* Surprise at suggestion of recapitalising state gas firm
* Funding might come from National Wealth Fund - sources
* Risks seen to rouble and sanctions-hit economy
* Putin says could use gold/forex reserves to buy shares
(Adds Putin says government share purchases an option)
By Katya Golubkova, Lidia Kelly and Denis Pinchuk
MOSCOW, June 6 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.
During the 2008 global financial crisis, Russia haemorrhaged
about $200 billion, or a third of its reserves, to prop up the
Following a landmark $400 billion agreement last month to
sell natural gas to China, Russian officials estimate Gazprom
now needs some $55 billion to build up pipelines and bring two
giant fields - Kovykta and Chayanda - on stream.
It was against that background that Putin told an energy
industry conference that a recapitalisation could help Gazprom
pay for the required infrastructure.
"It came as a total surprise to us," said an aide to one of
the participants at the meeting.
"VERY HARD YEAR"
Hit by Ukraine-related sanctions that have triggered nearly
$70 billion in capital outflows so far this year, the Russian
economy is expected to grow only by around 0.5 percent in 2014,
compared to an initial government forecast of 2.5 percent.
The rouble is 5 percent down since the start of the year
against the dollar. Even after rebounding from a steep fall when
Russia annexed Ukraine's Crimean peninsula in March, it is
still underperforming other currencies in the BRICS group of
The leaders of Russia and Ukraine met on Friday for the
first time since Moscow annexed Crimea, even as fighting
continued in eastern Ukraine between government forces and
"This crisis is much worse than in 2008. At that time,
everyone was in the same boat. Now it's only Russia, and
everyone wants to sink it in addition to dealing with their own
problems," said a senior banker from a Russian state-owned bank.
"It will be a very hard year."
Ukraine-related volatility has brought a spike in borrowing
costs for Russian companies, leaving the domestic market or the
government to serve all the needs of Russia's $2 trillion
economy unless Moscow can raise funds in Asia.
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
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
"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
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.
LACK OF DETAIL
Ksenia Yudayeva, first deputy governor at the central bank,
declined to comment on the recapitalisation plan when approached
at a conference in London on Thursday. Gazprom and the Energy
Ministry also declined to comment, while the Finance Ministry
would not return calls.
Kremlin spokesman Dmitry Peskov, asked to explain Putin's
remarks, told Reuters the issue needed to be discussed further.
Rosneft boss Igor Sechin, viewed as the most
powerful Russian energy executive, told reporters on Thursday
that Gazprom's recapitalisation is "a rational and very right
idea", and that Rosneft might take part in the process.
"There was a talk of possible pension money, reserves," he
said. "We will look into it if we are asked to. But I think it
is better to use those sources."
The idea also won support from Evgeny Gavrilenkov, economist
at state-run Sberbank, who said the Gazprom money was a
political price Russia needed to pay.
"Looking at geopolitics, sanctions, the supportive message
is needed that there is this money, and in reality, it is
there," he said.
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
Amid the doubts, confusion and lack of further detail from
the government, Merrill Lynch analysts suggested the whole idea
may be quietly buried.
In a note, they said: "We spoke to Gazprom, who said they
are confident this initiative gets forgotten about quickly."
(Reporting by Katya Golubkova, Lidia Kelly and Denis Pinchuk;
additional reporting by Oksana Kobzeva, Vladimir Soldatkin,
Olesya Astakhova, Alexei Anishchuk, Elizabeth Piper, Vladimir
Abramov in Moscow, Sujata Rao in London and Aleei Anishchuk in
Deauville, France; writing by Katya Golubkova; Editing by Mark
Trevelyan and Philippa Fletcher)