Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Putin Tells Gazprom to Clean Up Its Act

President Vladimir Putin on Monday ordered gas giant Gazprom to take steps to increase its transparency and raise a cap on foreign ownership.

Putin also told a regular government meeting that it is high time to move Gazprom's stocks away from a two-tier system under which shares traded in Russia are sold at a large discount to American Depositary Receipts in Europe.

Markets greeted the president's comments as a much-needed sign that the government would finally tackle Gazprom's murky dealings and provide a more level playing field for Russian and foreign investors. Gazprom shares shot up 6 percent to close at 35 cents in Moscow. In London, ADRs fell 0.8 percent to $6.08.

Calling for "new energy" to be sunk into the liberalizing of Gazprom shares, Putin said a working group will be formed to come up with a plan within three months. The group is to be led by Dmitry Medvedev, the Kremlin's deputy chief of staff and the board chairman of Gazprom.

The plan should include a lifting of the curb on foreign ownership in the company from 20 percent to 40 percent, Putin said.

Currently, foreigners are prohibited from buying shares on the local market. Foreign ownership is estimated by analysts to amount to 11.5 percent, but the number is probably much higher because many foreigners invest through gray schemes that give them access to the cheaper local market.

This two-tier system, created by presidential decree, has been coined by market players as a "ring fence" that keeps foreign investors out of the Russian market.

Stock prices — both at home and abroad — have been suffering for the past few years, largely because of the ring fence that limits share liquidity and foreign investor enthusiasm.

"It's necessary to reexamine the situation, taking general development trends into account," Medvedev said of the trading system.

"Right now, the situation doesn't completely satisfy market players, shareholders and the government, which is also a shareholder," he said.

The government owns 38 percent of Gazprom.

Charges will be made by amendments to existing laws and presidential decree, Medvedev said.

Analysts cheered Putin for speaking out on Gazprom, Russia's largest company, controlling about 30 trillion cubic meters of natural gas reserves and produces about a quarter of the world's gas.

"This shows the particular way that Putin works," said Stephen O'Sullivan, oil and gas analyst for United Financial Group. "He holds these regular Monday morning Cabinet meetings and the process starts."

Even though the announcement is the latest in a long line of plans to change things around at Gazprom, this one is significant because it has the explicit backing of the president, O'Sullivan said.

Interestingly, the working group's proposals are set to be released in July, shortly after a Gazprom shareholders meeting set for June 29. Thus, the group's proposals will only be released after the old guard at Gazprom has had an opportunity to exit. Gazprom chief executive Rem Vyakhirev is expected to leave the company after his contract expires at the end of next month.

"The timing can't be a coincidence," O'Sullivan said.

The announcement's timing also signals that Putin wants to discuss Gazprom with German Chancellor Gerhard Schr?der, who arrived in St. Petersburg on Monday for talks with Putin, said Jonathan Stern, a gas expert with the Royal Institute for International Affairs.

But Putin most likely doesn't want Gazprom to be treated as an asset up for grabs in a discussion over a debt for assets swap, Stern said by telephone from London.

Germany is the largest importer of Russia's gas in Europe as well as its biggest trading partner. Out of the 130 billion cubic meters sold to Europe last year, a fourth was consumed by Germany. Ruhrgas, the German gas giant, owns 5 percent of Gazprom, and its vice president Burckhard Bergmann sits on Gazprom's board.

Earlier this month, Ruhrgas CEO Friedrich Spath told the Financial Times that he is looking to increase his company's stake in Gazprom to 8 percent to 10 percent.

"However, it's still early to talk about putting our thoughts into action," Bergmann told the Oil Information Agency after Putin's announcement on Monday.

But Schr?der will certainly be interested in any revamp plans that Putin has up his sleeve, Stern said.

"What few understand is that this is a multibillion-dollar industry," he said. "And most in the industry don't want to mess with its current structure. Germans get very nervous about the whole thing. What they don't like is uncertainty."