Gazprom is one of the largest companies in the world in terms of gas reserves and production. However, it is also the cheapest energy company in the world for a number of reasons which Hermitage has identified through its in-house research. We believe that Gazprom has suffered from past asset stripping, lack of transparency and low domestic gas tariffs.

Hermitage together with other minority shareholders has already introduced certain amendments to the Gazprom Charter to strengthen the oversight by the Board of Directors concerning future business transactions. Through its original research, Hermitage identified seven major gas fields that had been taken away from Gazprom, estimated the value of the CIS distribution business that had been lost by Gazrpom and requested the new Gazprom management and the Government to take action to recover the lost gas fields and distribution channels. Hermitage also sought a court ruling to invalidate the PricewaterhouseCoopers‘ audit reports in order to pave the way for a new forensic audit at Gazprom by an independent auditor.

The Stanford case study of Hermitage Capital and Gazprom has been published. Below is the link to the case abstract on our Standford University site.
https://gsbapps.stanford.edu/cases/detail1.asp?Document_ID=1751

Sberbank (The Savings Bank of the Russian Federation) is the largest savings bank in Eastern Europe and the predominant banking institution in Russia. It accounts for 60% of all retail deposits in the country and enjoys an exclusive depositguarantee from the state. Despite its exceptional position, Sberbank’s valuations remain depressed because of the poor corporate governance, low quality of earnings, high concentration of credit risks and inefficient management.

In 2001 after Sberbank’s management proceeded with a new share issue without granting pre-emptive rights to existing shareholders, Hermitage together with other minority shareholders initiated shareholder action to stop the dilutive issue. It also launched a high-profile public debate on this topic. In the end, the Russian parliament approved amendments to the Joint-Stock Company Law that introduced the concept of pre-emptive rights to protect minority shareholders from dilutive share issues. Vadim Kleiner, Director of Research at Hermitage, gained a seat at the Sberbank’s Board of Directors and effectively blocked any further dilution of minority shareholders.

As a member of the Sberbank’s Board of Directors, Hermitage also voted to change PricewaterhouseCoopers, an audit firm which had been involved in whitewashing past asset stripping at Gazprom, for a new auditor to improve the quality of financial reporting at Sberbank.

UES (Unified Energy System of the Russian Federation) is the largest electricity generation and distribution holding in Eastern Europe. It is also one of the cheapest energyholding companies in the world because of poor corporate governance practices and inefficient management.

In March 2000, Anatoly Chubais, CEO of UES, announced a restructuring plan the primary goal of which was to sell assets of the company at a series of non-transparent auctions at depressed valuations. Combining efforts with several international investors, Hermitage launched a public campaign to draw the attention of the Russian government to potential losses which both the government and minority shareholders would incur should the initial plan go through. The investors addressed a letter to President Putin asking him to change the restructuring plan at UES. As a result, the Russian government established a special commission to prepare a new restructuring plan. As a member of this Commission, Hermitage took a proactive stance to ensure that the new restructuring plan provided for a pro-rata distribution of assets among existing shareholders in the company rather than for a sale of assets by UES’ management to outsiders. Thanks to the efforts of Hermitage and other international investors, the new restructuring plan was approved by the Russian government in summer 2001. It guaranteed minority shareholders protection of their rights and stipulated that assets would be sold only on a pro-rata basis.

Hermitage has also become an active member of the Independent Committee on UES Restructuring, whose primary goal is to develop specific plans for the company’s restructuring and ensure the protection of interests of minority shareholders in the process of this restructuring.