Putin says Gazprom may need new capital after China deal

ASTRAKHAN Russia Wed Jun 4, 2014 1:07pm EDT

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ASTRAKHAN Russia (Reuters) - President Vladimir Putin said on Wednesday that Russia should consider recapitalizing state gas company Gazprom after a $400 billion deal with China which will require multi-billion-dollar investments in pipelines and new fields.

"The government and finance ministry should consider the possibility of recapitalizing Gazprom in the amount needed to build up new infrastructure," Putin said at a meeting on energy strategy in the southern city of Astrakhan.

Boosting Gazprom's capital would put additional pressure on the Russian economy, already slowing due to a lack of reforms and following Western sanctions on Russia over its annexation of Crimea, which have weighed on the rouble and triggered capital outflows.

Russian authorities have estimated that the 30-year China deal could add 0.3-0.4 percentage points to economic growth annually from 2015. The economy is likely to grow by around 0.5 percent this year, the central bank said.

The $400 billion deal, signed during a visit by Putin last month, secured a major source of supply for China, the world's top energy user, and opened up a new market for Moscow, which risks losing European customers over the Ukraine crisis.

Russia plans to invest $55 billion in exploration and pipeline construction to China's border, and China's CNPC said it would build the Chinese section of the pipeline. A Gazprom executive said China would provide a $25 billion pre-payment.

Putin did not say how exactly Gazprom could be recapitalised but hinted it could be done from Russia's gold and foreign exchange reserves.

"In the modern world, endless increases in gold and foreign exchange reserves hold some risks as well," Putin said, adding that the Chinese contract was certain to recoup the investments in the long run.

Russia's gold and foreign exchange reserves, the world's fourth largest, stood at $468.4 billion as of last week, down almost $41 billion since the start of the year because of market volatility caused by the Ukraine crisis.

For now, Europe is Gazprom's key export market. The continent gets a third of its gas needs from Moscow, and about half of this is pumped via Ukraine.

Moscow and Kiev are in the middle of their third gas row in a decade, which also threatens to disrupt supplies to Europe.

CALL TO CUT RELIANCE

Following the annexation of Crimea from Ukraine in March, the United States and European Union imposed sanctions on Moscow, spurring talk of a need to diversify the Russian economy, including its financial and energy sectors, away from the West.

Putin told the meeting Russia should reduce reliance on foreign equipment in the energy sector and step up efforts to exploit oil and gas in Siberia and Russia's Far East, which borders China.

"Import substitution is not a panacea for all the problems but we understand that it may allow us to guarantee the implementation of many projects," Putin said, adding that Russia would not halt imports altogether.

Russian energy companies have so far said that Western sanctions have not affected their cooperation with global energy majors such as ExxonMobil and Royal Dutch Shell.

Oil production in Russia, the world's top crude producer, has fallen for five months running, highlighting the need to explore for unconventional resources and remote fields, where foreign know-how is most needed.

Gazprom Neft, Russia's No.4 oil producer, has already said it may look to domestic or Asian suppliers for drilling rigs if needed.

Some companies admit there could be risks in borrowing abroad because of sanctions.

Igor Sechin, CEO of Russia's state oil producer Rosneft, publicly acknowledged this for the first time on Wednesday when he told Putin the company faced potential risks both in borrowing abroad and implementing its foreign projects.

Sechin, although not Rosneft, is on the U.S. sanctions list as a close ally of Putin.

(Reporting by Vladimir Soldatkin; Writing by Katya Golubkova; Editing by Mark Trevelyan)

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