Gazprom: Investors Wanted

Russian natural monopoly Gazprom is making the headlines again – but this time its not the Russia-Ukraine-EU oil “crisis.”  This week, Gazprom opened its doors to foreign investors.  The result?  It now surpassed Wal-Mart and Procter and Gamble to become one of the world’s 10 largest companies. Although there are others, one of the reasons the prices of its shares have been soaring is that the restrictions put on foreign investors by the Russian government have been lifted.

Gazprom, after all, isn’t just any company. With hydrocarbon reserves equivalent to 119 billion barrels of oil and a market capitalization of $150 billion, Gazprom, which is 51% state-owned, is the world’s largest listed energy company in terms of reserves and the biggest company in emerging markets by capitalization. Yet thanks to legal restrictions imposed by the Russian government in 1997, international investors couldn’t get their hands on it.Dubbed the “ring fence,” the restrictions prevented foreigners from buying Gazprom shares traded on Russian exchanges. The only way they could legally acquire Gazprom shares was by buying American Depositary Shares (ADS) traded in London, which accounted for just 3.5% of Gazprom’s equity. The resulting scarcity meant the ADSs were more expensive than the locally traded shares, at one time trading at a premium of almost 100%. Their absence from the main U.S. exchanges also helped to deter American investors.

But does this “ring fence” created by the Russian government really meant that foreign investors were not able to buy significant amount of Gazprom shares (were limited to only 3.5%)?  If you say “Yes”, then you don’t know Russia.

True, many foreign investors evaded the restrictions through so-called “grey schemes” tolerated by the Russian authorities. For example, a Russian entity would buy local Gazprom shares and then give foreigners an opportunity to gain indirect access by selling shares in itself. As a result, some 15% to 20% of Gazprom stock was estimated to be in foreign hands last year. But such schemes tended to appeal mainly to investors specializing in Russia. Mainstream investors such as large mutual funds were put off by the complexity and legal risks.

The existence of these “grey schemes” [not only in Gazprom case but in the economy as a whole] has certainly hurt Russia in the past, and the removal of restrictions on investors is bound to improve transparency and increase the credibility of Gazprom, although much more needs to be done.  The Russian government will certainly keep its 51% stake in the company and the political involvement in Gazprom is unlikely to decrease, however, it will continue to take the necessary steps to bring in investors and make the company one of the world’s most influential economic entities.  At least for now – the market has been rewarding the company for its moves.  Time will show how speculative these rewards have been.
 

Published Date: January 13, 2006