| The concern did not want to compensate for the decline in export prices by cutting costs Gazprom's financial and political successes in 2003 had a relaxing effect on the company's management. The concern's management never learned to manage costs effectively, and the deterioration of the external environment immediately revealed the illusory nature of the concern's prosperity. This is clearly evidenced by the company's operating results in the first half of 2004, contained in the unconsolidated financial statements according to Russian standards. Gazprom's revenue increased by 8.5% due to indexation of domestic gas prices, while net profit, on the contrary, decreased by 13% (if adjusted for changes in accounting rules in 2003 and 2004).
The first half of 2004 was marked by a slight decrease in gas export prices - by about $10 per thousand cubic meters in Europe and by $5 in the CIS. As a result, even despite the overall increase in supplies outside the country by 3.1 billion cubic meters, the concern’s export revenue decreased by $430 million. At the same time, the increase in domestic regulated prices by only $7.5 while the volume of supplies to Russian consumers increased by 20 billion cubic meters gave Gazprom over $1.6 billion in additional revenue and more than covered export fluctuations. Net revenue from gas sales (excluding VAT, excise tax, etc.) in the first half of the year increased by 15.5%, to 345.3 billion rubles.
However, this did not bring any positive dynamics to Gazprom’s profits. The increase in production costs, commercial and administrative expenses neutralized the concern's success in achieving indexation of domestic prices. As a result, the cost of production of the monopoly increased by almost 26 billion rubles. (20%), up to 159 billion rubles. The company explains that this is mainly due to increased costs for repair and maintenance needs, increased wages and costs of purchased gas. According to Gazprom's budget for 2004, the salary fund should amount to 2.6 billion rubles, which is almost one and a half times more than a year earlier. Gazprom refused to say how much wages have increased over the past six months. In addition, the concern's management indicates that additional costs have arisen due to a threefold increase in the mineral extraction tax.
Gazprom's commercial expenses increased to 171 billion rubles. (by 13.09%) due to an increase in tariffs for gas transportation services through main gas pipelines provided by gas transportation organizations. However, in the consolidated statements of the group there will not be such an increase in costs in this item (since these gas transportation organizations are part of the group structure). At the same time, the concern does not disclose details of the increase in so-called “administrative expenses”, which increased by exactly 1 billion rubles. (30%). It is curious that the traditional reference by Gazprom managers to huge additional costs in the procurement of metallurgical products is not in the reporting.
However, the balance between a significant increase in domestic revenue and an equally impressive increase in expenses is easily explained. The main argument of the monopoly in the tariff dispute with the government is the loss-making nature of supplies (although managers promise to achieve a slight profit starting this year). Reducing costs while increasing revenue would mean for Gazprom's management a blow to its position in the discussion on indexation of domestic prices.
The victim of Gazprom's managers' reluctance to lose their main trump card in the tariff fight was the company's profit. Gazprom's net profit for the six months of this year amounted to 62.8 billion rubles, which is 29.63% lower than for the same period last year. However, the report says, it is more correct to estimate the decline at 13%, since some accounting standards have changed over the year. Alexey GRIVACHS |
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