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As Russia Stumbles, Gazprom Comes Up $910 Billion Short

By Halia Pavliva and Ksenia Galouchko
April 03, 2014 5:00 PM EDT 372 Comments
A driver waits outside the headquarters of OAO Gazprom in Moscow.
Photographer: Andrey Rudakov/Bloomberg
A driver waits outside the headquarters of OAO Gazprom in Moscow.

Back in April 2007, in the midst of the greatest commodities rally on record, OAO Gazprom’s (OGZD) deputy chief executive officer, 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 trillion in as little as seven years.

Medvedev was off by $910 billion. 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 billion 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 LLC, which manages $1.3 billion of assets including Russian stocks, said in an interview yesterday. “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 spokeswoman for Deputy Prime Minister Arkady Dvorkovich, who oversees Russia’s energy industry, declined to comment.

Oil Prices

Sergei Kupriyanov, a Gazprom spokesman in Moscow, said yesterday that the $1 trillion 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.

American depositary receipts of Gazprom slumped 1.1 percent to $7.60 in New York today, extending this year’s slide to 12 percent. The Bloomberg index of the most-traded Russian stocks in the U.S. fell 1.3 percent.

In an interview in Moscow on April 6, 2007, Medvedev said Gazprom wanted to be the “most capitalized company in the world” and that it would reach a $1 trillion 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 $106.15 a barrel on the London-based ICE Futures Europe exchange today, up from $68.24 the day before Medvedev spoke in 2007.

Bear Market

Russia’s benchmark Micex Index (INDEXCF) has dropped 19 percent over the past seven years, underperforming the MSCI emerging-market gauge’s 8.2 percent advance and the 10 percent gain in the MSCI World index of developed nations. The Micex entered a bear market on March 13 after Putin’s move to annex Crimea from Ukraine triggered the worst standoff between Russia and the U.S. since the end of the Cold War.

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

Putin, who’s described the collapse of the Soviet Union as the greatest geopolitical catastrophe of the 20th century, has boosted the government’s role in the economy since coming to power in 1999.

Khodorkovsky Imprisonment

In 2004, state-owned oil producer OAO Rosneft took over Yukos Oil Co., Russia’s largest crude producer at the time, after the government imprisoned the company’s founder, Mikhail Khodorkovsky. Last year, Rosneft purchased TNK-BP, a BP Plc oil joint venture in Russia, for $55 billion.

“This is an issue of any Russian state company,” Oleg Popov, who helps manage $1 billion of securities for Allianz Investments in Moscow, said by e-mail yesterday. “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 the stock 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 billion in Russian assets as chief executive officer of Prosperity Capital, said in an interview from London yesterday.

‘Political Agendas’

Gazprom’s profit for the first nine months of last year calculated under Russian standards declined 9 percent to 467 billion rubles ($13 billion). Income under international standards increased 4 percent to 859 billion rubles. The company hasn’t disclosed its full-year earnings report.

With about $3 billion of spending earmarked for the Olympics and billions more for new gas transit routes to Europe bypassing Ukraine, Gazprom has said it doesn’t have sufficient funds to distribute more cash. The government has frozen the company’s domestic prices and increased its taxes. Ukraine, meanwhile, has fallen behind on its gas bill, racking up a debt with Gazprom that’s swelled to more than $2 billion.

The company “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 Ltd. said in an April 1 interview.

To contact the reporters on this story: Halia Pavliva in New York at hpavliva@bloomberg.net; Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Tal Barak Harif at tbarak@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net Rita Nazareth

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