#3
Boston Globe
February 21, 2002
Who is a Model for Whom
By Marshall I. Goldman
Marshall I. Goldman is the author of the forthcoming Piratization of Russia and the Associate Director of the Davis Center for Russian Studies at Harvard University

Greed knows no limits. Not content with his enormous salary and dividends, the chairman and CEO of this billion dollar energy corporation siphoned off valuable assets from his own company to entities set up for his son and wife. And all the while its Big Five accounting firm stood by in silence.

One such operation is headquartered in Jacksonville, Florida. Over a billion dollars worth of assets disappeared this way. To win support for its activities, the mother company lavished millions of dollars on government officials and their political parties and charitable causes. It has also become a generous supporter of the arts and medicine. Not surprisingly, regulatory officials have in the past turned a blind eye to its questionable practices and requests for more transparency as well as the clarification of esoteric accounting practices are rarely heeded.

This describes not only some of Enron's practices but Gazprom's, Russia's largest corporation and the world's largest producer and exporter of natural gas. Rem Vyakhirev together with his predecessor Viktor Chernomyrdin (later to become Russia's Prime Minister under Boris Yeltsin) managed to set up more than 300 straws or subsidiaries headed by, among others, Vyakhirev's daughter and son and Chernomyrdin's sons as well as the wives, children and mistresses of a few of their senior associates. Enron with its tax dodging 3500 subsidiaries is one of the few companies in the world with more offshore affiliates than Gazprom.

There were major differences of course in the behavior of Enron and Gazprom. Despite being the world's largest exporter of gas (providing 24% of the natural gas consumed in Western Europe), Gazprom reported no profits for several years. That was their way to avoid taxes. Enron ended up with the same results but it took a very different route to get there. While it too managed to avoid paying taxes (only one out of five years) Enron needed to show high profits so it could attract investors and therefore it used its subsidiaries not only to shelter itself from taxes but to help it overstate its profits. Both companies also seemed to use transfer pricing- selling at a low price to a subsidiary which then sold at a high price- as a way to benefit those in control of the subsidiary and disadvantage those invested or expecting to collect taxes from the parent. That is how Gazprom built up its offshoot Itera which despite being headquartered in Jacksonville has now become Russia's second largest producer and exporter of natural gas-all with no visible sign of investment from either stockholders or lenders.

Auditors for both companies (Anderson for Enron and PricewaterhouseCoopers for Gazprom) also seemed equally willing to ignore their client's fuzzy math. And like Enron, Russian companies like Gazprom have also provided lavish support to their legislators (including in Gazprom's case, the Russian Communist Party) in an effort to limit government intervention in their affairs.

Now both in Washington and Moscow questions are being asked as to who was responsible for allowing the diversion of so much money and assets. In Russia, hearings (before a judge) are also being held as well and the prosecutor general is also busy issuing subpoenas.

In case Kenneth Lay is watching, so far two senior officials of a Gazprom subsidiary are in jail accused of siphoning off millions of dollars of assets and just as with Mr. Lay's son, Mr. Vyakhirev's son has resigned from some of his positions.

Gregory Yavlinsky, one of Russia's leading reformers has remarked that when Russia embarked on its economic reforms a decade ago, there were many who were determined to make Russian companies more like American companies. Many companies tried but only a few succeeded- unless you hold Enron out as the model.

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