HERMITAGE CAPITAL MANAGEMENT
Affiliated Party Transactions
Examples at Gazprom
William Browder
Chief Executive Officer
Hermitage Capital Management
November 12, 2004
1
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
Construction write-offs had materially hurt the profitability of Gazprom
8,000
6,000
Construction
write-off ($889) m
increase by 19%
4,000
2,000
mln
USD
Construction writeoff ($694) m
(2,000)
(4,000)
$4,659 m
increase by 73%
$946 m
Profit
Loss
decrease by 25%
($4,151) m
Construction
write-off
($1,052) m
Profit
Impairment charge for Assets
under construction, mln USD
EBIT, mln USD
(6,000)
1998
Source: PWC Audit of Gazprom 1998-2000
1999
2000
2
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
A company called Stroytransgaz had been contracted to do largest
share of Gazprom construction
120%
100%
80%
60%
40%
45%
47%
49%
Stroytransgaz
20%
0%
1998
Source: PWC Audit of Gazprom 1998-2000, Stroytransgaz prospectus
1999
2000
3
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
It appeared that there was a strong correlation between Gazprom
write-downs and services provided by Stroytransgaz
1,200
$1065.9 m $1052 m
Stroytransgas services, mln USD
Impairment charge for Assets under construction, mln USD
1,000
$889 m
$842.0 m
800
$676.3 m $694 m
mln
USD 600
400
200
0
1998
Source: PWC Audit of Gazprom 1998-2000, Stroytransgaz prospectus
1999
2000
4
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
Furthermore, in 1995 Stroytransgaz had been basically given 4.83%
of Gazprom
4.83% of Gazprom
Gazprom
Stroytransgaz
$2.5 million
Source: Gazprom and Stroytransgaz securities reports
5
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
That gift transferred huge value away from Gazprom
1,200
1,000
800
Million
USD
Valuation of 4.83% Gazprom
shares block “sold” to
Stroytransgaz
600
$1,087 mln
Loss of
$1085 m
400
200
$2.5 mln
$191 mln
0
Price paid by
Stroytransgaz
Market value of the
block in 1995
At Market Price
(May 14, 2002)
Source: Gazprom and Stroytransgaz securities market reports, Plan of Privatization, Reuters, Vedomosti
Gazprom loss
6
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
Through the affiliated party disclosure it was discovered who truly
owned Stroytransgaz
Victor Chernomyrdin
Rem Vyakhirev
Arngolt Bekker
Vyacheslav Sheremet
(former Chairman of the Board
and former CEO of Gazprom)
(former Chairman of the Board
and CEO of Gazprom)
(Member of the Board of
Gazprom)
(Member of the Board and first
deputy of CEO of Gazprom)
sons
daughter
children
kin
Vitaly
Chernomyrdin
Andrei
Chernomyrdin
Tatyana
Dedikova
N. Bekker
E.Bekker
V.Bekker
5.96% of
Stroytransgaz
5.96% of
Stroytransgaz
6.40% of
Stroytransgaz
6.99% of
Stroytransgaz
2.68% of
Stroytransgaz
2.65% of
Stroytransgaz
Kormanovski A.
20.00% of
Stroytransgaz
6.40% of
Stroytransgaz
57.04% of Stroytransgaz
Source: Gazprom and Stroytransgaz securities reports
7
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
As a result of the public pressure, 4.83% of its shares were returned
to Gazprom
Stage 1: Setting up JV
Stage 2: Liquidation of JV
Gazprom
Gazprom
4.83% of
Gazprom's shares
Veksels worth
$ 144 mln.
Joint Venture
4.83% of
Gazprom's shares
Joint Venture
Veksels worth
$ 144 mln.
Stroytransgas
Source: Interfax, November 27, 2002, Vedomosti, March 12, 2003, Preliminary Offering Circular February 14, 2003, Loan Participation Notes
Stroytransgas
8
Stroytransgaz Example
HERMITAGE CAPITAL MANAGEMENT
Stroytransgaz has also seen its share in Gazprom’s construction
budget decline
Share of Stroytransgas in Gazprom's
construction business (1998-2003, %)
60%
50%
45%
47%
49%
51%
40%
30%
26%
21%
20%
10%
0%
Source: Gazprom disclosure
1998
1999
2000
2001
2002
2003
9
RegiongasHolding Example
HERMITAGE CAPITAL MANAGEMENT
After the 1998 crisis, Gazprom decided to acquire gas retailers (about
80) by swapping their debt for equity and creating a holding company
RegiongasHolding
Gazprom
Gazprom
100%
100%
Mezhregiongas
3 outside companies
Mezhregiongas
75%
25%
Gas
wholesalers
80
retailers
Bryansobl
gas
Kalugaobl
gas
RegiongasHolding
...
Tyumenobl
gas
Bryansobl
gas
Kalugaobl
gas
...
Gas retail
sales
Gas retail
sales
Customers
Customers
Source: Hermitage Analysis, Federal Securities Market Commission
Tyumenobl
gas
But
surprisingly
Gazprom
only received
25% of the
new holding
company
10
RegiongasHolding Example
HERMITAGE CAPITAL MANAGEMENT
Instead of Gazprom owing RegiongasHolding, 75% of it ended up
in the hands of former management of Gazprom and
Mezhregiongaz
Valentin Nikishin,CEO
of Mezhregiongaz and
his son
Vitaly Chernomyrdin,
son of former Chairman
of Gazprom
100%
48%
100%
Quorum-N
50%
Protek-MG
Delta
50%
Agrohimtex
45%
45%
Resurs-MRG
30%
Regiongas Holding
shareholders
structure
Source: Hermitage Analysis, Federal Securities Market Commission
Gazprom
25%
Mezholimpinvest
20%
Gazspetztehnologia
25%
11
RegiongasHolding Example
HERMITAGE CAPITAL MANAGEMENT
As a result of public pressure, Gazprom recovered control over
RegiongasHolding
Regiongasholding Ownership Evolution
100%
90%
80%
Gazspetztehnologia,
25%
70%
60%
Others
45%
Resupr-MRG;
30%
50%
40%
30%
20%
10%
Mezholimpinvest
20%
Gazprom;
25%
Gazprom;
55%
0%
2001
Source: Federal Securities Market Commission, Regiongasholding 4Q 2002 securities market report
2002
12
Sibneftegaz Example
HERMITAGE CAPITAL MANAGEMENT
First dilutive issue took place in July 1997.
6,000
5,000
Placement price valued
Sibneftegaz at $1,285 K
5,000 shares
"Potential LO" 6%
ZAO "Schit" 10%
4,000
Local administrations 8%
150% capital
increase
3,000
Proekt (SBNG management)
15%
2,000 shares
2,000
LogoVaz
20%
3,000
new
shares
$777 K
worth
Local Administrations 20%
LogoVAZ 20%
1,000
Proekt (SBNG management) 15%
Gazprom
45%
Gazprom underpaid
$65 K needed to keep
its share intact
Gazprom
40%
0
May-95
Jul-97
13
Sibneftegaz Example
HERMITAGE CAPITAL MANAGEMENT
Second issue bring Gazprom down to only 21% to the benefit of two Itera
affiliated companies (38%) and Ingeneeringoil (5%) owned by Vyakhirev kins.
21,000
20,000 shares
Placement price valued
Sibneftegaz at $1,751 K
OOO Krifin 2%
Puringeneeringoil 5%
18,000
Linko-Optim 20%
15,000
300% capital
increase
12,000
Lanka Promkomplekt 18%
"Potential LO" 1.8%
15,000
new
shares
$1314 K
worth
ZAO "Schit" 10%
9,000
Local administrations 2%
LogoVaz 5%
3,000
0
Proekt (SBNG management)
15%
5,000 shares
6,000
"Potential LO" 7%
ZAO "Schit" 10%
Local
Administrations 8%
LogoVAZ 20%
Proekt (SBNG management) 15%
Gazprom
45%
Jul-97
Gazprom underpaid
$333 K needed to keep
its share intact
Gazprom
21%
Feb-99
14
Sibneftegaz Example
HERMITAGE CAPITAL MANAGEMENT
Sibneftegaz intrinsic value is between $78 mln and $627 mln based on
1.57 BOE of hydrocarbon reserves
$700
$627.2 mln
$600
Million USD
$500
Sibneftegaz valuation
$400
$300
$200
$78.4 mln
$100
$0
$1.8 mln
Last share issue (Feb-99)
Based on Gazprom $/boe
valuation
Based on average Russian $/boe
valuation
15
Sibneftegaz Example
HERMITAGE CAPITAL MANAGEMENT
Gazprom management related parties benefited from Gazprom dilution
Sergei
Sochnev
Victor Bryanskih
Yuri
Ryazanov
Department of
Strategic Development of
Gazprom
100%
100%
OOO
"Vista-Korall"
OOO "Krifin"
Lesya
Sokolova
90%
10%
OOO "Intergazsib"
13%
12.5%
100%
OOO "Linko-optim"
12.5%
75%
20%
18%
20%
OOO "Lanka-Promcomplect"
13%
Others
9%
18%
Sibneftegaz
10%
ZAO Firma Proekt
15%
21%
15%
5%
10%
5%
ZAO
Purengeneeringoil
70%
Genady Vyakhirev
brother of Rem Vyakhirev
Gazprom CEO
30%
Andrey Vyakhirev
nephew of Rem Vyakhirev
Gazprom CEO
Gazprom
10%
ZAO Insurance
Company "Schit"
42%
Vyacheslav Kuznetzov
Head of Internal Audit
Department of Gazprom
47%
Natalie
Kuznetzova
Mr.Kuznetzov
spouse
16
Sibneftegaz Example
HERMITAGE CAPITAL MANAGEMENT
In light of these and other discoveries, president Putin fired Gazprom’s CEO
Rem Vyakhirev
Gazprom Share Price (US$)
$0.70
May '01: Putin sacks Rem
Vyakhirev as CEO of Gazprom.
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
Jan-01
Source: Bloomberg
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
17
HERMITAGE CAPITAL MANAGEMENT
Disclaimer
The information is based on data obtained from publicly available sources, which have not been verified by Hermitage Capital
Management Limited, or any of its respective associates or affiliates. As a result of the difficulty in obtaining reliable data in Russia, we
do not represent this information to be accurate and complete and we do not accept any responsibility for the reasonableness of any
conclusions based upon such information.
18