Streetwise Professor

March 30, 2013

On Matters that “Smack of Fraudulent Schemes,” I Defer to Gazprom’s Expertise

Filed under: Commodities,Energy,Russia — The Professor @ 7:43 pm

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.

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  1. You are absolutely right, SWP, as to fraud in the energy sector in Ukraine and Russia.

    And, of course, Gazprom (and Putler) will always make noises about schemes by other countries to reduce reliance on Russia’s major source of revenue – oil and gas sales. And, of course, there is Russia’s attempt to use oil and gas as a political weapon.

    Part of this breast-beating and bellowing and posturing is, of course, just standard sovok technique and “conversation.”

    The back-and-forth blustering runs the gamut from “we are ‘brotherly’ nations, won’t you please lower the price,” to “we can just shut off your supplies” to “we will find alternate suppliers” to “you don’t have the capital to build alternate pipelines” to “we will lower the price if you join our Customs Union” and on and on.

    And – here is yet another example of a fraudulent scheme, written up in the Eurasia Daily Monitor:

    The Itera middleman, of course, goes back to the good old days when oil and gas were being imported via barter from Turkmenistan, etc. – which got galoshes (!!) in return for their oil and gas.

    Comment by elmer — March 31, 2013 @ 7:40 am

  2. @elmer-Intera is exactly what I was thinking of.

    The ProfessorComment by The Professor — March 31, 2013 @ 5:35 pm

  3. @elmer-unfortunately, that link didn’t work.

    The ProfessorComment by The Professor — March 31, 2013 @ 5:36 pm

  4. Intermediaries in Russia’s Gas Trade: What Do They Tell Us about Russia’s Foreign Policy and Domestic Regime?
    by Maria Semykoz

    Looking at the examples of the Gazprom’s gas import arrangements in the several East
    European countries, this paper suggests that the centrality of the intermediary companies’ role in
    them cannot be explained with purely economic or even political factors. First of all, Gazprom
    was obviously loosing profits through giving up large parts of lucrative markets to the
    middlemen, providing financially unreliable companies with loans and guarantees, etc. Secondly,
    in many instances, Gazprom’s own shares in the intermediaries had been knowingly diluted by
    the concern’s management, thus, not only depriving the giant from profits, but decreasing
    Russian control over the East European customer’s supply chain as well, like the ultimate
    development of Panrusgaz’ case in Hungary illustrates. And finally, Gazprom’s willingness (and,
    sometimes even explicit preference) for dealing with mafia-associated intermediary companies
    not only affects the concern’s image and capitalization, but harms Russian state’s international
    At the same time, the data gathered in the course of this research confirms the
    assumptions developed on the base of modeling Putin’s Russia as a kleptocratic regime: in most
    cases, there are convincing evidence that suggest that the intermediation schemes created
    numerous opportunities for private individuals close to the government in Russia or its gas trade
    partner countries to benefit from the arrangements ultimately at the expense of public interests.
    Thus, I believe that the concept of a kleptocracy indeed provides us with important insights into
    understanding Putin regime’s policies, including those affecting international gas trade.

    Comment by Oleg — April 1, 2013 @ 3:20 am

  5. Back in the 1970s the world leaders were invited to a short interview session with God himself. First went Nixon:
    – God, when will my people live happily?
    – In 30 years.
    – Oh – wailed Nixon – I won’t live long enough to see this!
    Next went Mittereand:
    – God, when will my people live happily?
    – In 50 years.
    – Oh – wailed Mittereand – I won’t live long enough to see this!
    Brezhnev was last:
    – God, when will my people live happily?
    – Oh – wailed God – I won’t live long enough to see this!

    Comment by Vlad Rutenburg — April 1, 2013 @ 3:42 am

  6. @ Vlad – good one, but the story I (sadly) like is about how the Sovok’s destroyed a peoples sense of continuity and true community – the things needed to fight what the Perfesser has described as Short term ism.

    Three men a stuck on an island, one Russian An American and a Frenchman. They decide to describe the happiest thing that ever happe3ned to them.

    The Frenchman tells about how he seduced his boss’s lovely young wife.
    The American talks about a business deal he pulled of.

    The Russian looks at both with scorn, saying that they have no appreciation for the true, deeper things in life, and begins to tell his story:

    “It was a dark night in mid-winter in Moscow during the time of Yezov. I was in our communal apartment on the fifth floor of our 6 story walk-up. Suddenly I hear the sound of cars pulling up in front of the building – 8 men get out an crash through the front door. I hear their feet stamping up the stairs. First past the 1st floor, then the second, the third, the fourth and finally they came to my floor. They break down the door, rush to my room and announce” Alexander Ivanovich, you are to come and answer for your crimes at the Lubyanka!”

    The Frenchman and the American were appalled. How, they asked could this be the best day in your life?

    Giggling uncontrollably, the Russian said “I told them “I am Alexander Alexandrovich, Alexander Ivanovich lives one flight up!’

    Comment by sotos — April 1, 2013 @ 7:31 am

  7. SWP

    Sorry about the link.

    It’s to the Eurasia Daily Monitor:

    Then click on the link to:

    Dmytro Firtash Launches New Opaque Gas Intermediary

    Also, Global Witness did a great article on the mess, which continues today, in 2006:

    Itera is traced in the article, which is available for download

    Comment by elmer — April 1, 2013 @ 7:55 am

  8. Sorry about the link, SWP

    another way to get there:

    Then click on the link to the article from March 25 2013:

    Dmytro Firtash Launches New Opaque Gas Intermediary

    Also, Itera and other shenanigans were traced by Global Witness here:

    The article is available for download

    Comment by elmer — April 1, 2013 @ 8:01 am

  9. Trying again – I apologize for any duplicates, but the browser did not seem to show previous posts.

    Sorry about the link, SWP

    Another way to get there:

    Then click on link to March 25 2013 article:

    Dmytro Firtash Launches New Opaque Gas Intermediary

    Itera was traced by Global Witness in this 2006 article:

    Article is available for download

    Comment by elmer — April 1, 2013 @ 8:04 am

  10. @sotos:

    You have hit the nail on the head. That’s exactly the biggest problem with the average Russian sovok mentality: they are grateful to the government every time something bad DOESN’T happen to them. Here is a perfect example that I ran across yesterday and even wrote a commentary. If you can read (or Google translate) Russian, here it is:

    The gist is that in 1948 a little girl, now a famous liberal actress, wrote a letter to the Soviet government about her mother and aunt vomiting blood everywhere and dying of tuberculosis, and asked for a medicine that had been discovered 2 years earlier but was not available to the average Soviet citizens. And in response, she received this medicine, prolonging her mother’s life by 40 years. So, a leading Russian stalinist intellectual A. Wasserman branded her “scum” for not being grateful and being anti-Stalin.

    Comment by Vlad Rutenburg — April 1, 2013 @ 4:51 pm

  11. A bit more on the “reversal scheme,” which Gazprom says is “fraud””

    On Saturday, Gazprom head Aleksey Miller alleged that Kiev’s purchases from Hungary are actually Russian gas, which is resold to Ukraine right after crossing the border.

    Miller called such a scheme “fraud,” which requires a “thorough investigation.”

    On April 1, an unnamed source in the Ukrainian Energy and Coal Industry Ministry confirmed Gazprom’s allegations:

    “We do not see any law violation here. The gas goes abroad and then it’s being returned to Ukraine by its new owner,” he told Kommersant newspaper.

    The source stressed that the arrangement proves that Russian gas sold to Ukraine is overpriced, as the purchase of the same Gazprom fuel from Europe is “7 percent cheaper for [Ukrainian national energy company] Naftogaz” than direct imports from Russia.

    Comment by elmer — April 2, 2013 @ 7:20 am

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