William Gamble

Gazprom: The Fall of a State Owned Company

Gazprom Neft Posts $543M Q4 Net Loss

Gazprom: The Fall of a State Owned Company

I would pick a company that is at the very minimum privately owned. For reasons based on game theory and law and economics, I do not believe that any state owned company can be managed efficiently.

Also after 30 years of investing I have severe doubts about information in any company. Information is valuable. It is either disclosed for consideration or because required by law. Since no law enforcement, as we have seen, is totally efficient in forcing disclosure, there will always be asymmetries of information.

So to protect yourself I would always diversify across a sector with ETFs.

As to oil generally, I feel that commodities are driven by demand from China. Specifically I reason to believe that the gas spike of last summer was driven by China buying on the open market to shore up reserves for the Olympics. For reasons stated in other articles, I question continued rapid Chinese growth, and as a result, the growth of oil.

Right now I would play it safe and stick with an S&P 500 ETF (SPY). I know only one thing about markets. They go up and down. The US market will recover and you will make money over the next 12 months. After that it might be time to look around. Right now the information available everywhere could be questionable. This is especially true in emerging markets. If you don't know what is going on, don't invest.

Gazprom: The Fall of a State Owned Company

No need to worry about my feelings, although that is very kind. I am a lawyer, and at least in the US we do not have a very good reputation for being either good or decent.

However my point has nothing to do with being either good or decent. My point has to do with the law. Some would say that the law in the US failed. In so far as it did not force more transparency regarding derivatives, it did fail. In so far as it did not avoid the concentration of risk within the financial system, it failed. In that it did not catch Madoff, that was not a failure. In fact it never caught Madoff. He turned himself in because he was afraid of the law, so that was actually a success.

Regarding the US, there is a general view that the economic crisis was created in the US and just happened to affect the world. Not so. Like all other crisis this one was about too much money, too much speculation and too much risk. This happened in every country. There were real estate bubbles from California to Kazakhstan. 2Russian banks' bad loans will quadruple to $70 billion this year, according to a Bloomberg survey. Nonperforming loans will increase to 12.8 percent of the 18.4 trillion rubles ($549 billion) that is owed by Russian companies and individuals by the end of this year, from 3.2 percent in March. These bad loans were created in Russia, not on Wall Street. Every country has them. We simply do not know about them because the laws in many countries do not protect information, so asymmetries develop.

Businesses are not ethical. They are not supposed to be. They are however predictable. They are in it for the money. They are trying to be profitable. So investors know what the company will try to do. Politicians on the other hand are not predictable. They are in it for power. When politicians run state owned companies, investors have no idea what or why. (Actually J. P. Morgan was a far seeing financier with fairly high morals. His biography is both excellent and timely)

I applaud you on any investment that increases 65%, but that is what investing in emerging markets is often about. Since many state owned companies go up or down depending on government actions or pronouncements, their stock can be very volatile. If you invest in these stocks, or in China where the entire market may be made up of state owned companies, keep your time horizons, very short. Unless you can predict government policy tomorrow, you might get nailed. So just invest when you see a trend, make a few bucks and bail. Be like Warren Buffet when he invested in the Chinese market for four months, not like Goldman Sachs who has invested for years.

As to Gazprom’s claim to assets, many of those were stolen from Yukos. The case has now been accepted by the European Court of Human rights. Russia as part of the Council of Europe has some obligation to enforce the court’s judgments. So Gazprom may not have title to some of those assets.

It’s not about morals. It’s about risk. Sustainable economic growth can only occur if the risk and government intervention is limited by the law.

Gazprom: The Fall of a State Owned Company

Gazprom, Russia’s natural gas monopoly, signed a $4.2bn deal to acquire Italian oil group Eni’s 20 per cent stake in Gazprom Neft. This is despite the fact that Gazprom is Russia's most indebted company with $48 billion in debts owed mostly to state owned banks.

Those banks are in such bad shape because of questionable loans to companies like Gazprom that they needed a $129 billion bailout. But that is not the problem.

The problem is that Gazprom Neft was part of Yukos stolen assets. The former share holders of Yukos have brought a case in the European Court of Human Rights in Strasbourg which has been accepted. Five days later, prosecutors brought up new charges against Mikhail Khodorkovsky in a second absurd trial on charges that conflict with the charges of the first trial.

What is obvious is that the siloviki in Russia are trying to strengthen their claim on stolen goods.

But they can't. All corporations, even in Russia, are simply pieces of paper: bunches of property rights. The value that any shareholder can hope to gain depends upon the legal infrastructure that surrounds those pieces of paper. If that legal infrastructure does not support property rights, then those pieces of paper may be just that, paper.

It may be possible that the Kremlin will not give up its ill gotten gains because of a court ruling from Europe. It also may be possible that Gazprom share prices could spike on another energy crunch. Still without a good legal infrastructure that gives certainty to the words on the paper, companies like Gazprom will not be safe investments. There are other safer ways to play energy.


The problem is that Gazprom Neft was part of Yukos stolen assets. The former share holders of Yukos have brought a case in the European Court of Human Rights in Strasbourg which has been accepted. Five days later, prosecutors brought up new charges against Mikhail Khodorkovsky

Gazprom: The Fall of a State Owned Company

Of course there is no difference between gas. There is a difference between gas suppliers. If you want to be successful in any business whether it is running a restaurant or supplying energy you have to prove that the customer and profits are the more important than political agendas.

As to Chinese companies, in China the price of gasoline is controlled. Last summer, Petro China was forced to take huge losses because they were buying at market prices and selling at fixed prices. The same happened with the electric utilities. They had to buy coal at world market prices and sell at fixed prices. The banks were told to make loans to help stimulate the economy and most of those loans were used to speculate on the Shanghai A. For short term, it is possible that some of these companies might make profits, but not if they exist to serve the political needs of a country's leadership.

I can understand making investments for patriotic reasons, but not if you want to make money.

Gazprom: The Fall of a State Owned Company

Correct. American private companies do not sell things at a loss. Under the US constitution forcing a company to lose money without compensation is unconstitutional. The case goes back to a chicken coop in WWII.

State owned companies like Airbus do sometimes sell at a loss or in Airbus's case, they sell with with the use of bribes.

The point is that investors in any state owned company will be severely disadvantaged because there interest in profit will be subordinated to the needs of the state.

Since many leaders are using the "failure of capitalism" to extend the power of the state, it is important for investors to understand that they should avoid these companies wherever they are. Whether in Russia, China, India or even Europe. These things cannot and will not make money over time.

Why Investors Should Avoid State-Owned Companies

The Children’s Investment Fund, the $9.5bn London activist hedge fund, has liquidated its holdings in Indian state-owned banks in one of the biggest single selldowns by a foreign institutional investor in the country’s stock market.

In the past three months, the fund, founded by former Perry Capital trader Chris Hohn, has sold holdings in eight banks, from state-owned Bank of Baroda to Union Bank of India.

Why Investors Should Avoid State-Owned Companies

Ricard

I was at a conference last fall. One of my colleagues wanted to introduce new ideas in addition to alpha and beta. She wanted to introduce zeta. Zeta is the unknown of government interference.

It is the prerogative of governments to change the rules (which is one reason I believe we are witnessing the end of the golden age of globalization as governments become more protectionist). Companies of course have to adjust as best they can to the new rules, but at least stockholders know that their managers have appropriate incentives to try and make a profit.

State owned companies are all subject to the whims of national policy. China shifted a large portion on the rising cost of energy to its state petroleum companies and its utilities. The results were shortages and power cuts. Russia has forced Gazprom to subsidize its foreign policy with cheap gas to the ‘near abroad’. India also shifted the costs of high energy to its national oil companies. Chinese banks were told to cut new loans last year stifling the source of 90% of their income. Not to forget changing the rules about short selling in the US.

These policy decisions not only dissipate shareholder value, it impacts the rest of the economy. The rise of energy prices in the US forced consumers to become far more efficient. Yes, it increased in stability by resulting in the near bankruptcy of GM, but GM was probably doomed because of dependency ratios. If the Chinese, Russians, Indians, Venezuelans, Saudis etc do not have economic incentives to become more energy efficient, their economies will be damaged along with shareholder value.
Populist politicians love the idea of introducing an industrial policy to satisfy the public’s natural desire for stability. It is short term, gives governments power that is tough to take away and always ends in tears.

Why Investors Should Avoid State-Owned Companies

Ricard

Sorry for the long winded reply. To simplify

Stalin, Lincoln, Mao, Rove and Obama all share one thing in common, They all wanted political power. Shareholders want something else. They want money. The Chinese government wanted CNOOC to buy Unocal to satisfy what it considered a political necessity, access to oil. (The Japanese had the same issue in 1940). The US Congress had to satisfy the political necessity of the negative image of an American company being purchased by a nominally communist country. Neither government cared that much for the investors in either CNOOC or Unocal. My point is that if you have a better chance of making money if you avoid political incentives of state owned companies and go for the profit of the private companies.

Why Investors Should Avoid State-Owned Companies

Regarding the size distinction between Exxon Mobile and PetroChina I agree with everything you say. As I pointed out in my book, Freedom, " Kuwait Petroleum Corporation (KPC). One of the largest companies in the world, KPC has an estimated market value of $378 billion dollars. When it was originally formed, its revenue was about $30 billion dollars (1980)— about the same as British Petroleum (BP). BP’s revenues have grown over 800 percent,% to $250 billion since then; . KPC’s revenue has merely doubled to about $60 billion, which does not even keep up with inflation.

My guess is that in 30 years time PetroChina will do about as well as KPC

Why Investors Should Avoid State-Owned Companies

Any investment is an attempt to predict the future. All systems function within a system of rules. The more stable the system of rules the better chance an investor has of predicting the future. If rules provide accurate, timely and complete information then the investor has an even better chance of predicting the future.

There is a higher probability of predicting the actions of managers who function with the set of rules, whose motivations are economic and who are required to provide information.

There is a lower probability of predicting the actions of managers who function in a situation where rules can be changed (for example to support anything deemed strategic, whose motivations are controlled by politics, and who may not have to provide information.

If you have a lower probability of predicting the actions, the risk goes up. If investors know this they should get a higher reward. Instead their assumptions.

All governments create rules or laws. They can be used two ways. They can limit power or extend power of governments. The system of rules or laws in economically inefficient when it extends power.

The US government like all government does through its legal system extend a degree of control over all businesses. Of course the extend of control is dynamic and subject to fierce debate. Designing the most efficient mechanism is an ongoing challenge.

The important aspect is that he process is transparent and subject to limits either law. Government controlled corporations are not subject transparent or subject to law. Worse they are not subject to markets. Not only can governments prevent them from being sold, they can also prevent competition. The result of the unlimited control is an inefficient system.

I believe that when the US government stopped the purchase of Unocal, that it was an unfortunate extension of government power and said so at the time. Not allowing GM to go bankrupt is probably another unfortunate extension of government power. The result with GM will result most likely in a waste of taxpayer dollars and an inefficient allocation of capital.

Since the definition of what is strategic is flexible, the tendency is to expand it along with government power, which is what is happening around the world today. What politician does not relish more power? The result where ever it occurs will not work. Will not help sustain economic growth and more importantly will not, over time, result in an increase of wealth for investors. Government run corporations are run for political purposes. There are no controls, no limits. Private corporations providing a public good are still run for profit subject to the rules.

Why Investors Should Avoid State-Owned Companies

Thank you. One trys