After the European Commission announced an antitrust investigation into OAO Gazprom ((OTCPK:OGZPY)), a Russian government minister denounced pressure on the gas giant as driven by "political factors," the Wall Street Journal said. Politics aside, a close look at how managers supervise Gazprom reveals its high risk of corruption.
The European Commission said September 4 that it was investigating whether Gazprom might be hindering competition in Central and Eastern European gas markets by allegedly taking steps such as abusing its dominant position and imposing unfair prices. European buyers of Gazprom's gas have long tried "various means, not always proper, to create better conditions for themselves, including the ones we've seen," Russia's Economy Minister Andrei Belousov told a Dow Jones Newswires reporter on the sidelines of a conference on September 5. Gazprom said in its first quarter results this Thursday that it renegotiated prices for its long-term gas supply contracts with "certain European customers" during 2012 and reconsidered gas prices for the periods prior to this year, resulting in a downward adjustment to revenue of 78.505 billion rubles.
While the European Commission emphasized that opening formal investigation proceedings does not prejudge their outcome, it's clear that Gazprom lacks many of the checks and balances that publicly traded companies typically put in place to prevent their managers from abusing power. For example, the majority of Gazprom's board is not independent. It also lacks a committee tasked with deciding how to compensate executives, although Gazprom does publish vague guidelines about remuneration procedures approved by the board, whose deputy chairman Alexey Miller also acts in the capacity of CEO in his role as the management committee chairman. Meanwhile the three person audit committee includes Mikhail Sereda, the head of the administration of Gazprom's management committee; the presence of an executive on the audit committee effectively nullifies its ability to provide independent financial oversight.
In part due to such issues, Gazprom has an ESG Rating of "D." The company does not disclose sufficient data about its financial results for the calculation of an AGR score, which would indicate the extent of its accounting and governance risk relative to peers.
Despite the dearth of information, public concerns about Gazprom's business strategies have occurred not only at the European Commission but also locally. On December 27, 2011, for example, Russia's federal anti-monopoly service fined Gazprom over 900 million rubles for fixing monopolistically high prices for diesel fuel and aviation kerosene. Gazprom had started changing its pricing policy for supplying fuel to the federal wholesale market of oil products since the beginning of February 2011, but after the Supreme Arbitration Court of the Russian Federation passed a ruling in February 15, 2011, it began undertaking the necessary actions to protect competitive conditions, the regulator said.
Perhaps the political factors that Minister Belousov mentioned this week apply to the home front as well.
Region: All Other
Country: Russian Federation
Industry: Integrated Oil / Gas
Market Cap: RUB 3,712,243.6 mm (Large Cap)
ESG Rating: D
AGR Rating: N/A
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: GMI Ratings pays me to write about corporate governance.