On Matters that “Smack of Fraudulent Schemes,” I Defer to Gazprom’s Expertise
Gazprom claims that the Ukrainian proposal to import gas from Europe “smack[s] of corrupt schemes”:
Plans by Ukraine to import natural gas from the European Union “smack of fraudulent schemes,” said the chief executive of Gazprom, Russia’s largest gas producer.
“Now as regards the reverse supplies of gas from the territory of the European Union to Ukraine – we know about these plans very well, but we have suspicion that it isn’t about any reverse supplies. De facto, there would physically be no gas involved – the plan is to use Gazprom gas in a kind of virtual reverse direction,” Alexei Miller said in the “News on Saturday with Sergei Brilyov” television program.
“In other words, Gazprom gas moves into Europe and immediately turns back and goes to Ukraine,” Miller said. “It doesn’t just get pumped across,” he said, claiming that Ukraine would transmit gas provided by Gazprom to the border, where a measuring station would show that a certain amount of gas had gone to Europe, but then the gas would return to Ukraine.
“These schemes smack of fraudulent schemes of some kind,” Miller said.
On matters of fraudulent gas schemes, I defer to Gazprom. Indeed, since Ukraine is as Sovok as Gazprom, on matters of fraud, it’s hard to choose between either on a priori grounds.
In other news, the Russian government is hardly trusting of Russian energy firms, and natural resource firms generally. Case in point. The Finance Ministry is opposing replacement of extraction taxes and export taxes on energy with a profits (income) tax:
Industry experts say profits-based taxation would allow companies to cut their tax base by artificially reducing their profits.
The tax authorities calculate MET based on Reuters pricing, and export duties from the Argus agency’s average price for Russian Urals blend.
“The Finance Ministry does not trust oil companies; it would not believe them should the tax be based on their profits. Mineral extraction tax based on a certain oil price, which is impossible to change,” said one industry expert.
Quantities and revenues are harder to manipulate than profits. This is a testament to the limitations of the Russian tax system, especially when the energy/oil industry is involved.
This story also speaks to the fiscal stresses on Russia, especially in light of the many promises that he made to get reelected:
The Finance Ministry cited guidelines set by Russian President Vladimir Putin, who before his return to the Kremlin last year promised to increase state salaries and other social spending.
“Our task is to increase the tax burden on the commodity sector,” Trunin said.
Brent and Urals Blend are currently hovering at the levels at which the Russian budget balances. Putin cannot afford any slippage in tax collection on oil sales.
Finally, if you need further convincing that the prospects for making Russia a major financial center are delusional, consider how Rosneft is totally hosing the minority shareholders in TNK-BP. Why? Because they can:
Prosperity Capital Management is looking to team up with fellow investors in the TNK’s traded unit, OAO TNK-BP Holding (TNBP), and seek redress after Rosneft’s plan to borrow money from the company rather than paying dividends sent the shares to a record low this week. Rosneft said its move was standard practice.
The biggest takeover in Russian history strengthens the state’s hold over oil and gas production, the source of half its budget revenue. The government is trying to turn Moscow into a global financial hub to attract investors and shift the economy away from resource dependence.
“The whole country’s reputation will suffer if a big company like Rosneft can behave like this,” Prosperity CEO Mattias Westman, who helps oversee about $4 billion in Russian assets, said by phone from Texas. “We will be talking to other investors and communicating directly with Rosneft on this.”
TNK-BP Holding fell the most since trading began on the Micex, retreating 26 percent to a record low on March 26. The biggest previous one-day decline came in October when Igor Sechin, Rosneft’s chief executive officer, warned that the company may end TNK-BP’s dividend policy and had no plans to buy them out.
This is classic short-termism. Although legally permissible, the refusal to buy out the minority interests in TNK-BP, and the draining of its cash makes it abundantly clear to foreign investors that they can expect the worst. Hardly calculated to make Russia a serious contender as an international financial center, even if its climate were indistinguishable from Cyprus’s or the BVI.
This also illustrates Rosneft’s limitations. It is the biggest publicly traded oil company in the world by production, but is straining every nerve to finance its acquisition of TNK-BP. A real supermajor would not face such difficulties, or find it necessary to engage in prepay transactions with oil trading firms or China to raise the funds for the acquisition. Which is why the long-term consequences of hammering minority shareholders are rather irrelevant to Rosneft, and to Russia. The financial pressures of the present are all important. The future will just have to take care of itself. Whether it will is highly uncertain, and outside of Russia’s control. It depends on many contingencies, which likely accounts for the obvious nervousness at Gazprom, Rosneft, and the MiFi.