The Nemtsov White Paper, Part II (Section 2)

This is a continuation in our serialization of the second part of the White Paper by Boris Nemtsov. Part II deals exclusively with the Gazprom fuel monopoly. Section 1 was published on Friday. This is Section 2, all new material exclusive to La Russophobe which has never before appeared in English.

Putin: The Bottom Line

by Boris Nemtsov and Vladimir Frolov

Translated from the Russian by Dave Essel

Gazprom Machinations: Asset Stripping

Instead of concentrating on Gazprom’s core responsibilities of ensuring the reliability of the country’s gas supplies and developing extraction, Putin and the management team he put in place have concentrated their efforts on assorted dodges and machinations to engender a new wave of asset stripping and outflow of finances from the corporation in favour of bodies close to Putin and his friends.

Initially, Putin was very keen for Gazprom to accumulate assets that had been taken out of the corporation and placed under outside concerns under Rem Vyakhirev. This included quantities of Gazprom’s own shares and the assets of Sibur, a petrochemical concern.

However, once most of the assets had been brought back under the corporation’s umbrella, the opposite began to happen and assets – in the majority of cases the selfsame assets that had been reacquired – again began to be leveraged away from Gazprom. Putin’s re-election to a second term marked the turning point.

It should be noted that back in the 1990s, this asset removal was done quite openly and was widely discussed in the independent media. Not so, however, during Putin’s second term. Now that he has well and truly clamped down on freedom of the press, the public is barely aware of this new wave of asset stripping. What business press is not under Putin’s control has written about it but their circulations are too small and their audiences too narrow for the information to become widely known. For obvious reasons, Russian television does not mention such matters at all.

And so as a result of a chain of strange commercial deals carried out during the time Putin was pulling the strings at Gazprom, assets worth tens of billions of dollars have been stripped from it. Many of these assets were shed only to pass into the control of a personal friend of the president of Russia. And such deals are continuing to take place: for example, in April 2008 it was announced that Gazprom was urgently divesting itself of the Sibur petrochemical company which was being sold to some Cyprus offshore company at well below its market price.

As a result of these dubious deals, funds have disappeared that could otherwise have been invested in gas extraction and help overcome the gas supply crisis we have described above.

Below we propose to collate all the information available on such machinations so that Russians may see the scale of the asset stripping that has taken place in Gazprom during president Putin’s rule. We will also show the amounts that could have been saved and used to develop Russia’s gas extraction industry had things been done otherwise.

Manipulating Gazprom shares

In early 2000, one of Putin’s widely publicised projects was the buy-back of Gazprom shares sold out from the corporation under Rem Vyakhirev’s control. A great hue and cry was raised in particular over the buy-back of 4.8% of Gazprom’s shares from Stroitransgaz.

However, once there shares were back in the corporation’s hands, they soon began to mysteriously disappear. The process was gradual but anyone who wishes to do so can see how it went by looking at Gazprom’s Quarterly Reports prepared to international accounting standards. These reports publish data on the number of Gazprom shares held by its subsidiaries.

Thus, as at 3 March 2003, the Quarterly Report shows that in the 1st quarter of 2003, Gazprom subsidiaries held 17.4% of Gazprom’s shares. As at 3 December 2007, the corresponding Quarterly Report has their holdings as just 0.3%. In the intervening period, a 10.7% shareholding was bought by state-owned Rosneftegaz.

But 17.4% – 10.7% – 0.3% = 6.4%. Thus, starting 2003, 6.4% of Gazprom’s shares have somehow fallen off its balance sheet. This tendency to disappear was greatest during 2007: at 1 January 2007, Gazprom subsidiaries still held 3.5% of its shares but by the end of the year this was down to 0.3%.

Some of these shareholdings, it would seem, were excluded from the balance sheet in connection with the fact that indices for Gazfond, the corporation’s pension fund (incidentally controlled by Putin friend Kovalchuk), ceased to be reported in Gazprom’s consolidated accounts. Gazprom also explains that it periodically buys and sells its own shares on the stock-market.

Nonetheless, we can see here that little by little over the last five years a large dollop of Gazprom shares has vanished from its subsidiaries’ books. Where did they go? No one knows.

Why is this important? Because 6.4% of Gazprom’s shares represents a quantity sufficient to give one the right to real participation in the corporation’s management. The market value of such a holding is in the region of $20 billion. It is in fact the next most valuable holding after the Russian state’s holding in the corporation and equal to that of E.ON Ruhrgas which also happens to own 6.4% of Gazprom’s shares. The dividends on such a holding, based on Gazprom’s 2007 distribution, is over $170 million a year. On the other hand, if one takes as a base the dividend paid by other private oil companies in Russia, the dividends could be as high as $1.1-1.7 billion. The owner of such a holding can be sure that he can place his candidate on Gazprom’s board of directors and directly influence the running of the company.

How such a holding could be allowed out of the government’s control is incomprehensible. In 1998, for example, the state sold off just 2.5% of Gazprom’s shares in an absolutely open auction. At that time the preparations for this and the actual sale were widely publicised on Russian television and Ruhrgas came out the winner in a transparent process. Nowadays, however, a considerably larger parcel of shares held by Gazprom subsidiaries can just vanish from their books without anyone knowing what happened.

Had this 6.4% holding been sold at open market today, Gazprom would have gained $20 billion which could have been used to develop gas extraction.

And the question of where these shares went still remains unanswered.

Another Gazprom deal also needs to be mentioned here: the “purchase” by the state of a 10.7% holding in Gazprom in order to make the state’s holding a controlling one.

Restoring the state’s control over Gazprom – lost during Rem Vyakhirev’s tenure – is a good thing. Not even the liberal reformers objected to the concept. But how was this done?

The state could have done this relatively painlessly and not too expensively by transferring shares held by Gazprom subsidiaries back to the owner corporation and then pay them off bonds. Proceeding in this way, the state would at no cost have increased its holding from 39.3% [see note 1] to nearly 48% and it could then have bought the remaining 2% plus a little more still needed on the market. (In 2003, this would not have cost more than $500-700 million.)

A proposal of this kind was discussed by the government back in 2000. Paying vast amounts out of the budget to buy back Gazprom shares was clearly not a sensible course from an economic point of view. Would it not be better to use state funds to clear the Pension Fund’s deficit?

But no, the state preferred, firstly, to wait until Gazprom’s market capitalisation had grown and the price of the shares to be bought back had risen, and, secondly, instead of doing a book transaction with bonds, to buy a 10.7% holding in Gazprom at great expense. The purchase cost the state $7.2 billion – 10 times more than would have been needed to buy 2% of Gazprom in 2003.

One gets the feeling that someone deliberately delayed the state’s restoration of a controlling share in Gazprom in order to get more state money onto Gazprom’s books and then to use that money to buy up Sibneft from Abramovich (at, incidentally, an inflated price – about which more below). The deal cost the state budget a cool $6.5 billion. One might well ask if a deal of this kind falls within the meaning of “criminal waste of state funds”?

Lastly, the 10.7% holding has never been transferred to the Russian Federation and continues to float around in Rosneftegaz’s books.

The purchase of Sibneft

In September-November 2005, Gazprom bought 75% of Sibneft from Millhouse Capital. This latter is believed belong to Roman Abramovich (although in our report Putin – The Bottom Line we note that its actual owners are unknown).

We have already describe this deal in detail, pointing out how Sibneft’s market value was pumped up prior to the sale (Sibneft’s Value Inflated, article in Vedomosti, 28 September 2005). It share price was $3 in early 2005 but stood at $4 when the deal was done.

Today, three years after the Sibneft purchase, we can state with certainty that Gazprom’s entry into the oil business has been a failure. Sibneft’s average daily output has fallen from 95,800 tonnes a day in September 2005, when the company was bought, to 84,700 tonnes a day in June 2008, a drop of 11.5% in less than three years.

Gazprom has invested $13.7 billion in a project which from the point of view of productive results is a failure and also clearly overpaid Roman Abramovich companies in the process.

The deal was overseen by none other that V. Putin. No one has been held responsible for the senseless failure of the Sibneft purchase.


The sale of Sogaz was the first instance of a sale of Gazprom assets to friends of Putin. Sogaz, the Gas Industry Insurance Association by its Russian initials, is one of Russia’s largest insurance companies. In 2004, Sogaz was the sixth most highly rated insurance company in Russia with premium income of about $500 million.

The insurance business is outside Gazprom’s remit of extracting, transporting, and processing gas and supplying the same to consumers. In 2000-2002, some members of government and groups of experts actively discussed the need for Gazprom to divest itself of non-core assets. Sogaz was on the list. It was assumed back then that the sale would be preceded by preparatory work on the company to increase its market value, that it would take place transparently, and that it would bring into Gazprom billions of dollars that it needed to invest in gas extraction.

In 2004, however, Sogaz was sold by Gazprom on the Moscow Interbank Currency Bourse to a consortium composed of Evrofinance Mosnarbank, Severstal Group, and Rossiya Bank. Sogaz’ quarterly report for Qtr1 2005 make it clear that 51% of Sogaz was later resold to a company called Abros, a 100% owned subsidiary of Rossiya Bank. Another 12.5% ended up in the hand of Aktsept, which owns 3.93% of Rossiya Bank.

According to the Russian media, Aktsept is 99.99% owned by Mikhail Shelomov, the son of the cousin of Russia’s second president, Vladimir Putin.

We have already written about Rossiya Bank in Putin – The Bottom Line. The bank was set up in 1990. Its main investor was the Administration Directorate of the Leningrad District Branch of the Communist Party of the Soviet Union. According to the Russian media, the bank’s largest shareholder is Yuri Kovalchuk, the chairman of its board of directors and a friend of Putin’s dating back to when the latter worked in Petersburg. Again according to the media, Yuri Kovalchuk is one of the businessmen who is closest to Putin.

It is worth mentioning in passing that Kovalchuk is in the diplomatic service of the Kingdom of Thailand, being Thailand’s honorary consul in St. Petersburg. His office is located inside the Thai Consulate, a location that enjoys diplomatic immunity.

And so Gazprom lost control of one of the country’s largest insurance companies. After passing into the hands of Rossiya Bank, Sogaz’ business grew rapidly: premium income went up from $500 million in 2004 to nearly $1.5 billion in 2007. According to Russia press estimates_ [see note 2] the main reason for this growth factor was that it began insuring the big state-owned companies (including Rosenergoatom, the Russian Railways, and others). In off-the-record interviews with Vedomosti newspaper, Sogaz customers referred to its having official support but refused to be quoted by name.

According to Rossiya Bank management estimates [see note 3] the purchase of Sogaz cost them about $120 million although the real value of the company is perhaps $1.5-$2 billion. Stripping one of Russia’s largest insurance companies away from Gazprom at a ridiculously low price and then “pumping it up” with income from government-owned companies directed to use it – that, it would seem, was the Putin clan’s strategy vis-à-vis Sogaz. Had Sogaz been properly prepared well before being put on the market and had the company itself then been sold at an open auction, Gazprom would probably have made $1 billion from the sale. And the funds could have been invested in developing gas extraction. But…

Gazfond and Gazprombank

In August 2006, Sogaz, by then already owned by Rossiya Bank, bought 75% + 1 share of Lider, the company which manages Gazfond, Gazprom’s pension fund. Gazfond is the largest non-state-owned pension fund in the country with reserves (as at 1 July 2006) of over $6 billion.

These funds do not belong to the pension fund or Lider, the company which manages them, but may be invested in any projects the management company decides. When Rossiya Bank’s owners bought Lider, they did so with the intention of gaining control over the pension fund: in 2005, Yuri Shalamov (son of Nikolai Shalamov, a Rossiya Bank shareholder from late 2004) became Gazfond president.

The next purchase to be made was done with Gazfond money: this was the acquisition of a controlling share in Gazprombank, one of the country’s largest banks (at the time of the purchase it had the 3rd largest assets in Russia although on occasion its assets would take it up to second place after Sberbank, relegating Vneshtorgbank to the third position).

In early 2000, the government had discussed the possible sale of Gazprom’s financial assets, including Gazprombank, for cash at open auction as part of a general move to divest Gazprom of non-core assets. As late as 2006, Gazprom’s board considered discussing the sale of a large shareholding in Gazprombank to a strategic investor, Dresdner Bank. Although this proposed deal was not particularly transparent and Dresdner Bank was headed by a former Stasi operative and long-time personal friend of Putin’s, Matthias Varnig, the sale was to be carried out for real money.

In late 2006, however, the Gazprom board approved the divestment of a quantity of Gazprombank shares not for money but in exchange for Gazfond’s shareholding in Mosenergo. Gazprom could have have held on to Mosenergo or could have sold this electric power generating company’s shares on the stockmarket – as indeed it could have sold Gazprombank shares. But they decided instead on this idea of a “swap” – with the result that by April 2007, as was announced by Gazprombank’s press office, Gazfond now controlled the bank with 50% + 1 share. Gazprombank, which according to a number of experts is worth $25 billion, slipped away from Gazprom without Gazprom getting so much as a kopeck of real money for its valuable asset.


In the course of innumerable asset swaps, it came about that Gazprom-media, Russia’s largest media holding, slid out of the direct control of Gazprom. (We wrote about this in our report Putin – The Bottom Line). Gazprom-media owns the NTV and TNT television channels and other media assets. Its shares were transferred into the ownership of Gazprombank prior to Gazfond’s getting a controlling share in the bank, or to put this in another way – prior to its ending up in the business empire of Rossiya Bank and Yuri Kovalchuk. When in July 2005 Gazprom-media’s and the NTV and TNT television channels’ shares were transferred into the books of Gazprombank (back then this was only a normal internal operation within Gazprom), Gazprom was paid $166 million for the shares by Gazprombank.

However, just 2 years later, after ownership of Gazprom-media as part of Gazprombank’s assets had passed to Rossiya Bank, vice-premier Dmitri Medvedev publicly put another value on Gazprom-media’s assets – $7.5 billion. This means Gazprom gave its assets away for an order of magnitude less than its real value, at a discount of say $7.3 billion!

Rossiya Bank today controls a number of other major media assets besides Gazprom-media. These are the Ren-TV and St. Petersburg Channel 5 television channels, the country’s largest circulation newspaper Komsomolskaya Pravda, and dozens of other TV, radio, and newspaper companies. In 2005-2007, the media group won the right to broadcast in 41 regions of Russia and then got allocated frequencies in a further 29 regions. And Gazprom, in losing Gazprom-media, lost, as we said, $7.3 billion.


The dubious scheme whereby opaque intermediaries are used in the resale of Turkmen gas to the Ukraine for subsequent re-export in part to Europe was set up by the Putin clan back in 2002. Back in Rem Vyakhirev’s time, similar dubious operations were carried out by a company called Itera. Many Gazprom shareholders and outside analysts were strongly against these schemes under which, in Gazprom’s full cognisance, a large proportion of profits on sales disappeared into the hands of intermediary companies with ultra-complex ownership structures which had inserted themselves into the operation of the state-owned petrochemical companies of Russia, Turkmenistan, and the Ukraine.

At the start of Putin’s presidency, there had been serious hopes that such intermediaries would cease to be used in the Russia-Turkmenistan-Ukraine gas triangle and that Gazprom would start getting full commercial value from its activities in this sphere.

However, by as early as 2003, Rem Vyakhirev’s pet company Itera was merely replaced by another intermediary, EuralTransGas, which was registered in Hungary by four persons in 2002. In 2004, according to Vadim Kleiner [see note 4] of investment fund Hermitage Capital Management [see note 5], a Gazprom shareholder that attempted to protest against the outflow of capital from the corporation, Gazprom gifted its intermediary EuralTransGas with $767 million profits from the resale of Turkmen gas to the Ukraine for subsequent re-export.

Starting 2005, EuralTransGas relinquished its role of intermediary in the Russia-Turkmenistan-Ukraine gas triangle to Swiss-registered Rosukrenergo which received the exclusive right to resell Turkmen gas to the Ukraine. Rosukrenergo founders were Gazprombank (which paradoxically has no gas interests) with a 50% holding and unknown persons. Suspicions were frequently voiced that big-time criminals were involved in Rosukrenergo and EuralTransGas. Later two businessmen, Dmitri Firtash and Ivan Fursin acknowledged their involvement. Despite the fact that Gazprom was now via Gazprombank receiving its share of the profits from the resale of Turkmen gas to the Ukraine and its subsequent re-export to Europe, a proportion of the profits were not going to Gazprom. In 2005, the amount that went to then then unknown co-owners of Rosukrenergo amounted to to $478 million.

It can therefore be seen that in 2004-2005, Gazprom simply gifted $1.25 billion of profit from its Turkmen gas trade with the Ukraine to some shady intermediaries.

Yet Rosukrenergo’s role in all this only grew. By an ill-famed agreement of 4 January 2006 between Russia and the Ukraine, Rosukrenergo was given the exclusive right to resell all Russian and Central Asian gas to the Ukraine. This agreement annulled direct contractual agreements between Gazprom and Naftogaz Ukrainy. As we shall show below, this scheme was not a commercial success for Gazprom.

In late 2006, just before Rossiya Bank gained control over Gazprombank, Gazprom bought a 50% share in Rosukrenergo from Gazprombank for €2.3 million (~$3.5 million). Furthermore, not long before that Gazprombank and private shareholders in Rosukrenergo had been paid $730 million in dividends. It therefore turns out that just before handing control of Gazprombank to Rossiya Bank, Gazprom further primed it with hundreds of millions of dollars that became Rossiya Bank’s.


The 2008 story of the attempt to sell petrochemical concern Sibur to private individuals is perhaps the most insolent example of the asset stripping of Gazprom in recent years. Sibur is the country’s largest petrochemical corporation. It consists of 6 (out of the 8) Western Siberian plants for processing oil field gas; Tobolsk-Neftekhim, one of the countries largest petrochemical plants; 7 synthetic rubber production plants; 6 polymer production plants; 6 tyre factories; and 2 mineral fertiliser plants. Its turnover in 2007 was $6 billion and it made an operating profit of $1.2 billion.

In 2002-2003, the issue of regaining control of Sibur following the attempt by its former chairman Yakov Goldovsky to wrest it away from Gazprom was made one of the big themes of Putin’s propaganda campaign about returning assets lost to Gazprom under Rem Vyakhirev. Goldovsky was arrested in Gazprom head Aleksei Miller’s reception. Sibur was returned to Gazprom. Goldovsky had to flee abroad. Putin addressed the following threatening remark to Miller: “One needs to be more careful about questions of property. One day you may yawn a little too widely and lose more than Sibur.”

However, it would appear that Sibur was brought back into the fold only to be again handed to unknown private persons. AOnly a few years later, Gazprom once again finds itself losing its control over the company. First, through a series of manipulations Sibur finds itself no longer under direct Gazprom control and is owned by Gazprombank (70% – 1 share) and Gazfond (25% + 1 share). These two entities, of course, later pass from Gazprom into the hands of Rossiya Bank (as detailed above). In addition to all this, Gazprom wrote off 40 billion roubles of Sibur debt to it.

In April 2008 an attempt was made finally – and most hurriedly – to hand Sibur over to a group of private persons. On 22 April 2008 Sibur president Dmitri Konov and 4 other top managers informed Sibur’s board of directors of their intention to begin talks with Gazprombank regarding the purchase of a majority shareholding in Sibur by Hidron Holdings Limited, a Cypriot offshore company. A price and terms were agreed by the parties within a mere five days. According to Russian media sources, Hidron was to buy Gazprombank’s whole 70% holding in Sibur based on a preliminary valuation of the company at $3.8 billion.

Many analysts, however, estimated that $6.5 billion was a fairer valuation for Sibur.

Nearly half the amount Sibur’s managers were going to pay Gazprombank in accordance with the terms they had agreed (25 billion roubles out of a total of 53.5 billion roubles) was to be lent to them by Gazprombank for a three-year term. Gazprombank was in effect going to finance its purchasers in the deal! In addition to this, the new owners had negotiated for themselves the right to sell back to Gazprom the Sibur subsidiaries Sibur-Russkie-Shiny (Sibur Russian Tyres) and Sibur-Minodobreniya (Sibur-Mineral Fertilisers), evidently at a premium.

For what services five top managers who had only worked for a few years in the company were being given such a munificent present is a complete mystery. Why were they being allowed to rush-purchase a controlling share in Sibur on such unbelievably good terms? The company president Dmitri Konov had only been in place for four years, of which only 18 months in the top spot. None of the four other managers had worked in Sibur for more than 5 years. In addition, no one know who the ultimate beneficiary of Hidron Holdings Ltd, the buyer, is. Judging from the rush and the fantastic terms of the deal, there is every reason to believe that the object is to “reward” not Konov & Co. but some highly placed government figure “for all his good work”.

And of course Gazprom stands to lose no less than $3 billion in the matter.

Gazprom Asset Stripping Machinations: Conclusion

Over the last few years as a result of machinations to strip Gazprom of assets, the corporation has lost control of assets to a value exceeding $60 billion (6.4% of its own shares, shareholdings in Gazprombank, Sogaz, Sibur, Gazprom-media, and the assets of Gazfond, the largest non-state pension fund) plus cash amounting to almost $20 billion extracted from the corporation under the pretext of buying shares in Sibneft and machinations involving the trading company Rosukrenergo.

The value lost to Gazprom in these deals is, in our estimation, approximately equal to the cost of bringing the Shtokman, Bobanenkovo, and a number of other major new gas fields into production. These funds could have been used to develop new gas industries and ensure a reliable supply of gas for Russian consumers.

Instead, we have seen efforts devoted in the main to consolidating Rossiya Bank’s business empire by raiding Gazprom assets.

Rossiya Bank’s Empire built on assets stripped from Gazprom

Rossiya Bank’s Empire built on assets stripped from Gazprom


1. This includes the 0.9% holding of state-controlled of Rosgasifikatsiya
2. Greater detail to be found in Rossiya Bank’s Helpers: How Yuri Kovalchuk Built Up His Empire, Vedomosti, 24 July 2008
3. Interview with Rossiya Bank’s chairman, D. Lebedev, Keeping a Weather Eye Out For Freebies, Vedomosti, 17 June 2008
4. Source: Presentation entitled How Should Gazprom Be Managed in Russia’s National Interests and the Interests of Its Shareholders, Vadim Kleiner, Gazprom Board Candidate, June 2005.
5. Its head, William Browder, would later be refused Russian entry visas and its staff became the subjects of persecution._


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