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Commentary: Give Gazprom a Fresh Start, President Putin


By Paul Starobin

Russian President Vladimir V. Putin has a big decision to make: Whether to retain Rem Vyakhirev as CEO of Gazprom (OGZRY), the massive gas company that counts the state as its single largest shareholder. Vyakhirev's contract expires on May 31, and Putin has the votes on the board to bring in a newcomer.

It should be an easy call. Gazprom's opaque, retro-Soviet operating style is crimping an economy Putin has vowed to remodel along 21st century market lines. But the politics of reform are never simple in Russia. The Gazprom CEO did the Kremlin a big favor by removing the NTV television station from the hands of a Putin critic, Vladimir Gusinsky. (Gazprom is a major NTV investor.) Putin may thus feel obliged to repay a political debt by letting Vyakhirev, 65, stay--or tapping a Vyakhirev deputy as the new chief.

Such impulses should be resisted. The case for a fresh management team at Gazprom--Russia's biggest company, on target to reap $21 billion in sales this year--rests on two sturdy pillars. The first is that the Vyakhirev regime is blocking a sensible if painful reform plan that is crucial to the modernization of the Russian economy and supported by German Gref, Putin's Economics Minister, as well as one of the five government representatives on Gazprom's board.

The Gref plan would require Gazprom to open its monopoly pipeline system to all gas producers in Russia at reasonable rates. Eager for this opportunity are big oil companies with large gas fields: These companies now account for only 5% of Russian gas production, but their market share could reach 15% within three years if they are allowed access to Gazprom pipelines at market-based rates, says analyst Steven Dashevsky of Capital Group Aton in Moscow. Gazprom currently accounts for 88% of total industry production.

Putin should also end the devil's pact that Vyakhirev's regime has thrived on. The government makes Gazprom sell gas at artificially low prices to industrial customers, a practice that perpetuates the inefficiency that plagues Russia. But Gazprom gets a generous payback: abundant tax credits and a virtual monopoly on the export market, where prices are nine times higher than the subsidized rate at home. Its hard-currency earnings are expected to reach $15 billion this year.

The second reason for Putin to bring in an outsider is to strike a blow against the cronyism that prevails at Gazprom and too many other Russian companies. Documents filed with Russia's Federal Securities Commission show that a prime Gazprom pipeline contractor, Stroytransgaz, is at least 60% owned by Gazprom managers and relatives, including Tatyana Dedikova, daughter of Vyakhirev. Yet the Vyakhirev regime has paid little heed to minority shareholders who say such relationships are a form of asset-siphoning and a big reason why Gazprom's vast reserves are valued at a 90% discount to those of Western companies. The first task for a new CEO is to spend "a couple of years cleaning up shop," says minority director Boris Fyodorov, a Yeltsin administration policymaker who is a vociferous Vyakhirev critic. Vyakhirev declined to comment on allegations of corruption.

This is not just an internal Russian matter. Gazprom is Europe's largest gas supplier--last year, it exported $3.5 billion worth to Germany. The sole Westerner on the board is Burckhardt Bergmann, vice-president of Germany's Ruhrgas, a gas distributor. Bergmann has been a Vyakhirev supporter, but Ruhrgas declined to state a position on his future. A spokesman says Ruhrgas hopes Gazprom will improve its corporate governance.

Gazprom management is not to blame for all the problems that afflict the company: It is the state that has forced Gazprom to subsidize the Russian economy with cheap gas. But with Putin's team coalescing behind structural reforms, new managers are needed to implement new policies. Gazprom shares could "double" if Putin brings in new management, says gas-industry analyst Steve Allen of Moscow broker Renaissance Capital. But if Putin shies away from this difficult task, investors will see another reason not to invest in a nation that continues to lag well behind Poland, Hungary, the Czech Republic, and the Baltic states in its adaptation to a post-communist world. The stock market has it right: Putin should evict Vyakhirev. Moscow Bureau Chief Starobin covers Russian business and finance.


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