The Russian Roots of the Texan Mafia
Do you think Enron could have learned from the flaws of Russia’s energy industry?
December 20, 2001
After the Soviet Union’s collapse, the country’s centralized oil sector was among the first to be privatized. In that process, a number of new, private oil companies sprung up. They all boasted vast reserves — and a huge potential of export revenues.
Meanwhile, Russia’s natural gas industry avoided a split-up. It was neatly folded into Gazprom, one of the largest natural resource companies in the world.
Not surprisingly, the fantastic prospects of the Russian energy sector became one of the leading global investment stories of the 1990s. Foreign investors rushed headlong into Russia. Eventually, they triggered the ascent of the Russian stock market, based on such energy blue-chips as Gazprom, Lukoil, Surgutneft and Tatneft.
And in those heady days of the go-go 1990s, many American officials grew hoarse criticizing Russia’s dubious financial management practices and demanding better disclosure and shareholder protection. Almost inevitably, most foreign investors ended up losing their money.
Now let’s switch the scenes completely. At least in hindsight, it’s uncanny how much events at Houston-based Enron ended up resembling the story of Russia’s crooked energy giants.
In essence, Russian energy companies lacked transparency and hid transactions and revenues in a Byzantine accounting system. As we are now becoming aware, despite its much glitzier and perfectly polished exterior, on the inside, the shenanigans of Enron senior management echo the 1990s in Russia.
Only, in the ultimate analysis, Enron’s feat must be considered that much more stunning. After all, it did not happen in a fluid situation of underdeveloped supervisory agencies — and in a country lacking the appropriate depth in financial management skills.
The Enron fiasco occurred right under the presumably watchful and experienced eye of the Securities and Exchange Commission, independent auditors, market analysts, credit rating agencies and an army of other highly-skilled professional watchdogs in the United States.
Despite all these deep layers of professionalism, Enron was able to engage in the same kinds of activities sported, if not pioneered, by its Russian counterparts.
Just like Russian oil giants, Enron was able to hide losses and mislead investors. Of course, one crucial difference was that Russian companies usually tried to hide profits — in order to keep them from investors and tax authorities. Enron, by contrast, deliberately overstated its profits for a number of years to push up the value of its shares.
When trouble started at Enron, its senior managers appear to have sold off their shares, leaving shareholders — including the employee pension fund — holding the bag. Enron CFO Andrew Fastow, whose departure prompted the company’s meltdown, set up a number of private partnerships on the side, which did business with Enron while he managed them.
His actions have plenty of precedents in Russia. Take the case of Gazprom’s long-time management team which was investigated earlier this year. It turned out that the company had routinely guaranteed loans and also made investments into businesses set up by close relatives of Gazprom senior executives.
In Russia, such practices are often legal — or at least not expressly forbidden. What’s surprising is that in the United States, accountants and rating agencies managed to maintain silence, or ignorance, about Enron’s practices for so long.
And legions of U.S. stock analysts were only too happy to tout Enron. They must have been solidly asleep all along. It should have been a warning to U.S. mutual fund owners that, in some cases, the analysts pushing Enron’s stocks were the same guys who had promoted Russian energy companies just before the Russian stock market bubble burst in August 1998.
But the potentially most corrosive aspect of the Enron scandal lies in the political realm. Russian energy companies have been able to fool investors largely because they were protected by powerful political connections.
(Viktor Chernomyrdin, the long-serving Prime Minister in Boris Yelstin’s government, had previously been the head of Gazprom. He is rumored to have become Russia’s first billionaire as a result of that connection.)
Hence, it proved very difficult to sue any of the Russian investors in court. Even if investors win a decision, it’s pretty much impossible to enforce it. Indeed, Russian regulators are too weak to go after them.
Enron seemed to have banked on a similar formula for success. Its Chairman and CEO, Kenneth Lay, has close personal and business ties to the Bush family. As one of the largest and earliest contributors to George W. Bush’s presidential campaign, he “earned” the title of a “pioneer” — as one of those contributors whose contribution to the President’s campaign war chest exceeded $100,000.
While Mr. Lay himself was considered a candidate for Energy Secretary, other former Enron executives figure prominently in the Bush administration. At the Pentagon, Thomas E. White serves as the Secretary of the Army. Previously, he was Vice Chairman of Enron Energy Services.
There are differences, of course. No Russian oligarch has ever been punished for defrauding investors — or taking minority shareholders and tax authorities for a ride. On the contrary, most energy companies in Russia rushed to support Vladimir Putin once he became Russian prime minister in August 1999.
They also helped finance his subsequent presidential campaign. Since then, two of the largest energy concerns, Gazprom and Lukoil, helped throttle the two remaining media groups that dared criticize the government.
While Mr. Putin had promised voters to eliminate the oligarchs as a class, in reality they have become more powerful and wealthier than ever under his rule. At least, Mr. Putin sent his top assistant to clean up the murky business affairs at Gazprom.
But in the United States, Enron’s political connections have not saved the company from bankruptcy. Investigations are under way, Congress is looking closely into the matter — and a myriad of lawsuits have been filed by duped shareholders.
But despite this pivotal difference between the United States and Russia, there is one discomforting parallel. For whatever reason, the rise to political power is all too often financed by companies that can only be characterized as having questionable accounting practices.
Policy Director of the Economic Growth Program, New America Foundation Michael Lind is Policy Director of the New America Foundation’s Economic Growth Program. He co-founded the New America Foundation with Ted Halstead and Sherle Schwenninger, and was the first New America fellow. Mr. Lind has taught at Harvard University and Johns Hopkins University and writes […]