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A Gazprom 50% dividend payout changes the game

Needing money, the Kremlin wants state-controlled firms to raise dividends again. It’s a risky move for investors

The Russian government is considering hiking dividends paid by Gazprom and other state-controlled companies to 50% of profits as part of a push to plug a gaping hole in its budget.

Such a move to double the pay-out made by energy monopoly Gazprom under International Financial Reporting Standards (IFRS) should send stock prices surging as well as help feed the budget. But foreign portfolio managers have been spun this “investor friendly” story before, and should be wary.

The government has been gradually raising the level of dividend payments since the beginning of the decade but plans to radically increase pay-outs were announced in early 2013 when Russia was still trying to transform Moscow into a serious financial centre by luring in more long-term capital. The finance ministry then proposed to increase the minimum threshold of dividends of state companies to 35% of IFRS profits, but the proposal was ultimately not supported by the government.

Current finance minister Anton Siluanov has set out his stall and said proposed budget estimates for 2016 already account for dividends from all state-owned companies to the tune of not less than half of net profits under IFRS. The move, which could rake in an additional R110bn ($1.5bn), was proposed by the Federal Property Management Agency late last year and also has the backing of economy minister Alexei Ulyukaev. There will be no exceptions to the rule, according to Siluanov.

The finance ministry is facing a budget deficit this year of R2.4 trillion, based on an average (and optimistic) oil price of $50 a barrel. That deficit will mainly be covered by one of Russia's sovereign wealth funds, the Reserve Fund. But its value had shrunk to $50bn by 1 March, from $70bn in October.

If the budget deficit widens, the government will have to look at other funding options. The finance ministry is fighting to complete a $3bn sovereign Eurobond sale as the US Treasury applies pressure on US and European banks to pull out of the syndicate. A lukewarm reception by investors to the prospect of more privatisations, including selling a stake in oil major Rosneft, may make the dividend play seem more attractive.

Painful to pay

An increased dividend payout will put a large dent in the capex programme of these state companies, which also have to contend with the possibility of increased taxation.

Meanwhile, other officials have indicated that the government would look at companies' capital expenditure requirements on a case-by-case basis to determine achievable pay-out ratios before the onset of the annual-general-meeting season in early summer.

The main payers, which include Gazprom, Rosneft, Bashneft and Alrosa, have so far reacted to the new dividend proposals with restraint.

Bashneft, which was renationalised in December 2014, is “not scared” about the prospect of dividends being doubled, according to its president Alexander Korsik. The company is obliged to pay dividends worth R20bn for 2015, which corresponds to 46% of net profit under IFRS for 2014, he said.

State companies presently have a choice between paying 25% of net income calculated on the basis of the IFRS accounting or 35% using Russian Accounting Standards. But pressure has been applied by Siluanov and former finance minister Alexei Kudrin to get state companies to migrate to IFRS to improve the quality of reporting. In most cases, state companies can get away with paying smaller dividends if they stick with RAS but the Federal Property Agency is now trying to nix many of the exemptions and force more companies to use the IFRS standard.

Rosneft, Russia’s largest oil company, has already switched to calculating dividends under IFRS in 2014 but Gazprom and oil pipeline monopoly Transneft persist with using RAS.

Gazprom seems to support the idea of paying higher dividends under IFRS in principle. “We support anything that is beneficial to our shareholders, but the discussion is more than 10 years old and there is still no decision from the state,” the firm’s deputy director, Igor Shatalov, told an investor day in February.

Gazprom paid out an IFRS dividend ranging from 9-16% from 2010 to 2013. Last year, the monopoly maintained its dividend at R7.2 a share, which worked out as 107% of IFRS profits due to its huge loss on foreign exchange.

The finance ministry’s proposal has yet to be ratified, so investors have time get involved as the record dates fall between June and July; and the bulk of the payments will be made by August.

A move to double Gazprom’s dividends under IFRS was described by analysts at Citigroup in a February 29 report as “a potential game changer.” But questions remain as to whether it will happen – or if it will be temporary fix until energy prices scrape higher.

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