- President Vladimir Putin's idea of a massive boost to Gazprom's share capital has taken bankers and the energy industry by surprise, with some fearing it could further strain Russia's sanctions-hit economy and undermine the rouble.
Putin floated the unexpected suggestion on Wednesday, hinting that a recapitalisation of the state gas giant could be funded from Russia's gold and foreign currency reserves. Since then, sources have suggested the money could come from a 'rainy day' fund meant to cover the state pension deficit.
On Friday he elaborated on the idea, saying the state could buy into a possible Gazprom share issue with the reserves, but adding that it was just one of several options.
The Kremlin has declined to give details of the plan, and analysts are questioning not only how it would be implemented, but whether Gazprom actually needs the extra funds at all.
"The Gazprom story is rouble-negative. The use of forex reserves to recapitalise Gazprom will decrease the safety cushion held by the central bank," said Tatiana Orlova, strategist at RBS in London.
Russia's gold and forex reserves, the world's fourth largest, have shrunk by $42 billion since last year to $466.9 billion, mostly due to central bank intervention to curb the rouble's fall since the crisis over Ukraine erupted.
"Reserves are needed to support the rouble. We should not forget about 2008 when oil prices more than halved... I think this is a very tricky path," said Sergei Zhavoronkov of the Moscow-based Gaidar Institute for Economic Policy.
It was against that background that Putin told an energy industry conference that a recapitalisation could help Gazprom pay for the required infrastructure.
Analysts, business and government sources asked by Reuters about the Gazprom idea said a recapitalisation could be carried out via loans from state entities or by government purchases of new shares.
Putin mentioned a possible share issue on Friday.
"If the construction costs roughly $55 billion, maybe more, this is a fail-safe option for investing money," he told journalists when asked about the possible recapitalisation during a visit to France for D-Day commemorations.
But he added: "This is just one of the possible options. There are others."
Under current law, the central bank cannot invest its reserves in equity.
Several sources told Reuters the cash could come from one of Russia's 'rainy day funds' that have amassed windfall oil revenue.
"There is an understanding that either the Reserve Fund or the National Wealth Fund" will be used, said a government source. Both are managed by the Finance Ministry and their foreign currency holdings are part of the central bank's reserves.
But by law, the Reserve Fund can only be used to cover budget deficit or repay national debt - so unless there is a change in legislature, the Wealth Fund seems the more likely option. As of June 1, the fund stood at $87 billion, or 4 percent of Russia's gross domestic product.
The fund, which would have little left if Gazprom received all $55 billion, is essential to finance the Pension Fund deficit, which came to $27 billion last year. The need for state support is expected only to grow as Russia's 143-million population is ageing, and 40 million are pensioners already.
Other analysts, however, pointed to the relative low debt of Gazprom, a company often referred to as Russia's "national heritage", and the lack of apparent obstacles to raise new debt.
Putin suggested this was an option. "There's no doubt that with such a long-term ... contract, Gazprom can easily raise money on the market," he said on Friday.
Furthermore, Russia and China have agreed in principle that Beijing will make a $25 billion pre-payment under their gas deal, according to Alexander Medvedev, chief executive of Gazprom Export, which could be used for new infrastructure.
Putin mentioned this as well, saying that it would "in essence make the project substantially less costly."
"Gazprom could manage without recapitalisation," said Ivan Mazalov, a director at Prosperity Capital Management, a Gazprom shareholder. "There are no grounds for share issue. They have good cash flow and debt is at adequate level."
A banking source told Reuters that Gazprom may do a "small" borrowing operation in Chinese yuan this autumn to test Asian appetite for possible bigger deals.
"It has $20 billion of cash and cash equivalents on its balance sheet, generates $55 billion in operating cash flow and has a 0.9 debt/EBITDA ratio. So the company has enough cash to finance its Eastern programme, we believe," VTB Capital said in a note.
Amid the doubts, confusion and lack of further detail from the government, Merrill Lynch analysts suggested the whole idea may be quietly buried.
Source: Reuters
Putin floated the unexpected suggestion on Wednesday, hinting that a recapitalisation of the state gas giant could be funded from Russia's gold and foreign currency reserves. Since then, sources have suggested the money could come from a 'rainy day' fund meant to cover the state pension deficit.
On Friday he elaborated on the idea, saying the state could buy into a possible Gazprom share issue with the reserves, but adding that it was just one of several options.
The Kremlin has declined to give details of the plan, and analysts are questioning not only how it would be implemented, but whether Gazprom actually needs the extra funds at all.
"The Gazprom story is rouble-negative. The use of forex reserves to recapitalise Gazprom will decrease the safety cushion held by the central bank," said Tatiana Orlova, strategist at RBS in London.
Russia's gold and forex reserves, the world's fourth largest, have shrunk by $42 billion since last year to $466.9 billion, mostly due to central bank intervention to curb the rouble's fall since the crisis over Ukraine erupted.
"Reserves are needed to support the rouble. We should not forget about 2008 when oil prices more than halved... I think this is a very tricky path," said Sergei Zhavoronkov of the Moscow-based Gaidar Institute for Economic Policy.
Putin mentioned a possible share issue on Friday.
"If the construction costs roughly $55 billion, maybe more, this is a fail-safe option for investing money," he told journalists when asked about the possible recapitalisation during a visit to France for D-Day commemorations.
But he added: "This is just one of the possible options. There are others."
Under current law, the central bank cannot invest its reserves in equity.
Several sources told Reuters the cash could come from one of Russia's 'rainy day funds' that have amassed windfall oil revenue.
"There is an understanding that either the Reserve Fund or the National Wealth Fund" will be used, said a government source. Both are managed by the Finance Ministry and their foreign currency holdings are part of the central bank's reserves.
But by law, the Reserve Fund can only be used to cover budget deficit or repay national debt - so unless there is a change in legislature, the Wealth Fund seems the more likely option. As of June 1, the fund stood at $87 billion, or 4 percent of Russia's gross domestic product.
The fund, which would have little left if Gazprom received all $55 billion, is essential to finance the Pension Fund deficit, which came to $27 billion last year. The need for state support is expected only to grow as Russia's 143-million population is ageing, and 40 million are pensioners already.
Putin suggested this was an option. "There's no doubt that with such a long-term ... contract, Gazprom can easily raise money on the market," he said on Friday.
Furthermore, Russia and China have agreed in principle that Beijing will make a $25 billion pre-payment under their gas deal, according to Alexander Medvedev, chief executive of Gazprom Export, which could be used for new infrastructure.
Putin mentioned this as well, saying that it would "in essence make the project substantially less costly."
"Gazprom could manage without recapitalisation," said Ivan Mazalov, a director at Prosperity Capital Management, a Gazprom shareholder. "There are no grounds for share issue. They have good cash flow and debt is at adequate level."
A banking source told Reuters that Gazprom may do a "small" borrowing operation in Chinese yuan this autumn to test Asian appetite for possible bigger deals.
"It has $20 billion of cash and cash equivalents on its balance sheet, generates $55 billion in operating cash flow and has a 0.9 debt/EBITDA ratio. So the company has enough cash to finance its Eastern programme, we believe," VTB Capital said in a note.
Amid the doubts, confusion and lack of further detail from the government, Merrill Lynch analysts suggested the whole idea may be quietly buried.
