Russia's Shadowy Giant

Gas supplier Itera's clout extends across the old Soviet empire

Itera is hardly a household name in Russia, to say nothing of the rest of the world. But Western investors--especially energy giants--are likely to be hearing a lot more about this mysterious company. It's the fourth-largest holder of gas reserves on the planet. It has a virtual monopoly on gas trading in two key former Soviet republics, Georgia and Ukraine, that lie at the gateway for transporting the region's energy resources to the West. And it's already a player in the energy-rich Caspian Sea region, where it has close ties to political leaders. Indeed, Itera President Igor V. Makarov says he holds the key to the Caspian for any foreign energy company wanting a foothold in the region, considered one of the hottest oil and gas plays anywhere. "Today, we are the only company that can turn joint ventures with U.S. enterprises into real businesses," he says.

That's quite a claim. Certainly, Itera's connections and ability to cut off gas supplies to entire republics make it a power player. Its clout in Georgia and Ukraine fits in with Russian President Vladimir V. Putin's desire to rebuild Russia's influence in key regions of its former empire. But even as Itera seeks recognition and funding from the West, law enforcement officials in Europe and the U.S. are scrutinizing Itera's activities for possible money-laundering.

Makarov denies the allegations, but Itera's rise from barter trader to global gas giant in nine years is raising questions inside Russia, too, where the company has been under fire for months. Some minority shareholders of Russia's Gazprom, the world's biggest gas company, suspect that Gazprom managers helped create Itera as a vehicle to park choice assets siphoned from Gazprom for their own personal enrichment. Gazprom and Itera have denied the charges, but a minority shareholder move for an independent audit conducted by Deloitte & Touche of Gazprom's deals with Itera has been voted down by the Gazprom board, which is dominated by the government and management. The board hired its own autitor, PricewaterhouseCoopers, to probe the relationship. But some investors question the objectivity of a firm that has to review its own previous audits. Meanwhile, the Russian Audit Chamber, the parliament's budgetary watchdog agency, is investigating links between Gazprom and Itera.

PR OFFENSIVE. Makarov is fighting back with a public-relations offensive. He has hired Western Strategy Group, a New York and Washington firm headed by former Republican Senator Malcolm Wallop from Wyoming. Makarov met recently in the U.S. with energy players Enron, Ruhrgas, and Unocal. And he is promoting a project to build a pipeline that would ship gas from the Central Asian republic of Turkmenistan's vast reserves of more than 8 trillion cubic meters through Georgia into Turkey, the gateway to the lucrative energy markets of the West. He hopes to drum up Western investment for the $200 million project.

While Makarov trolls for partners, investigators keep looking into Itera's affairs. In a telephone interview on Mar. 16, a senior investigator at Russia's Audit Chamber, Mikhail Beskhmelnitsin, said the chamber has joined hands with U.S. law-enforcement officials in probing alleged illegal dealings, including possible money-laundering through U.S. institutions. An FBI spokesman would not comment, citing an "ongoing affair." Makarov coolly waves off any allegations that Itera may have been involved in questionable dealings. "Our business is absolutely legal," he says.

In Belgium, prosecutors are asking questions about Itera and Tractebel, a Belgian energy conglomerate that co-owned the Kazakhstan gas-pipeline network until October, 2000. Pierre Bocquet, a former crisis manager at Tractebel's Kazakhstan operations, has given prosecutors documentation on Tractebel's dealings with Itera. Bocquet says Itera and senior Tractebel managers siphoned off millions of dollars from gas sales and transit fees. "Huge amounts got stashed away," he says. Yet Bocquet himself is under investigation because of allegations he took bribes--a charge he denies. A Belgian prosecutor, Paul Degrwse, confirmed that he is investigating Itera's possible involvement in money-laundering and bribery, but he would not comment further. Itera Vice-President Vladimir Martynenko denies the allegations, saying in a written response: "All companies belonging to the Itera group operate absolutely legally. These allegations have nothing to do with reality."

FOREIGN-POLICY WEAPON. Western energy companies operating in the region say the Putin government has closed its eyes to Itera's questionable dealings. They speculate that Itera's tight hold on the gas market in the former Soviet empire, combined with millions of dollars in gas debts owed to it, turns Itera into a valuable economic and foreign-policy weapon for the Kremlin.

One example: Russian-based gas supplies to a thermal-power plant in Georgia owned by U.S. energy giant AES Corp. were cut off twice in December and January. Russian border officials claimed AES's deal to buy gas from trader Inneftegazstroi, the only operator on the Georgian market to contest Itera's market position, was illegal and that they were compelled to turn off supplies. That plunged Georgia into darkness for several days--until AES agreed to start buying supplies from Itera. Itera spokesman Nikolai Semenenko claims the Russian gas giant acted to "save AES from a force majeure situation that could have brought the entire energy system of Georgia to a halt." But AES managers suspect the Russian government engineered the move to help Itera regain its monopoly on gas supplies. "This was a shot across the bows of the Georgian government. Our original aim was to try to break Itera's monopoly and reduce Georgia's vulnerability to that kind of pressure," says Michael Scholey, general director of AES's Georgia operations.

Georgia's border with Turkey means it is a key region for pipeline routes to the West--and that's where geopolitics comes in. Washington wants a pipeline to funnel gas from Azerbaijan's Shah Deniz gas field through Georgia into Turkey. But Russia opposes any pipeline that doesn't snake through Russian territory or involve a Russian company. "We would be very unhappy if Russia persuaded Georgia to block the pipeline," says a senior official at the U.S. State Dept., who unsuccessfully cried foul to the Kremlin over the way AES was forced to cancel its contract with Inneftegazstroi. "Itera is one of the tools some elements of the Russian government would like to use to regain control over the region. Our experience in dealing with Itera has been rocky."

There's no question that some of the controversy surrounding Itera may be prompted by information from business rivals jealous of Itera's clout in the former Soviet Union, as Makarov claims. He has even agreed to put Itera up to the due-diligence scrutiny of New York consulting firm Strang Hayes, which is run by two former agents of the U.S. Drug Enforcement Administration--a move that Senator Wallop sees as proof that Itera is confident allegations of questionable dealings are unfounded. But hardball tactics such as cutting off AES undermine the company's attempt to gain new standing and funding in the West. Putin has vowed to clean up the corporate sector. The gas business may be a good place to start.

By Catherine Belton in Moscow, with Dan Carney in Washington

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