William Browder was on the cover of the Financial Times today. My wife and I had a bit of a debate about him. (He was banned from entering Russia in November, and runs the largest investment firm in Russia). He has been a Putin supporter for some time, so it was a bit of a surprise that he was banned from entering Russia (this is under the new state security law). My wife had the typical Russian opinion that he must be a criminal (though she knows a bit about this - she is reading the WSJ as I type this, and starting an MBA in a few months). This has been a unique case, though, as Tony Blair, Jack Straw, and the head of the London Stock Exchange have put pressure on Mr Putin to reverse this decision.

Here is my opinion. Mr Browder had been asking for better knowledge of the owners of Russian corporations, and better rights for minority shareholders. In the past, this has been very good for Russians, as it increases the value of their companies. For example, most oil companies are valued at about $20 per barrel of oil they have in the ground. Russian oil companies are valued at about $3 per barrel. Investors don't like this risk, as they fear that secret government ownership/interference will likely result in Yukos-like seizure of their assets.

The other risk is that instead of selling things (like oil) at market prices, Kremlin interference will result in goods being sold below cost for political reasons. Again, my opinion is that Mr Browder has been critical of the Gazprom pipeline deal with Germany. (Mr Schroder, former German chancellor, was instrumental in this - and is now an indirectly employee of Gazprom). The reasons for this deal were more political than economic - it gives the Kremlin greater leverage over former Soviet states. (It is a fact that Russian state-owned energy companies prefer to sell products under long-term contracts at set prices for political reasons. These contracts don't mean much, as the Kremlin forces renegotiation of them frequently)

Again, my opionion is that Gazprom has been essentially defrauding Russian taxpayers (its ultimate owners) by negotiating money losing deals for political reasons. It has also been enriching Kremlin cronies through undisclosed ownership stakes in the company (I believe mainly through Swiss holding companies such as the one Mr Schroder heads).

Also, I realized that under current Russian law, posting this effective bars me from entering Russia. (I hope no one at the Kremlin is reading this).

So - does anyone here have another opionion about this? I am very curious.

hey russ,

I guess my note is a bit of sideways from your post but nontheless...
Gazprom is defrauding russian taxpayers and making Eltsin-born, Putin-raised cronies rich. There could be no other sane opinion about it.

However, do not mix it up with normal desire of a big company (especially state run, which is rare for US but quite popular in other countries) be independent of the political or economic whims of other contries (like say Ukraine) and be able to make even more money.
So Northern pipe line is internal deal of participating sides and in this instance it might be a small price to pay for future business and political advantages. It would be naive to think that any other countries would act differently in this case.

As far as silencing all the critics of current russian regime... it is done so effeciently that it's scary. It looks like a price for current stability. We'll see if this price is affordable.

All of your observations are amazingly to the point.

Gazprom does nothing for its owners (ordinary Russians).

The major problem with all state-owned companies is that they do not make good economic decisions. They tend to make short-sighted political ones. While this is not unique to Russia, it is much worse there.

I would disagree with your opinion of the pipeline. It is a massive boondoggle. There is an easy land route to transport gas over Ukraine. Look at this objectively. If the concern is Ukraine becoming too aligned with the EU, it won't matter much for the price of gas to sell it to the EU. The Ukraine would need to deal with EU trade rules, basically forcing them to allow gas transit to other EU countries. Hell, the Germans could buy their pipelines if they cared that much. The Kremlin doesn't want this to happen, though.

If Ukraine buddies up with Moscow again, it also wouldn't matter either. The Kremlin would tell them what to do.

These are the only economic realities. And the Kremlin knows this. All of this is political, it does not increase the ability of Russia to sell gas to Europe. All it lets them do is ###### Ukraine over. (sorry for the language, but that is what they are doing). Once they can sell gas directly to the Germans, they can use it as a political tool to force Ukranians not to join the EU, to follow the Kremlin's foreign policy. It has nothing to do with profits from gas. (The pipeline will cost far more than any profits it would generate.)

The fact that most Russian don't know this, and can't even discuss it is what bothers me. No western country would tolerate this type of bullshit. Most Russians will never know about it.

Much news has been printed about Gazprom in the Financial Times in the last few days.

Big details - the CEO is a Putin crony from St Petersburg (this is already known). This gist of Saturday's article was that the Kremlin calls the shots there (no suprise to anyone,) though Mr Putin's direct involvement sounds incredibly detailed from the article. This is important because his involvement is described as being far more involved than has been reported in the past.

The biggest political news is that a competing pipleline may run south of the CIS states. This has resulted in a threat from Gazprom to cut off all European gas supplies. (this was threatened indirectly, by saying they would sell gas to Asia)

I have a feeling that this will boil over into something big. Far more money is involved here than in the Russian debt default back in the 90s. There is also much more corruption and government interference involved.

Russ,

Obviously, you're spending more time than I researching the business side of Gazprom deals so I can't argue directly about the profitability of say Northern pipeline.
However, the reasons it's being constructed are worth some number of billions of dollars. Namely, Ukraine has been notorious thief of the gas which is piped through its terrtory to Europe. This problem was resolved recently after extensive negotiations but when disagreement on the pirces occured it suddenly came back leaving all of the western europe without gas. For Gazprom that destroys the image of reliable supplier which is worth quite a lot, you must agree.

Again, I'm not aware of detailed calculations how much money needs to be invested in the Northern Pipeline, but lets see who's screeming about that "unfair" deal? Only Ukraine and Poland - two countries that will lose money as a result of the construction. Therefore it's only natural and understandable for them to complain. On the other hand, a participant, Germany welcomes it (unless of cause they have been bought but the bribe of such proportions seems not too probable) because contrary to what you've said Ukraine's pipelines are currently not for sale to anybody.

The southern line you talked about is an odd deal which I cann't comment at this time. Thanks god at least they decided to spare lake Baikal and go around it...

Again, great points. We don't know how much the ex-chancellor of Germany is being paid, though he pushed for the deal and is now an employee of the pipeline. That sounds kind of fishy to me. Certainly a big conflict of interest.

This would be similar to Mr Bush using his power as president to push for opening the ANWR for oil drilling, forming a corporation with exclusive rights to it, and upon leaving office, taking over the corporation for undisclosed pay.

I think that if most Germans knew everything about their deal, they wouldn't like it. (This is mostly speculation, no one really knows the details). The known facts are scary by themselves.

As for the Ukranian pipeline - I'm sure there is some graft. Oil is stolen in Russia too (and almost everywhere else for that matter.) This is why big oil pays big bucks to defend their pipelines with private armies against this. Everyone else in the world has figured out how to prevent this - why can't the Russians?

Also - the idea of theft makes little sense in this case. With pipelines, you pay for the transportation of X. You get an equal amount of X at the other end (usually not yours though). If someone is stealing, you know pretty quickly... The Ukranians could only steal from themselves. (At least, this is how it works in the rest of the world).

The other side of this is that Ukraine already had a contract in place for several more years. The Russians turned the gas off, then made them agree to a new contract at higher prices before turning it back on. If theft of gas was the issue, they could instead insist on payment for the stolen gas. Do you think they were given this option? Me either. The Russians would know exactly the volume of gas that was never delivered. Also, no one doubts that the order to turn off the gas came from Mr Putin personally, and not from Gazprom.

As for Europen energy security, where the pipeline runs doesn't matter much. They are worried about the gas being turned off from INSIDE Russia. Gazprom doesn't like to sell gas at market prices, they prefer long-term contracts. The risk to Europeans is that Russia will force them to cancel contracts if the market price goes up (they will do this by turning off the gas). This is exactly what happened to Ukraine, Georgia and other states. Yes, ultimately it was because of political squables. But it is likely there there will be political squables between Western Europeans and Russians in the future...

The ultimate result is that Europeans are forced into buying gas from Russia, and will end up doing so at above market prices. Gas then also becomes a political tool, as the threat of turning it off is severe. (Oil doesn't work this way - if Russia refused to sell it to someone, they could basically buy it from someone else the next day).

Former Chancellor Kolh's job does look like a challenge to european way of life... alas new chancellor just confirmed German's support to Northern pipeline (hence new outbrake of hysteria from Poland). It's got to be in the interests of Germany because to buy one party in the foreign country is a lot for Russians to accomplish but to buy all of them...
So following your fantasy suit about Mr. Bush future job as Alaska owner it's as if newly elected democratic president confirmed that former president's decision to drill the hell out of Alaska was the last resort (I know it sounds increduolous - Bush making right decisions...).
Now about Ukraine stealing gas... first of all stealing is never justified by saying someone else also doing this. Try this argument in the court (just don't get your hopes up). Second, nobody in russia takes gas from that pipe without authorisation (one needs a station to do it because it's pressuarised and Gazprom is too powerful to mess with). Third, you're absolutely correct how to calculate the amount of the transported gas. Precisely same calculations were presented to ukranians so they were forced to acknowledge "unauthorised borrowing" of the gas. They never paid for it either considering it's sort of a perk for allowing the trasport.

And the Contract... I haven't seen the text of the document but I'm pretty sure that with cancerous development of lawers on the body of humanity it was viable to exit that agreement. Note, that Ukraine NEVER argued that they had a contract and they want Russia to comply. No, they said to russians "do not raise prices to the market value too quickly". That's formalities but the real side of the deal is that russian government which owns Gazprom subsidized Ukraine by selling gas four times lower the market price. Why not if one loves thy neighbor?
Now, why would anybody want to sponsor a neighbor which has hostile interests? Market price is a market price. It is considered fair by the mordern ethics (which is not final truth of cause). It's very simple logic which somehow escapes westerners when they start dealing with russian affairs.
As far as scary "dependence on russian gas" goes it's just a myth. It'll be an artificial argument for a while to try and reduce russian influence but it'll die out naturally. Everybody knows that even during the darkest hours of cold war the gas blackmail was never an issue. Also, Gazprom is still only second biggest gas company in the world. So it is as bad as any near-monopoly company anywhere in the world.

There's a good run-down of what happened here . The key points- Russia supplies about 8% of gas to Ukraine. With all the retoric, you would think it was more than this...

The major Russian complaint is that Ukranians pay less for gas than Russians. (But, they use relatively little Russian gas)

The original agreement with Russia was for Ukraine to be compensated with 15% of the gas going through their pipelines. (from 2002-2013) The theft the Russians alleged only took place during a few days in December 05.

This has become a bit of a Gazprom debate. While interesting, it is Mr Browder's situation I am much more concerned with. I have trouble seeing why the Kremlin considers him such a threat to security.

Many people are banned from Russia now, I'm curious what the criteria is. His case is getting more attention than most would. It is possible that it is not even related to Gazprom, but who knows?