The Moscow Times: Gazprom, Yukos and A Mystery Company

Tuesday, March 20, 2007. Issue 3618. Page 1.

By Miriam Elder
Staff Writer 
Grigory Sysoyev / Itar-Tass 

The company has no web site, no publicly listed phone number, and a history of murky deals. Yet it runs the country’s largest independent electricity supplier, owns the country’s most popular tabloid, and is headed by one of Russia’s richest men.

The story of ESN Group runs deep. Headed by flamboyant multimillionaire Grigory Beryozkin, the company has fostered close, yet foggy, ties with state-run Gazprom as it grows into a major ¬investment vehicle.

Perhaps that is why more than a few eyebrows were raised when in January it became the first company to express publicly an interest in acquiring Yukos’ remaining assets.

Gazprom and state-owned Rosneft are widely expected to emerge as the main winners in upcoming Yukos auctions. The possible involvement of ESN raises the specter of auctions past, when proxy firms grabbed assets at bargain prices only to pass them on to the state-linked giants.

“The company has kept a low profile,” ESN spokeswoman Marianna ¬Belousova said when asked why the company did not even have a web site.

Beryozkin grants no interviews to the media.

Other people familiar with ESN’s dealings were reluctant to discuss what they knew, citing the delicacy of Beryozkin’s dealings and their fear of upsetting him and losing a business contact.
 
An examination of its known dealings, however, provides a glimpse into the workings of the multimillion-dollar powerhouse.

ESN, founded upon the Soviet Union’s demise in 1991, has propelled Beryozkin, 40, to the rank of Russia’s 67th-richest man with $900 million, according to a Finans magazine rating released last month. The company, which Belousova says employs 200 in Moscow and 1,000 around the world, has never disclosed its revenues or the total value of the assets it manages.

Now, through subsidiary ESN Energo, it has linked up with two of Italy’s largest firms, oil and gas major Eni and power utility Enel, to enter the race for some of the nearly 200 Yukos assets up for grabs over the next two months.

The ESN consortium hopes to acquire gas units Arcticgaz and Urengoil, which will be auctioned off with 19 other Yukos assets on April 4. The assets, which include Yukos’ 20 percent stake in Gazprom’s oil arm, Gazprom Neft, will be offered in a single lot at a starting price of 145 billion rubles ($5.5 billion).

ESN has focused on expanding its presence in the electricity sector in recent years, running the North Western Power Plant in St. Petersburg with Enel and a supply company called Rusenergosbyt. The Yukos gas assets would allow ESN to control the entire electricity cycle, from production to distribution, said Belousova.

Some observers, however, see another game at play. Kommersant, citing no sources, reported last week that a recently created firm called Razvitiye had links to Beryozkin and would take part in the April 4 auction. Belousova declined to comment.

“When an auction takes place, a contender must have a competitor,” said Valery Nesterov, an analyst at Troika Dialog. “If there isn’t another big bidder, they have to stage something. So they set up shell companies to make sure the outcome of the auction is legal.”

When Yukos’ main oil production unit was sold off in December 2004, the winning bid came from Baikal Finance Group, a hastily created firm that was bought out by Rosneft just days after the auction. Gazprom had also hoped to get its hands on Yuganskneftegaz, but pulled out of the race at the last minute after an injunction from a U.S. court.

Industry insiders say Beryozkin’s company, driven as all firms are by a desire to increase its capital, has a history of acting for state-run companies to win lucrative deals.

In 2003, ESN bought 5.3 percent of Unified Energy Systems making it the largest minority shareholder in the state utility at the time. The company turned around and sold the stake to Gazprom about a year later.

“It was a market deal,” Belousova said, citing a change in rules governing UES minority shareholders that stripped their right to swap shares in the company for generation assets as the reason for the sale.

Yet one industry insider with knowledge of the situation said: “They certainly bought it for Gazprom. “Why did they do it? Because they made money on it and probably shared with the guy in Gazprom who made money from it,” said the source, who has known Beryozkin for eight years.

He said ESN’s link to Gazprom came from Alexander Ryazanov, Gazprom’s deputy CEO who left in November in the gas company’s most high-profile shake-up since President Vladimir Putin appointed Alexei Miller as CEO in May 2001.

A month after Ryazanov was dismissed, Gazprom announced that it would cease buying electricity from Rusenergosbyt, the ESN supply company in which Enel owns a 49.5 percent stake, and would buy instead from a new Gazprom subsidiary, Mezhregion-Energosbyt.

Belousova denied that such a dramatic shift, which would see Rusenergosbyt lose 17 percent of its sales, had taken place.

“Three of the Gazprom companies made a contract with the new Gazprom electricity company, but all the others have stayed with Rusenergosbyt,” she said.

A spokeswoman for Mezhregion-Energosbyt said her company was indeed taking over electricity supplies and intended to sign contracts with all Gazprom units by the end of next year.

“We are taking over all supplies gradually, step by step,” said the spokeswoman, Maria Frolova.

Ryazanov has said he left Gazprom because he didn’t have enough – independence.

Beryozkin is working on building other relationships inside Gazprom, the source said. “He has other links. He’s a smart guy and very good at keeping up relationships,” he said.

Beryozkin is better known for his eclectic leisure pursuits than the details of his business dealings. In 2003, he founded the Moscow Polo Club with Peruvian-born businessman Victor Huaco. An avid skier, Beryozkin can be spotted most winters in Courchevel, the favorite playground for Russian oligarchs in the French Alps. His wife and four children always accompany him, Belousova said. The businessman is also known for his collection of classic cars — which number as many as 20, according to Forbes’ Russian edition.

Beryozkin and his company got off the ground in the mid-1990s by managing assets that included KomiTEK, the regional oil company based in the Arctic republic of Komi. ESN turned around the ailing company, clinching a deal to sell all of its output to Roman Abramovich’s Sibneft. Beryozkin built KomiTEK into the country’s eighth-largest oil producer by the time he sold it to LUKoil for a small fortune in 1999.

He went on to build ESN into a management consultancy and investment firm, managing UES subsidiary Kolenergo in Murmansk, among other ventures.

Beryozkin joined the UES board of directors in 2004 and was recently renominated to the post.

Besides oil and electricity, Beryozkin has made a name for himself in media.
Back in 2001, Beryozkin participated in an investment consortium that Vladimir Gusinsky’s Media-MOST group turned to in hope of staving off a politically tainted takeover by Gazprom-Media.

More recently, Gazprom-Media said in January that it was stepping back from a long-planned purchase of Komsomolskaya Pravda, the country’s most popular tabloid. Ownership of 60 percent of the newspaper went instead to ESN. Vedomosti reported that Gazprom had acted as a consultant to ESN during the sale.

ESN has found most of its success through ventures with Eni and Enel. Beryozkin accompanied Putin on his trip to Italy last week, although no deals were announced.

After setting up ESN Energo and Rusenergosbyt in 2003, ESN brought in Enel to help run the North Western Power Plant. And last year, the Italian company bought a 49.5 percent stake in Rusenergosbyt for $105 million, marking the first foreign strategic investment into the country’s power sector. In September, Eni was brought in to form the Eni-Enel-ESN consortium.

Rusenergosbyt remains the country’s largest independent supply company, with customers that include Russian Railways, LUKoil and, until recently, Gazprom.
The industry insider said Enel was looking to get out of the venture as a result of ESN’s losing Gazprom’s business.

Spokeswomen for Eni and Enel in Rome did not respond to repeated requests for comment over the past week.

Gazprom spokespeople declined to comment about its links to ESN.

A European Union industry source questioned Enel and Eni’s need for ESN. “In liberalized markets, major customers can go to the market directly. Then what do such giants as Gazprom and the Russian Railways need ESN for? Can ESN get for them better conditions than they would do on their own?” he said.

Enel shows no public signs of pulling out. Its CEO, Fulvio Conti, said last month that he hoped to boost power sales through Rusenergosbyt by 36 percent this year to 30 terawatt hours and to invest up to 4 billion euros ($5.32 billion) into the Russian energy sector. But Eni CEO Paolo Scaroni may have hinted at the real state of matters in a February interview with The Wall Street Journal. “Our relationship with the country goes through Gazprom,” he said.

For now, though, the Italian companies remain linked up more closely with ESN. They stand to make significant inroads into the country’s gas sector if the their consortium with ESN succeeds in buying Arcticgaz and Urengoil in the Yukos auctions.

Arcticgaz sits on 4.5 billion barrels of oil equivalent, while Urengoil has 2.5 billion barrels of oil equivalent. Both units operate in the Yamal Peninsula, where Gazprom hopes to start production soon as older fields in western Siberia begin to dry up.

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