitate foreign investment and boost the cash value of stockholdings. Given the poor state of the domestic banking system, many Russian companies need foreign investment as a source of capital for future growth.
Corporate governance in Russia has gradually improved in recent years, especially since the 2001 adoption of amendments to the law on joint stock companies, which have tightened protection for minority shareholders. Still, it is not a question of the glass being half empty or half full: at best it is one-quarter full. Only a dozen or so of the leading firms have adopted international accounting standards, and trade their shares on a stock exchange.
Stock ownership in Russian firms is extremely concentrated, posing an endemic problem for minority shareholders. And in many cases, actual control is not related to formal stock ownership. More legal reforms are needed. In February the Chamber of Commerce and Industry suggested new rules to prevent individuals from seizing share registers and to stop investors holding a handful of shares from launching malicious lawsuits (Moscow Times, April 22).
World Bank President James Wolfensohn attended last week’s conference, telling Interfax on June 3 that investors will not put money into companies if they think corporate officials are going to steal it. “Good governance is in the interest of Russian owners because a smoothly functioning, transparent system is likely to be more stable and to make them more money.”
Would that it were so. There are two problems with the promotion of improved corporate governance, which foreign investors cite as a cure for Russia’s ills. First, it is unclear that Russian owners actually stand to make more money by being honest. Many have done very well by being dishonest.
Second, there is the troubling role of the state. The Russian state is clearly not enthusiastic about foreign investors gaining control of Russian firms — especially in strategic sectors, such as oil, gas and metals. On the other hand, Russia does need their technological and managerial expertise in these sectors.
Take the case of Norilsk Nickel, a firm owned by Vladimir Potanin, one of the organizers of last week’s conference. Ekspert magazine in cooperation with consulting firm PricewaterhouseCoopers, ran a competition for the quality of annual accounts, and declared Norilsk Nickel the winner (Ekspert, February 23). However, Ian Hague of Firebird Management notes that the “government’s refusal to declassify information on platinum-group metals reserves all but eliminates the possibility of Norilsk Nickel getting a full international stock market listing” (Russian Political Weekly, May 13).
And there is the case of Mikhail Khodorkovsky, who is scheduled to stand trial next week. Wolfensohn downplayed the relevance of the Yukos affair, seeing it as an “individual case…not a systemic change.” Similarly, Jonathan Schiffer, vice president of credit ratings organization Moody’s Investors Service, explained, “We raised the rating of Russia to investment grade in the middle of the Yukos affair. In other words, we saw that as an isolated event” (Interfax, June 2). Moody’s took a 20% stake in the Interfax company last November (Rosbalt, June 8). One wonders whether their own commercial stake in the Russian market influenced their objectivity.
One can argue that Yukos is not an isolated case, but part of a broader pattern, showing the limits of state tolerance of business independence and foreign involvement. It also shows how unpredictable those limits are, that they can shift at any time.