Posted on 05/22/2005 3:58:07 PM PDT by Tailgunner Joe
MOSCOW (Reuters) - The emerging markets event of the year -- the opening up of share trading in the world's largest gas producer Gazprom -- is likely to be only partial and may be some time off yet, fund managers and analysts warned on Friday.
Gazprom (GAZPq.L: Quote, Profile, Research) this week said existing curbs on foreign buying of its stock will go by the end of the year after the state gets a controlling stake via a cash buyback of Gazprom treasury stock.
The latest plan, which sparked a jump in the share price, replaced an ill-starred attempt to merge Gazprom (GAZPPE.RTS: Quote, Profile, Research) with state oil firm Rosneft. But Rosneft also is set to play a central role in the new buyback plan.
The buyback will be done via a state-owned special purpose vehicle, Rosneftegaz, in which Rosneft will be parked. Rosneftegaz will raise the debt from international markets and repay it later by floating a minority stake in Rosneft.
Fund managers said the plan looked dodgy, because it relies on a Rosneft initial public offering.
Rosneft is saddled with $20 billion of debt after it borrowed heavily to buy Yuganskneftegaz, the prize unit of fallen major oil company YUKOS, which was seized in lieu of back taxes. The Yugansk acquisition also brought a high risk of litigation on the part of YUKOS shareholders.
A chunk of Yugansk's oil revenues have been mortgaged to the Chinese in a deal in which China lent Russia $6 billion.
Rosneft is also in technical default of an international syndicated loan secured to Yugansk's oil receivables, called in by Western banks and which it refuses to pay.
"The whole thing is a farce," said Martin Taylor, a hedge fund manager at London-based Thames River Capital, which runs $1.1 billion of assets but has no Gazprom exposure.
"The idea that Rosneft will have an international IPO in a Western sense with a prospectus is completely laughable."
Even if the money is raised, analysts fear it will disappear into the pockets of interest groups bankrolled by the so-called "siloviki" clan of ex-KGB men running the Kremlin.
LONGER AND ONLY PARTIAL Gazprom Chief Executive Alexei Miller said this week that curbs on foreign share ownership would be removed only when more than 50 percent of the company is directly owned by the state, which will happen only after the liquidation of Rosneftegaz.
"Until the government completes the Rosneft part of the deal, which we find the most challenging and likely to take the most time to complete, the ring fence (restricting foreign ownership) will remain in place," Aton brokerage analysts said.
"Investors should be aware that full ring fence removal may take a lot longer than expected, possibly extending into 2006."
Foreign investment in Gazprom equity currently is capped at 20 percent. Foreigners can freely trade only American depositary shares, which account for 3 percent of Gazprom stock and trade at a premium to local common shares.
In a television interview this week, Miller also promised "full liberalisation" of the company's share trading.
But fund managers reckon liberalisation will be partial, with the limits expected to be relaxed to 25 percent only.
"Ideally the government should remove all restrictions. But at first stage, they'll keep the cap for foreigners," said Oleg Jelezko, head of structured products at Renaissance Capital.
Liberalisation will turn Gazprom into a top emerging market global play following an upgrade of its weighting in Morgan Stanley Capital International benchmark emerging markets indexes.
But fund managers caution against any early euphoria.
"We won't know the full impact of liberalisation until it happens," said Ian Hague, a fund manager at Firebird, which has $1.2 billion of assets, with Gazprom its biggest holding in Russia.
Investors have already been burned once by the destruction of YUKOS under the weight of punitive tax claims, seeing its market value crash from a peak of $40 billion to $1 billion.
Taylor said investors won't be fooled this time.
"What they want us to do is to buy back the YUKOS that was stolen from us," he said. "It's like someone stealing your car and selling it back to you at the retail price. And they expect us to be pleased about that? The whole thing is pathetic."
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