Streetwise Professor

Russia has approved a plan to sell stakes in a variety of state companies for an estimated $32 billion. Notable by its absence from the list is Transneft, the state oil export pipeline monopoly.  Transneft management has been outspoken in its opposition to any sale of a stake in the company to outside investors.

And no wonder.  Why would they want any nosy outsiders in on their rackets?  Their big time rackets, as news reports indicate:

The leaking of an official report suggesting $4 billion was stolen by Transneft insiders during the construction of a pipeline to the Chinese border was greeted Wednesday with the government offering congratulations to the state-controlled oil pipeline operator for completing the project.

“They stole. They overstated prices. They connived with contractors to cheat. Then they destroyed the documents,” Andrei Navalny, a minority Transneft shareholder and lawyer, wrote on his blog, where he published what he described as a Transneft report requested by the Audit Chamber.

. . . .

One of the largest allegations of expropriated funds in Navalny’s Transneft report is in the “baseless inflation of estimated project-exploration values” as a part of the initial phase of the ESPO pipeline. The amount alleged to have been stolen is more than 10 billion rubles.

There are more details here.

Now the allegations are directed at the previous management, and the company’s current management hinted that it agreed with the reports of massive fraud by its predecessors.   But they would, wouldn’t they?  They have many reasons to.  For one, they can use this to shovel blame for any subsequently discovered problems or missing sum on the previous management.  Moreover, this is the perfect pretext to undo arrangements with contractors and others entered into by the prior management–so the current management can replace them with its own tunneling schemes.

The allegations bring to mind the Credit Mobilier scandal of the 1860s-1870s in the US.  Credit Mobilier was a firm that was contracted to construct the Union Pacific Railroad.  Credit Mobilier was owned by officers and directors of the UP, and (among other things), overcharged the railroad for construction.  Since the government was footing a big portion of the construction of the road, the overbilling defrauded the government.  Something similar was going on (should I say “was”?) at Transneft.

Big infrastructure builders like Transneft (or the UP) are the perfect vehicles for this kind of scheme.  Nosy independent shareholders would be harmed by these actions, and would have an incentive to try to uncover them (although if the minority shareholders are diffuse their incentives would be somewhat weaker).  Depending on where the company is listed, the private shareholders could take legal action against the company if such a scheme were uncovered by them.  Auditors would also be more concerned about liability, and would have an incentive to be more inquisitive.

So it is no surprise whatsoever that Transneft has resisted so vociferously being included in any Russian privatization plan.  The last thing it wants is to risk any sunlight illuminating the dark tunnels through which so much money flows.