Gazprom audit leads to "Russia's Enron"

PricewaterhouseCoopers was plunged into an Enron-type scandal April 15 as a top foreign investment fund in Russia sued it for damages, claiming it had effectively covered up asset-stripping by gas giant Gazprom.

Hermitage Capital lodged "a series of legal actions" with the Moscow Arbitration Court, alleging that PwC audits of state-controlled Gazprom were "deliberately false," according to a statement faxed to Agence France-Presse.

The fund also applied to the Finance Ministry to suspend PwC's audit license in Russia and bar it in the future from auditing Gazprom, the world's largest gas producer.

"The amount of asset stripping (by Gazprom) is by far the largest we've had in Russia, and PwC did a good job of trying to minimize it," William Browder, chief executive of Hermitage Capital, told AFP.

"This is Russia's Enron," he said, referring to the scandal surrounding the accounting firm Arthur Andersen's alleged role in covering up falsified accounts at bankrupt U.S. energy giant Enron.

"We've met with a number of senior government officials and they share our concerns," Browder added, saying these included Trade and Economic Development Minister German Gref and deputy head of the presidential administration Dmitry Medvedev.

A PwC spokeswoman said the company had no immediate comment to make as it was studying the fund's legal action.

Alexander Dobrovinsky, whose law firm was hired by Hermitage to lead the case, said the arbitration court could examine the lawsuits within a month.

PwC had received $12 million a year in fees from Gazprom for the past five years and 10 percent of the gas giant's assets had been diverted during this time, the lawyer said, commenting on the likely damages he would seek.

PwC has audited and approved in recent years the annual accounts at Gazprom, the largest Russian company which holds a quarter of the world's estimated gas reserves, but seen until recently as one of the country's worst-managed.

Gazprom minority shareholders accuse the accounting powerhouse of deliberately overlooking several suspect deals conducted between the gas monopoly and its subsidiaries.

The minority shareholders are especially concerned about a deal in which Gazprom sold a stake in the Purgaz gas-producing subsidiary to the company Itera for $1,200.

Analysts estimate the 32 percent stake in Purgaz was worth more than $400 million.

Some Russian media have accused Gazprom officials of setting up Itera as a shell company in which they hid profits from other shareholders, including the state. Gazprom directors deny the charges.

Itera, a small private firm registered in the U.S. state of Florida in 1992 with undisclosed shareholders, has become the second-largest gas producer in Russia, while Gazprom has seen its share of the market diminish.

Russia's audit chamber, the budget watchdog within the State Duma, said in February that it would investigate PwC's audits of Gazprom.

According to Hermitage Capital, PwC concluded that Itera had always fulfilled its obligations to Gazprom, although an audit chamber report showed that Itera had failed to repay $251 million.

PwC also found that Itera was not competing with Gazprom in foreign markets, while in fact the company ended up gaining 66 percent of the gas market in the Commonwealth of Independent States, over five years, Hermitage Capital said.

The Russian gas giant's dealings with Itera "led to billions of dollars of losses for Gazprom and resulted in Gazprom shares being deeply depressed over a long period of time," said Hermitage Capital's Browder.

"PwC should have been presenting the truth instead of trying to hide it," he added.

Since spring last year the Kremlin has been clawing back control over Gazprom, once seen as a "state within a state" and in which the Russian government is the main shareholder.

Rem Vyakhirev, the head of the gas monopoly since the early 1990s, was pushed aside in May 2001 and replaced by a chairman loyal to President Vladimir Putin, Alexei Miller.

Under Vyakhirev, the management of the group's assets was shrouded in secrecy.