1.What is the solution for Mr. Bolden's issues (or questions) as stated in the first three paragraphs under the section titled Introduction? Substantiate with calculations

2.Establish the nature of setting in Russia (particularly, the payments gridlock, the struggle over tax remittances, and the fact that Russian economic statistics are not firmly grounded in reality)

3.How should a $1.2 billion cash investment in Gazprom be structured (in debt or equity)?

4.The relationship between the two public markets for Gazprom stock varies in the course of a single year. Why do the same financial assets NOT trade at similar prices in two different markets

Answer these question based on following case

Gazprom

Introduction

James Bolden, executive vice president of Mobaco, one of the world's largest integrated oil companies, was sitting in his suite at the Metropol Hotel in Moscow. He had a complex decision to make. At the time, in the fall of 1997, Mobaco had beaten all the competitors in the "New Big Game" and was on the verge of formally announcing an alliance with Gazprom, the world's largest gas company. However, several issues remained outstanding and had to be resolved quite soon; the deal took more than a year to materialize and the patience of the Russian partners, not used to such long periods of negotiations, was starting to wane.

In order to conclude the alliance, Mr. Bolden had to agree to make a large cash investment in Gazprom. The amount of this investment had been settled at $1.2 billion, but the actual Gazprom securities that Mobaco would acquire were yet to be negotiated. Mobaco's first preference was for a bond with a relatively short term. While Gazprom would agree to a bond, its term would have to be 10 years and the interest rate could be no more than 8%. Under Mobaco's capital budgeting procedures, an investment as risky as this would have to earn an expected return of at least 15%. This suggested that a conversion privilege or warrants on Gazprom's stock would have to be added.

Gazprom's stock was publicly traded, but its price varied significantly, depending on whether the shares were traded domestically or internationally, and Mr. Bolden was having difficulty reconciling either price with his own discounted cash flow analysis. These value differences were troubling, and Mr. Bolden was trying to decide where they came from. Did they reflect different information or different interpretation of the limited information available? Were they somehow a product of Russia's unusual economy? If Mobaco were to invest in Gazprom's stock, it first had to establish a valuation that would be acceptable for both parties. Furthermore, Russian law prohibited foreigners from owning more than 9% of Gazprom. With existing foreign ownership at approximately 4% and more foreign issues contemplated, both Mobaco and Gazprom had to be careful not to overstep the legal limit.

Russia

With a land area of 16.9 million square kilometers, Russia is by far the world's largest country in geographic extent. It covers nine time zones and stretches from arctic regions of the north to the sub-tropical climate of the Black Sea. Its population was 147 million people in 1997. Russia had been the central component of the Soviet Union, the world's primary advocate of communism and a major military power, which was formed in 1917 and was dissolved in 1991.

Following the collapse of the Soviet Union, Russia suffered one of the most severe economic depressions any country has known in the twentieth century. In several years, the entire population saw its savings disappear in a whirlwind of hyperinflation, while the formerly command-controlled industries started to disintegrate. Exhibit 1 shows the collapse of GDP and the inflation, which finally seemed to have come under control in 1997.

As the regime changed from communist to quasi-democratic, the old industries found themselves in dire need of reorganization. The formerly state-owned enterprises were saddled with huge social infrastructures: hospitals, housing, etc. that were not easy to abandon because they functioned as the society's only social safety net. Yet there were no more guaranteed state orders, and budgets were being cut everywhere. Some ambitious people left to start their own small businesses. Organized criminal groups moved into a vacuum of power and controlled some of the enterprises. Productive equipment was mostly outdated and uneconomical. The Russian military, which funded by some estimates more than half of Russia's industrial production and a huge part of its science, saw its budget decrease by 90% in just five years.

Furthermore, in the new Russian economy internal payments were gridlocked, and no one seemed to pay their bills. Barter arrangements were becoming the dominant form of trade. Intercompany debts were not settled, and taxes were accrued but rarely paid. Increasingly, workers were not being paid either. Companies reported net income but no one seemed to have sufficient cash. Market reforms appeared to have been made; yet markets were not functioning normally. This extraordinary system was analyzed in an important article by Gaddy and Ickes published in 1998 in Foreign Affairs entitled "Russia's Virtual Economy" which can be obtained from www.foreignaffairs.org.

However, one part of the old system had a potential to survive and even prosper in the new environment: natural resources, in particular oil and gas. The Soviet Union had been dependent on oil and gas for hard currency earnings throughout the 1970s and 1980s, and the situation had changed little in the 1990s. With approximately half of its hard currency revenues coming from the oil and gas sector, the Russian economy was highly dependent on natural resource production. So however pessimistic one might be about the Russian economy, one could find Gazprom an interesting opportunity.

Gazprom

Gazprom was Russia's largest enterprise and the world's largest gas producing and exporting company. It traced its roots to 1943 when Glavgazprom was set up to build a pipeline from Saratov to Moscow. However, its importance was minimal until 1961 when the Punga field in Western Siberia was discovered and the region was established as the world's richest gas area. In 1963 the Urengoi field was discovered with initial proved reserves of 6,700 billion cubic meters (bcm). Since these gas fields were located in very remote areas with harsh climatic conditions, the scope and complexity of the exploiting them were unprecedented.

In 1965 the Soviet Ministry of Gas Industry was established and absorbed Glavgazprom. Several years later, Russia started exporting gas to Eastern and Western Europe. This business grew at a rapid pace for almost three decades, developing new fields, laying new pipes and entering new markets. In August 1989 the state enterprise Gazprom was established, based on the former Ministry of Gas Industry. In June 1992 a Presidential Decree confirmed Gazprom's rights to virtually all western Siberian gas reserves. In November 1992 a decree on incorporation and ownership of gas industry assets followed. Finally in February 1993 the Russian joint stock company Gazprom was established and in April 1994 its privatization began.

Russian privatization was voucher-based, with each eligible citizen receiving a voucher book that could then be used for bidding in privatization auctions. Privatization was heavily tilted in favor of insiders, i.e. the managers and workers in the privatized enterprises. The Russian Ministry of Finance approved Gazprom's privatization in May 1993. Under the plan, 40% of the company was left under state ownership, of which 35% was held in trust by Gazprom's management. Another 28% of the stock was sold in closed auctions to residents of Gazprom's production areas in proportion to the value of fixed assets located there. A further 15% of Gazprom's stock was sold at closed auctions to workers and management at a discount price, while Gazprom acquired 10% at par value for subsequent sale to investors. Finally, 5% was sold in a closed cash auction to residents of northern Russia, 1% was transferred to the charter capital of Rosgazifikatsiya and 1% was sold on Vladivostok Stock Exchange.

Thus in the course of two years almost 60% of the company's stock was transferred from state to largely insider private ownership. Exhibit 2 shows the initial distribution of shares and also the rather different distribution that prevailed as of June 1997. From 1994 onward Gazprom was aggressive in international markets, setting up a number of joint ventures for exploration, production and distribution both domestically and internationally. It initiated reorganization and ambitious maintenance and upgrading programs. At the same time it integrated both vertically and horizontally and diversified into some unrelated areas.

In the course of the difficult transition period, Gazprom was quite successful. It remained a profitable company, accounting for 5.6% of Russia's GDP and 20% of the federal budget collection. It weathered the economic downturn quite well, with gas production falling from its peak in 1991 by only 7% compared to oil production, which fell by 45% from its peak in 1987. Exhibits 3, 4 and 5 show the income statement, balance sheet and cash flow statements of Gazprom for 1996.

Gazprom stock

Following the privatization, Gazprom's stock was almost totally illiquid. This was a result of extremely strict trading rules that were established in an attempt to control the secondary market. Foreign ownership was capped at 9% and any acquisitions by foreigners required the written permission of Gazprom. In addition to that, Gazprom asserted the pre-emptive right to purchase any of its shares offered in the secondary market. Anyone wishing to sell Gazprom stock had to offer it to Gazprom first. After that, Gazprom could exercise its right and purchase the stock within 30 days, otherwise the shareholder was free to sell the stock within 90 days at a price no lower than the price which it offered to Gazprom. These measures effectively dried up the secondary market for Gazprom's shares. There were, of course, ways around these rules

In a restrictive environment with a weak legal structure in place, a flurry of semi-legal activity occurred. To bring the "gray market" under control and to gain access to foreign investors, a more organized trading system was needed. In March 1996 Gazprom authorized the newly-formed Federal Securities Corporation to start conducting regular auctions. This had an immediate effect on stock's liquidity and dramatically increased its price (from Rb 407 (US$ 0.08) in March 1996 to Rb 3,750 (US$ 0.65) in May 1997).

This also resulted in some interesting arbitrage opportunities. Since most of the auctions took place in Moscow and most of the stock was held by employees of Gazprom and residents of remote production areas, an enterprising individual could get onto a train, take a 5 day ride, fly a helicopter to the production areas beyond the Polar Circle and trade Gazprom's stock for a couple of bottles of vodka. Upon return to Moscow, the stock could be resold at a significant premium. This continued until most of the stock was transferred from the people originally meant to hold it to arms-length investors. Gazprom also bought back some of its stock at low prices.

In October 1996 a new chapter was opened in Gazprom's market development with the successful placement of its shares in the form of American Depositary Shares (ADS). The global offering was three times over-subscribed, even though it was priced at 300% premium to the local shares. A total of 27.3 million ADS (each representing 10 shares) were sold after a 15% green-shoe option was exercised. Large international investors acquired most of the ADS. Over time, the premium of ADS over local shares fluctuated between 50% and 500%. Even though Gazprom claimed that ADS represented the same class as local shares, effectively two classes of shares were created since investors never were able to change the form of their investments.

Some investors attempted to profit from the arbitrage opportunity. The most notable example was Hong Kong-based Regent Pacific, which tried to set up an offshore fund of $200 million called Regent Gaz for investing in Gazprom's local shares. This drew an immediate and fierce reaction from Gazprom's management, resulting in the eventual dissolution of the fund. To quote an American fund manager based in Moscow, who preferred to remain anonymous: "Nobody wants to mess with Gazprom. If they blacklist you, you will never be able to get a piece of their business. That's not something you want to do". Following numerous arbitrage attempts, Gazprom sent a further signal that its strict trading rules would be enforced. This further increased the premium in the ADS price.

Gazprom's markets

Gazprom sold its gas in four different markets: (1) the Russian internal market, (2) the countries of the former Soviet Union (FSU), (3) Central Europe and (4) Western Europe. In 1996 the breakdown of sales was as follows: 304 bcm were sold to domestic consumers, 73 bcm were sold to FSU countries, 48 bcm were sold to Central European countries, while 75 bcm were sold to the Western European markets.

While largest in terms of volume, the Russian internal market was less significant in terms of revenues. The government set domestic prices at a fraction of the world price. During the late 1990s, domestic gas prices were increased from ridiculously low to merely somewhat low. Exhibit 6 shows the evolution of gas prices in the European, Russian industrial and Russian residential markets.

But more important than price was the problem of non-payment and barter. Only 75-80% of the company's sales were paid for in any form, and only 20% were paid in cash. The rest was paid for in heavy machinery, pipes, oil, paper, beer and other products. Gazprom accepted accounts receivable which it then cancelled against its accounts payable to the same customer. Gazprom had to create trading companies to facilitate disposal of the products it received in payment. It even created a special subsidiary, Mezhregiongaz, exclusively responsible for monitoring domestic supplies and directly dealing with the customers. One has to note, however, that by the Russian standards a 75-80% collection rate for an industrial company was excellent; others managed to get only 20-30%. This was a result of Gazprom's control of the pipelines, as it could cut off at least the smaller of the non-paying customers or reduce their gas supply at will.

On the other hand, Gazprom still had close links with the government and had a "moral obligation" to supply ailing Russian industry. The privatized oil companies were not as heavily controlled and could divert more of their production to exports. The domestic oil price therefore bore a much stronger resemblance to the world price. This price imbalance led to excessive consumption of gas: the share of gas in nation's energy balance grew from 40% in 1986 to 52% in 1995, the highest gas utilization rate in the world. Total domestic consumption of gas is shown by year and by category of user in Exhibit 7.

Gazprom's largest debtor was the state. This is not surprising, since more than 40% of Gazprom's domestic gas was used for power generation, which was state-owned, and public finances were in shambles. Gazprom could not easily cut the large state plants off and the government was in no hurry to pay off its debts. To make matters worse, the state insisted on Gazprom paying its tax bills on time and refused to net them against government obligations.

Central Europe was Gazprom's first export market, with exports to Czechoslovakia commencing in 1967. However, for 30 years gas had been supplied to this region at significantly discounted prices, effectively subsidizing socialist regimes and their inefficient economies. It was expected that this would end in the 1990s as the countries of the region started their transition to a market economy. However, since gas played such a large role in their energy and industrial policies and the infrastructure was already in place, it was virtually impossible for them to switch in the short term from Gazprom to another gas provider or to an alternative fuel. Gazprom's export pipeline went through the countries of Central Europe, and the marginal cost of adding local customers was negligible, while building an alternative pipeline would have been prohibitively expensive. Gazprom's exports to Central Europe and its joint ventures and subsidiaries in Central Europe are shown in Exhibits 8 and 9.

Due to restructuring in the economy, gas demand in Central Europe fell somewhat, but then recovered as some of the transition economies began to overcome their problems. During the period of downturn, though, Gazprom bought into local gas distribution systems, further strengthening its grip on the market. The old subsidized supply contracts expired in 1998, allowing Gazprom to charge Central European countries the full market price. Revenues from this market were therefore expected to grow by about 30- 40% in the late 1990s.

Western Europe had been Gazprom's main source of hard currency revenues for 20 years. In the Soviet times, revenues earned on the export markets were typically used for acquiring technology and building up the infrastructure ("gas for pipes"). The volume of trade reached a very respectable 75 bcm in 1996, making Gazprom the biggest gas exporter in Europe. Gazprom sold its gas to six Western European countries: Austria, Finland, France, Germany, Italy and Switzerland, plus Turkey.

Gazprom had been developing Western European markets very aggressively, selling more gas to its existing customers and acquiring new customers along the way. Gazprom was reported to be close to closing more long-term contracts with Greece, the Benelux countries, Sweden and Spain. The company increased its long term contract portfolio from 1,450 bcm on January 1 1996 to 2,188 bcm as of January 1 1997. These long-term contracts had a remaining duration of between 12 and 21 years. Gazprom's contracts were typical for the European market, having such features as no rights for re-export, a take-or-pay clause and no unilateral termination right. The gas price was set according to a formula that reflected current and past gas prices for the period, as well as the price of a pre-negotiated set of competing oil products. With the increasing popularity of gas and intensifying competition for gas supply, these formulas would probably move more firmly toward market prices fully equivalent to oil. Gazprom's exports to Western Europe and its joint ventures and subsidiaries in Western Europe are shown in Exhibits 10 and 11.

Gazprom's exports to the Former Soviet Union countries were shrinking by 3-5% a year in the late 1990s, due to the continuing economic contraction in the region and the countries' inability to pay. The export emphasis had shifted westwards very significantly: while in 1991 exports to the FSU countries (107 bcm) were comparable to those to Europe (105 bcm) by 1996 the picture had changed significantly: exports to Europe comprised 117 bcm compared to 73 bcm to FSU countries. Gazprom's exports to the FSU countries are shown in Exhibit 12.

Political and economic realities of the region forced Gazprom to use short-term (up to one year) contracts in FSU countries. Baltic states (Latvia, Lithuania and Estonia) were traded with on a cash-only basis. Due to political considerations, Gazprom was forced to extend credit to other countries of the region, resulting in non-payments more often than not. The Ukraine was Gazprom's biggest FSU customer and also its biggest debtor. Its debt at different times reached as much as $5 billion, mostly as a result of inability to curb its demand in the changing economic environment. The situation was further complicated by the existence of several different Ukrainian gas distribution companies. Furthermore, 90% of Gazprom's exports to Europe (except for Finland) passed through the Ukraine.

There were several occasions when Ukrainians diverted Gazprom's export gas for their own use, following a cut in the supply level as a result of non-payment. However, the Ukraine could not afford to cause a serious disruption to Gazprom's European exports. Annual transit fees that the Ukraine received from Gazprom (in gas) were estimated at $1.5 billion in 1996. Additionally, the Ukraine depended heavily on Russian imports and any diversions from Gazprom could have very serious political and economical consequences. However, in order to quell customers' fears in Central and Western Europe, Gazprom had arranged for several large underground gas storage facilities in those regions to assure uninterrupted supply. The interplay of all these factors meant that Gazprom was paid in cash for at most half of its FSU exports.

Gazprom's assets

Gazprom owned the rights to 23% of world's total proven gas reserves. In the beginning of 1997 Gazprom had 33,400 bcm of A, B and C1 gas reserves. According to the Russian classification system, A, B and C1 include volumes of gas fields under development and volumes of gas fields where field boundaries had been defined by delineation drilling. A Western audit of Gazprom's reserves was to be delivered in 1998. The audit ultimately showed Gazprom's reserve estimates to be quite accurate (within 8%). In addition to natural gas, Gazprom had control over gas condensate and oil reserves of approximately 2,000 million tons. In 1996 the company produced 564.7 bcm of gas, 7.6 million tons of gas condensate and 960,000 tons of oil.

In terms of barrels of oil equivalent (BOE) Gazprom controlled more assets than any other company in the world. Iran's gas reserves were 60% of Gazprom's, but the entire Middle East had fewer gas reserves than Gazprom. Six out of eight world's largest gas fields are located in Russia and controlled by Gazprom. The company's reserves were constantly being revised upwards as a result of continuing prospecting. Gazprom spent significant amounts of money on exploration, and in 1996 alone Gazprom enhanced its reserve base by 1,000 bcm through exploration, reserve revisions and acquisitions. It was expected that Gazprom's reserves would continue this upward trend, especially liquid hydrocarbons (oil and condensate), which had been systematically underestimated in the past due to the focus on gas.

The majority of Gazprom's reserves were located in Western Siberia and required extensive infrastructure, both physical and social. Their extraction also required a well-developed system of pipelines. One therefore had to adjust the economic value of Gazprom's reserves for the high cost of exploitation. While there were some gas liquefaction and condensation technologies that could possibly simplify the transportation of gas, they were still too complex to be used commercially in the difficult conditions in which Gazprom operated.

Gazprom's extensive gas reserves would have little value without the infrastructure necessary to extract and transport them. Gazprom owned the world's largest gas transmission system: 150,000 km of high-pressure pipelines serviced by 249 compressor stations with the nominal installed capacity of 40.3 mw. The general direction of the pipeline was from east to west, spanning the entire continent. The main pipeline was linked with smaller ones, allowing for more flexible and efficient service. This infrastructure accounted for most of Gazprom's capital investment. It was estimated that over the next 5-6 years depreciation charges alone would represent $3.5 - 6.5 billion.

The transmission network's efficiency was assessed by 13 international gas consultancies in 1995 and was deemed to be satisfactory, both in terms of operational reliability and security. System losses in 1995 accounted for 1.4% and a further 46 bcm were consumed by the compressor stations. While there were no serious faults in the system, it suffered from sporadic bottlenecks and quality deficiencies, mostly due to inadequacy of Russian construction practices. Gazprom worked continuously to improve the network's efficiency and reduce downtimes. The failure rate went from 0.58 failures per 1,000 km of pipes in 1985 to 0.21 failures in 1996. Since most of the pipeline was laid in 1970s and 1980s, the average age of the network was about 15 years in the late 1990s, which is acceptable by international standards. Gazprom conducted extensive rehabilitation, maintenance and replacement work in order to keep the network in a good condition. It gained significant amounts of gas otherwise lost in transportation from improvements in network efficiency. Gazprom contracted Italian Tragaz for the modernization and rehabilitation of 161 compressor units to further improve the system's capacity and reliability.

Gazprom had a number of projects intended to develop its existing reserves and to increase the flow in its pipelines. The flagship project was the construction of the Yamal-Europe pipeline and related development of the huge Yamal gas field, plus the entire infrastructure required to transport this gas. The infrastructure part of the project had already started; sections of the pipeline were being constructed in Poland, Belarus and Germany (note the circumvention of the Ukraine). Development of the reserves could take place rapidly or slowly, depending on the state of Russian economy and domestic demand. In case domestic demand stayed at the current level or went down, Gazprom would most likely be able to supply the new pipelines from existing sources. The cost of putting in place a Western Russia-Belarus-Poland- Germany pipeline (two 1,659 km 56" pipelines) pales in comparison to the cost of developing the new field and building a new trans-Siberian pipeline ($6.7 billion versus $32-35 billion, of which $23 billion is pipeline construction). The new trans-Siberian pipeline would be huge even by Gazprom's standards (triple 56" pipeline, 2,462 km long).

Gazprom was also hoping to develop Russia's large offshore gas reserves to meet the demand for gas. However, because of its lack of experience in offshore production and huge capital costs required, it was unlikely that any production would start before 2005. The company was also looking into building a pipeline to Finland and then expanding it through Scandinavia and possibly into Germany. This would allow Gazprom to enter a new market and save significantly on transit charges. Finally, following a $13.5 billion contract signed with Turkey, Gazprom was planning to build a 400 km undersea pipeline to supply Turkey directly from Russia's southern shores. With all of these projects and existing infrastructure in need of constant repair, yearly capital expenditures would remain at the $9-10 billion level for several years before slowly declining.

Besides pure exploration and production Gazprom was involved in a number of other activities, both related and unrelated. In 1996 the company produced 7.6 million tons of gas condensate and 960,000 tons of crude oil. Gazprom's six processing plants produced 541,000 tons of gasoline, 1,100,000 tons of diesel fuel, 579,000 tons of LNG and 2.24 million tons of crystallized sulfur. Gazprom was building a 300,000 tons/year ethylene plant in cooperation with BASF, as well as a 680,000 tons/year methanol plant.

Gazprom owned a number of construction and machinery building subsidiaries. It also inherited a number of research institutes involved in a number of areas related to gas industry. Gazprom was one of major shareholders in Imperial Bank, one of the largest banks in Russia. It also had its own Gazprombank, which performed clearing operations between the subsidiaries. Besides banking, Gazprom was involved in a number of other businesses, which in a normal country could have been contracted out, such as airline, telecommunications, truck manufacturing and security services. A full list of Gazprom's domestic subsidiaries and joint ventures is given in Exhibit 13.

Governmental relations

Since the gas industry was critical to the country's economic health, the Russian government was heavily involved in dealings of Gazprom. Former Russian Prime Minister Viktor Chernomyrdin was a former CEO of Gazprom and its largest shareholder. The intertwined relationship was not a simple one.

As Russia's largest corporate taxpayer Gazprom was often leaned upon quite heavily. Whenever the Russian government ran out of money, it would step up its tax collection efforts. Since the Russian tax system was very new and its legal underpinnings were weak, the government turned most naturally to its easiest target, in which it still maintained a 40% interest. This power, however, had to be used sparingly so as not to kill the goose that laid golden eggs. While it was hoped that the statutory tax rate would someday fall from 55% to a more normal world level of 35%, the constant needs of the Russian government made this unlikely in the near term.

Gazprom played an important role in the political landscape as well, especially in relations with the FSU countries. Their obligations to Gazprom were used as pawns in different political games, ranging from sovereignty disputes to Black sea fleet division. For instance, Gazprom could be "advised" to supply gas to a friendly regime without concern for the payment. However, as the Russian government became more sophisticated and the relationships with the former republics normalized, these practices became less frequent.

Gazprom's domestic pricing was heavily regulated, resulting in a price disparity between domestic industrial and residential consumers. Industrial customers paid 2.5 times more than the residential, but that still amounted to less than half the world price. A system of discounts and incentives supported selected types of customers. In addition, the price was somewhat differentiated depending on the proximity to the production regions. Finally, Gazprom had recently been granted a right to offer up to 40% discounts to pre- paying customers. The current "blended" domestic price was around $38 and was expected to grow by 5- 10% a year.

Following its privatization, Gazprom retained "the moral obligation to supply domestic customers under any circumstances". This resulted in the company's being unable to cut off the non-paying customers, especially utilities. From the government's point of view this made sense; social unrest would be unavoidable if the heat were to be cut off in the middle of the winter. For the company's shareholders, whose objective was to maximize the performance of the company, this simply acted as an expensive additional tax.

The government incurred large portions of Gazprom's accounts receivable, and this was rapidly becoming the government's favorite source of financing. In the past it had allowed the company to offset its tax obligations against the government debts, but this practice had come to an end and showed no signs of being revived.

The valuation problem

James Bolden felt that the risks of the Russian environment required a rate of return of at least 15% and preferably higher. If Mobaco made its required $1.2 billion cash investment in exchange for a Gazprom bond bearing an interest rate of 8%, a number which had been discussed during negotiations, then the total return which Mobaco would get on its Russian project would be a somewhat unsatisfactory 12%. Higher returns might be possible with a stock investment or a bond with a conversion privilege or option on Gazprom stock, but framing this required a view on the stock's present and likely future value. Unfortunately, even the stock's present value was subject to dispute.

He contemplated the aggregate value of the Gazprom stock as traded in the local and the international markets at several points during the past year, as shown in Exhibit 14. The disparity was huge and also volatile, ranging between five times and two times difference within a single year. He could only scratch his head in amazement. Finance theory said that such things were not supposed to happen. What could possibly account for it, and which one should he focus on?

Mr. Bolden's staff had put together the summary comparison of gas companies in a few other countries as shown as Exhibit 15. Mr. Bolden knew that he needed some guidelines to interpret the market prices of Gazprom's stock, and he hoped that this comparison would help him. However, it seemed that conditions in Russia were quite different from those in the other countries, so it was not obvious whether any simple ratio analysis based on foreign comparables would be useful. But were the Russian comparables any more useful?

He also had been given five-year financial projections, translated to dollars, of Gazprom's income statement and balance sheet, but was not sure how to translate these numbers, shown in Exhibit 16, into cash flow. In this environment, wouldn't any free cash flow be pre-empted by the government? Did the shareholders really own any cash flow in this cash-starved economy? More generally, could the financial statements for Gazprom be relied upon to correctly reflect the company's financial condition? The unusual circumstances of barter and nonpayment seemed to undermine the application of standard cash projections and discounting, but Mr. Bolden was quite unsure what adjustments he would need to make to take this into account. And time was running out.

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