Tuesday, April 10, 2007

Will the World's Most Valuable Company be a Wholly Owned Subsidiary of The Kremlin?

General Electric and Exxon Mobil are likely to fend off any hostile bids out of Russia, but according to the IHT, Gazprom plans to be worth more than $1 trillion within a decade. It might seem unlikely for one Russian company to exceed the size of Russia's entire economy for 2006, but Gazprom has the inside track to success.

When Putin took power just a few short years ago, Gazprom was worth only $25 billion and suffered from severe mismanagement. The management of the company didn't get any better, and may in fact have gotten worse due to political meddling in company affairs. But the company achieved a market value of $250 billion because Putin's government essentially outlawed doing business with anyone else in Russia. Shell and other big oil companies played ball because they let the potential of Russia's massive energy reserves blind them, and Gazprom prospered.

It's probably no longer possible to strong arm the West into any more favorable terms of trade, at least over the short term. But Gazprom still has significant room to grow. Gazprom's proven oil reserves in the ground are valued by financial markets at about $5.50 a barrel. In contrast, Exxon Mobil's reserves in the ground are valued at around $20 a barrel. The reason for the big difference is that investors fear the Kremlin will just seize the 50% of the company it does not already own.

If Putin and his eventual successor convince financial markets that Russia won't nationalize the company, it would be a trivial accomplishment for Gazprom to become the world's most valuable company. And even if Putin just outright nationalizes the company, it would still be true that the underlying assets represent the most valuable company on earth.

All those "No More Blood for Oil" folks should take a good long look at Russia. Exxon Mobil is hardly the most innocent company in America, but Gazprom makes America's oil lobby look like a bunch of sissies.

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