The market capitalization of OAO Gazprom smashed through $200 billion as the Russian gas giant prepared to list its shares on a major Moscow exchange.
Gazprom shares, which have so far been freely available only to local investors on small exchanges, have surged 26% this year after Russia lifted restrictions imposed during the chaotic post-Soviet period to protect the state-controlled company from a foreign takeover.
A recent dispute with its Ukrainian counterpart has further underpinned the investment case for Gazprom, which provides a quarter of Europe's gas and controls 15% of the world's proven reserves, as it presses Russia's ex-Soviet neighbors to pay market prices.
Gazprom shares rose 10% Thursday, hitting a record 244.70 rubles ($8.61), after Moscow's Russian Trading System, or exchange, said it would list Gazprom on Friday, making it accessible to more investors.
RTS previously partnered with the St. Petersburg exchange to offer ruble-denominated shares in Gazprom, but as of Friday trading will be conducted directly by RTS on its main dollar-denominated exchange.
The RTS benchmark index ended 3.2% higher Thursday, posting a new high of 1255.92, though Gazprom shares aren't likely to be included before an index reweighting, due in March. Each stock is limited to a 15% weighting, and that means Gazprom, with a value roughly as much as Russia's next four-biggest companies combined, won't dominate.
By contrast, Gazprom is expected to make up more than 40% of Morgan Stanley Capital International's Russia index, a key benchmark for emerging-market investors.
Gazprom also plans by the end of the month to list on Russia's other main stock market, the Moscow Interbank Currency Exchange, or Micex, and has said it may seek a New York listing and issue second-level American depositary receipts as it targets a market capitalization of $300 billion, surpassing that of BP PLC.
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Business Week Online January 13, 2006 Gazprom: Open for Global Investors Russia has finally lifted the "ring-fence" restrictions that kept foreign money away from the gas giant. Result: A soaring share price By Jason Bush
It's being called the "Big Bang" for the Russian stock market. Since Jan. 10, the first trading day since the end of Russia's New Year holiday, foreigners have been free to buy into Russia's largest company, national gas concern Gazprom, without restrictions. It's a day long awaited by foreign investors in Russia. "The most important impact is that nearly every investor in the world who wanted to invest in Gazprom couldn't until now," says William Browder, CEO of Hermitage Capital Management, the largest portfolio investor in Russia.
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.
INDEX EFFECT. 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.
An even bigger deterrent was the effect the ring fence had on the composition of key indexes tracked by the large investment funds. Only the internationally traded ADSs were included in estimates of Gazprom's free float. Last year, Gazprom's weighting in the Morgan Stanley Capital International (MSCI) Emerging Markets Index, a key emerging-market benchmark used by large investors, was just 0.4%. That's now due to increase nearly tenfold, to 3.7%, reflecting the increase in Gazprom's free float to around 40%. Gazprom's weighting in the MSCI Russia index, is set to increase from 6.3% to 42.8%.
Gazprom's stock has soared with the removal of the restrictions, rising by 24% in the first three trading days. The daily volume of Gazprom share trading has also surged, to some 80 million to 90 million shares per day, three times higher than a typical day's trading last year, according to Alexei Dolgikh, a trader at Moscow investment bank Troika Dialog. "We're seeing very big buying power, a lot of new money," says Dolgikh.
WEIGHT ADJUSTMENT. The run-up is even more impressive, because for the last year, Gazprom's stock price has already registered impressive gains. Last year, the share price surged by 145%, as those investors able to buy snatched up Gazprom shares in anticipation of the ring fence's removal.
Many believe the prospect for further increases is good. Russia's two largest exchanges, the Russian Trading System (RTS) and Moscow Interbank Currency Exchange, have yet to begin trading Gazprom shares (the RTS is due to launch trading on Friday, Jan. 13). And it will still be a few more weeks until Gazprom shares start trading in the U.S. in the form of level-1 American Depositary Receipts (ADRs).
Finally, one of the most important effects of the ring fence's removal -- the revision of Gazprom's weighting in the MSCI index -- won't be completed until May. "When they make that adjustment, it should lead to one-off demand of around $8 billion from [large mutual] funds. That's one of the drivers of the share price," says Chris Weafer, head of research at Russia's Alfa-Bank. He adds that once the new weightings take effect, even the most conservative investors, such as large U.S. pension funds, will find it hard to ignore Gazprom and Russia.
POLITICAL INFLUENCE. Not everyone, though, is so bullish. Some analysts caution that Gazprom is now starting to look expensive measured against its current earnings. Yet Browder of Hermitage points out that Gazprom trades at around $2 per barrel of reserves, eight to nine times less than BP (BP ) or ExxonMobil (XOM ). "The asset valuation of Gazprom is still dramatically lower than any other major hydrocarbon company in the world," he says.
Separately, questions remain regarding Gazprom's corporate transparency. Despite the company's recent efforts at portraying itself as an independent entity, rather than an arm of the Kremlin, it's clear that its business, both at home and abroad, is affected by Russia's murky politics.
Indeed, at the same time the ring fence was being lifted, Gazprom caused a major stir internationally by cutting off gas supplies to Ukraine. The move briefly caused shockwaves in Western Europe, Gazprom's key export market, where the interruption of supplies may spur long-term efforts to diversify Europe's energy imports away from Russia.
A WAYS TO GO. But Gazprom's heavy-handed tactics -- obviously linked to political tensions between Russia and Ukraine -- don't seem to be fazing investors. They welcome Gazprom's efforts to raise gas prices in countries such as Ukraine, and switch gas exports to more lucrative Western markets.
"Investors see this as confirmation that Gazprom is being moved away from being a foreign aid program towards a commercial orientation," says Alfa's Weafer. However, it remains to be seen just how far Gazprom and the Russian government are willing to go to complete the modernization of the company. What's clear is that the long-awaited lifting of restrictions on foreign investment is a very large and welcome step in the right direction.
Nu, zayats, pogodi!
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