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Sam Vaknin, Ph.D.
Editing and Design:
A Narcissus Publications Imprint, Skopje 2004
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C O N T E N T S
Accounting (in Eastern Europe)
Hermitage Capital Management, an international investment firm owned by HSBC London, is suing PwC (PricewaterhouseCoopers), the biggest among the big four accounting firms (Andersen, the fifth, is being cannibalized by its competitors).
Hermitage also demands to have PwC's license suspended in Russia. All this fuss over allegedly shoddy audits of Gazprom, the Russian energy behemoth with over $20 billion in annual sales and the world's largest reserves of natural gas. Hermitage runs a $600 million Russia fund which is invested in the shares of the allegedly misaudited giant.
The accusations are serious. According to infuriated Hermitage, PwC falsified and distorted the 2000-1 audits by misrepresenting the sale of Gazprom's subsidiary, Purgaz, to Itera, a conveniently obscure entity. Other loss spinning transactions were also creatively tackled. Stoitransgaz - partly owned by former Gazprom managers and their relatives - landed more than $1 billion in lucrative Gazprom contracts.
These shenanigans resulted in billions of dollars of losses and a depressed share price. AFP quotes William Browder, Hermitage's disgruntled CEO, as saying: "This is Russia's Enron". PwC threatened to counter-sue Hermitage over its "completely unfounded" allegations.
But Browder's charges are supported by Boris Fyodorov, a former Russian minister of finance and a current Gazprom independent director. Fyodorov manages his own investment boutique, United Financial Group. Browder is a former Solomon Brothers investment banker. Other investment banks and brokerage firms - foreign and Russian - are supportive of his allegations. They won't and can't be fobbed.
Fyodorov speculates that PwC turned a blind eye to many of Gazprom's shadier deals in order to keep the account. Gazprom shareholders will decide in June whether to retain it as an auditor or not. Browder is initiating a class action lawsuit in New York of Gazprom ADR holders against PwC.
Even Russia's president concurs. A year ago, he muttered ominously about "enormous amounts of misspent money (in Gazprom)". He replaced Rem Vyakhirev, the oligarch that ran Gazprom, with his own protégé. Russia owns 38 percent of the company.
Gazprom is just the latest in an inordinately long stream of companies with dubious methods. Avto VAZ bled itself white - under PwC's nose - shipping cars to dealers, without guarantees or advance payments. The penumbral dealers then vanished without a trace. Avto VAZ wrote off more than $1 billion in "uncollected bills" by late 1995. PwC did make a mild comment in the 1997 audit. But the first real warning appeared only three years later in the audit for the year 2000.
Andrei Sharonov, deputy minister in the federal Ministry of Economics said, in an interview he granted "Business Week" last February: "Auditors have been working on behalf of management rather than shareholders." In a series of outlandish ads, published in Russian business dailies in late February, senior partners in the PwC Moscow office made this incredible statement: "(Audit) does not represent a review of each transaction, or a qualitative assessment of a company's performance."
The New York Times quotes a former employee of Ernst&Young in Moscow as saying: "A big client is god. You do what they want and tell you to do. You can play straight-laced and try to be upright and protect your reputation with minor clients, but you can't do it with the big guys. If you lose that account, no matter how justified you are, that's the end of a career."
PwC should know. When it mentioned suspicious heavily discounted sales of oil to Rosneft in a 1998 audit report, its client, Purneftegaz, replaced it with Arthur Andersen. The dubious deals dutifully vanished from the audit reports, though they continue apace. Andersen claims such transactions do not require disclosure under Russian law.
How times change! Throughout the 1990's, Russia and its nascent private sector were subjected to self-righteous harangues from visiting Big Five accountants. The hectoring targeted the lack of good governance among Russia's corporations and public administration alike. Hordes of pampered speakers and consultants espoused transparent accounting, minority shareholders' rights, management accessibility and accountability and other noble goals.
That was before Enron. The tables have turned. The Big Five - from disintegrating Andersen to KPMG - are being chastised and fined for negligent practices, flagrant conflicts of interests, misrepresentation, questionable ethics and worse. Their worldwide clout, moral authority, and professional standing have been considerably dented.
America's GAAP (Generally Accepted Accounting Practices) - once considered the undisputable benchmark of rectitude and disclosure - are now thought in need of urgent revision. The American issuer of accounting standards - FASB (Financial Accounting Standards Board) - is widely perceived to be an incestuous arrangement between the clubby members of a rapacious and unscrupulous profession. Many American scholars even suggest to adopt the hitherto much-derided alternative - the International Accounting Standards (IAS) recently implemented through much of central and eastern Europe.
Russia's Federal Commission for the Securities Market (FCSM) convened a conclave of Western and domestic auditing firms. The theme was how to spot and neutralize bad auditors. With barely concealed and gleeful schadenfreude, the Russians said that the Enron scandal undermined their confidence in Western accountants and the GAAP.
The Institute of Corporate Law and Corporate Governance (ICLG), having studied the statements of a few major Russian firms, concluded that there are indications of financial problems, "not mentioned by (mostly Western) auditors". They may have a point. Most of the banks that collapsed ignominiously in 1998 received glowing audits signed by Western auditors, often one of the Big Five.
The Russian Investor Protection Association (IPA) and Institute of Professional Auditors (IPAR) embarked on a survey of Russian investors, enterprises, auditors, and state officials - and what they think about the quality of the audit services they are getting.
Many Russian managers - as avaricious and venal as ever - now can justify hiring malleable and puny local auditors instead of big international or domestic ones. Surgutneftegaz - with $2 billion net profit last year and on-going dispute with its shareholders about dividends - wants to sack "Rosexperitza", a respectable Russian accountancy, and hire "Aval", a little known accounting outfit. Aval does not even make it to the list of 200 largest accounting firms in Russia, according to Renaissance Capital, an investment bank.
Other Russian managers are genuinely alarmed by the vertiginous decline in the reputation of the global accounting firms and by the inherent conflict of interest between consulting and audit jobs performed by the same entity. Sviazinvest, a holding and telecom company, hired Accenture on top of - some say instead of - Andersen Consulting.
A decade of achievements in fostering transparency, better corporate governance, and more realistic accounting in central and eastern Europe - may well evaporate in the wake of Enron and other scandals. The forces of reaction and corruption in these nether lands - greedy managers, venal bureaucrats, and anti-reformists - all seized the opportunity to reverse what was hitherto considered an irreversible trend towards Western standards. This, in turn, is likely to deter investors and retard the progress towards a more efficient market economy.
The Big Six accounting firms were among the first to establish a presence in Russia. Together with major league consultancies, such as Baker-McKinsey, they coached Russian entrepreneurs and managers in the ways of the West. They introduced investors to Russia when it was still considered a frontier land. They promoted Russian enterprises abroad and nursed the first, precarious, joint ventures between paranoid Russians and disdainful Westerners.
Companies like Ernst&Young are at the forefront of the fight to include independent directors in the boards of Russian firms, invariably stuffed with relatives and cronies. Together with IPA, Ernst&Young recently established the National Association of Independent Directors (NAID). It is intended to "assist Russian companies to increase their efficiency through introduction of best independent directors' practices."
But even these - often missionary - pioneers were blinded by the spoils of a "free for all", "winner takes all", and "might is right" environment. They geared the accounts of their clients - by minimizing their profits - towards tax avoidance and the abolition of dividends. Quoting unnamed former employees of the audit firms, "The New York Times" described how "... the auditors often chose to play by Russian rules, and in doing so sacrificed the transparency that investors were counting on them to ensure."
Afghanistan, Economy of
I. The Poppy Fields
Conspiracy theorists in the Balkan have long speculated on the true nature of the Albanian uprising in Macedonia. According to them, Afghanistan was about to flood Europe with cheap opium through the traditional Balkan routes. The KLA - denounced by the State Department as late as 1998 as a drug trafficking organization - was, in the current insurrection, in its new guise as the NLA, simply establishing a lawless beachhead in Macedonia, went the rumours. The Taliban were known to stock c. 3000 tonnes of raw opium. The Afghanis - Arab fighters against the Soviet occupation of Afghanistan - another 2000 tonnes (their fee for providing military and security services to the Taliban). Even at the current, depressed, prices, this would fetch well over 2 billion US dollars in next door Pakistan. It also represents 5 years of total European consumption and a (current) street level value in excess of 100 billion US dollars. The Taliban intends to offload this quantity in the next few months and to convert it to weapons. Destabilizing the societies of the West is another welcome side effect.
It is ironic that the Taliban collaboration with the United Nations Office for Drug Control and Crime Prevention (UNODCCP) culminated this year in the virtual eradication of all opium poppies in Afghanistan. Only 18 months ago, Afghan opium production (c. 4600 tonnes a year) accounted for 70% of world consumption (in the form of heroin). The shift (partly forced on the Taliban by an unusual climate) from poppies to cereals (that started in 1997) was thus completed successfully.
Afghanistan is not a monolithic entity. It is a mountainous and desert territory (c. 251,000 sq. miles in size, less than 10% of it cultivated). Administratively and politically, it is reminiscent of Somalia. The Taliban government - now recognized only by Pakistan - rules the majority of the country as a series of tribal fiefdoms. The country - ruined by a decade of warfare between majority Pushtuns and minority Tajiks and Uzbeks in the north - lacks all institutions, or infrastructure. In an economy of subsistence agriculture and trading, millions (up to one third of a population of 27 million) have been internally displaced or rendered refugees. One third of all farms have been vacated. Close to 70% of all villages are demolished. Unemployment - in a mostly unskilled workforce of 11 million - may well exceed 50%. Poverty is rampant, food scarce, population growth unsustainable. The traditional social safety net - the family - has unraveled, leading to widespread and recurrent famine and malnutrition. The mainstays of grazing and cattle herding have been hampered by mines and deforestation.
The Taliban regime has been good to the economy. It restored the semblance of law and order. Agricultural production recovered to pre-Soviet invasion (1978) levels. Friendly Pakistan provided 80% of the shortfall in grain (international aid agencies provided the rest). The number of heads of livestock - the only form of savings in devastated Afghanistan - increased. Many refugees came back.
Urban workers - mostly rural labourers displaced by war - fared worse, though. As industries and services vanished and army recruitment stabilized with the Taliban's victories, salaries decreased by up to 40% while inflation picked up (to an annual average of 20-25%, as reflected in the devaluation of the currency and in the price of bread). More than 50% of the average $1 a day wage of the casual, unskilled, worker, are spent on bread alone!
But this discrepancy between a recovering agricultural sector and the dilapidated and depleted cities led to reverse migration back to the villages. In the long term it was a healthy trend.
Paradoxically, the collapse of the central state led to the emergence of a thriving and vibrant private sector engaged in both legal and criminal activities. Foreign exchange dealing is conducted in thousands of small, privately owned, exchange offices. Rich Afghani traders have invested heavily in small scale and home industries (mainly in textiles and agri-business).
In some respects, Afghanistan is an extension of Pakistan economically and, until recently, ideologically. Food prices in Afghanistan, for instance - the only reliable indicator of inflation - closely follow Pakistan's. The Afghan currency (there are two - one issued by the Taliban and another issued by the deposed government in Faizabad) is closely linked to Pakistan's currency, though unofficially so. The regions closest to Pakistan (Herat, Jalalabad, Kandahar) - where cross border trading, drug trafficking, weapons smuggling, illegal immigration (to Western Europe), and white slavery are brisk - are far more prosperous than the northern, war-torn, ones (Badakhshan, Bamyan). The Taliban uses economic sanctions in its on-going war against the Northern Alliance. In 1998-9, it has blockaded the populous provinces of Parwan and Kapisa.
Another increasingly important trade partner is Turkmenistan. It supplies Afghanistan with petrol, diesel, LNG, and jet fuel (thus reducing Afghani dependence on hostile Iranian supplies). Uzbekistan and Tajikistan, its two other neighbours, are considered by the Taliban to be enemies. This enmity results in much higher costs of transportation which price out many Afghan products.
With Pakistan, Afghanistan has an agreement (the Afghan Transit Trade) which provides the latter with access to the sea. Afghanistan imports consumer goods and durables through this duty free corridor (and promptly re-exports them illegally to Pakistan). Pakistani authorities periodically react by unilaterally dropping duty free items off the ATT list. The Afghans proceed to import the banned items (many of them manufactured in Pakistan's archrival, India) via the Gulf states, Russia, Ukraine (another important drug route) and into Pakistan.
|Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review"||Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review"|
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