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. Last Updated: 07/27/2016

Gazprom Must Play Ball or Lose

The state gas monopoly Gazprom thinks of itself as the tough kid on the block, but it may have met its match.

Far and away Russia's biggest company, Gazprom answers to no one in Russia. It commands the allegiance of Gazprom old boy Viktor Chernomyrdin, it finances or owns large sections of the media and it has a stranglehold on whole regions and industries to which it supplies cheap gas.

This immovable object is now, however, coming up against an irresistible force in the form of international financial markets. For the first time, Gazprom has started to sell off its shares through a public offering now being prepared in London. Gazprom directors, used to ruling like feudal barons, are now sweet talking investors and hawking their stock in the City.

The reason for the change of heart is not a sudden infatuation with the West, but a desperate need for investment. The company itself says it will need $40 billion over the next 10 years to finance its operations, especially plans to build two huge pipelines from its gas fields in the Arctic North across Russia to Western Europe.

Despite its wealth and power, Gazprom has a lot of problems with bad debts and bad investments, and it will be hard pressed to raise $40 billion on its own.

The trouble is that while the City, Wall Street and the other financial centers of the world will have heard about Gazprom, they are unlikely to be impressed by a tough attitude. They have plenty of other places to invest and will expect Gazprom to show it really wants their money.

Investors have a basic shopping list of requirements: They want to see a free market in Gazprom shares, ending the veto that Gazprom directors have held on who buys and sells their stock; they want to get a clear picture of what they are buying, including fully audited financial statements; they eventually want some say in the way the company is run.

Gazprom is now paying for the fact that its directors have refused to play ball. Markets will only pay about $400 million for the 1 percent of its shares now on offer whereas Gazprom had hoped to raise three times that much.

While it may take comfort in ruling the roost in Russia, Gazprom will have to make much more serious concessions to market demands if it is to raise more money from another 8 percent of stock it plans to sell.

This all has broader consequences. If the markets do change Gazprom's ways, it will have consequences not only for investors but for Russia at large. For if Gazprom can be made accountable and understandable to shareholders, it will also be much easier for the government to handle.