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Gazprom’s Demise Could Topple Putin

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Anders Aslund, Bloomberg

No large company in the world has been so spectacularly mismanaged as Russia’s state-dominated natural-gas corporation Gazprom OAO. (GAZP) In the last decade, its management has made every conceivable mistake.

Gazprom Crisis

Even so, Russian President Vladimir Putin denies the very existence of a crisis and maintains his support for Alexei Miller, the chief executive officer since 2001. Gazprom’s situation is serious not only because it is Russia’s biggest company by market value, but because Putin is its real chairman. Where Gazprom goes, so does Russia and the Putin government.

In May 2008, Gazprom was one of the world’s most valuable companies with a market capitalization of $369 billion. Miller boasted that it would be the first global company to reach $1 trillion. Today, its market value has plummeted to $83 billion and the decline continues. Although it claimed the largest net income of any global company in 2011 at $44.5 billion and still at $38 billion in 2012, its price-earnings ratio has dropped to a fatally low 2.4 for 2013. It has no credibility with shareholders.

At the heart of Gazprom’s mismanagement lies extreme inertia; reluctance to absorb new information; corruption and outlandish arrogance. Its managers are used to exercising Soviet-style monopoly over consumers, not having realized that the market has taken over. The company has traditionally varied prices by countries for opaque reasons. For example,Lithuania pays 15 percent more for Gazprom gas than neighboring Latvia.

Supply Cutoffs

When consumers behave inappropriately in its eyes, Gazprom cuts off supplies, as it did to Ukraine and much of eastern Europe in January 2006 and 2009. As a result, these dismayed customers have reduced their dependence on Gazprom, by cutting consumption, building converters and storage, and developing alternative supplies.

The Gazprom business model is as simple as old: to produce conventional gas from giant fields in West Siberia and pump it through pipelines to Europe. In the last decade, the company has missed three big revolutions in the industry: the shale-gas expansion in the U.S., the global liquefied-natural-gas boom, and the rise of Chinese demand.

In a call-in program in April, Putin dismissed shale gas, claiming implausibly that it was more expensive than conventional gas — of which Russia has one quarter of global reserves — and not environmentally sustainable. (He didn’t mention that Russia burns billions of cubic meters of surplus gas because private producers aren’t allowed to use Gazprom’s pipelines.) Miller has gone so far as to call shale gas “a bubble that will burst soon.” Yet LNG designed for the U.S. market is now flooding Europe, depressing prices there below Gazprom’s oil-linked prices.

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