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. Last Updated: 07/27/2016

UES: Gazprom Spent $2Bln on Shares

Gas monopoly Gazprom has spent $2 billion accumulating stakes in power monopoly Unified Energy Systems and its Moscow regional utility unit Mosenergo, a top UES official said Thursday.

The gas giant's expansion into the power sector has stirred Russia's equity markets and worried reformers and regulators, but UES board member and deputy chief executive Sergei Dubinin told an industry conference that he welcomed Gazprom's move.

Asked whether the expansion of one state monopoly into another was good for the development of a market economy in Russia, he replied: "I believe Gazprom will only help reforms in the power sector ... and have a better understanding of our needs."

Analysts say Gazprom now owns 10 percent of UES and has built up a stake of 30 percent in loss-making Mosenergo, owned 51 percent by UES.

UES official Vasily Zubakin confirmed at the conference on Wednesday Gazprom had a blocking stake in Mosenergo -- equal to 25 percent plus one share -- that is worth $1 billion.

"I don't see why we should view the arrival of a company like Gazprom into the power sector negatively," Dubinin said.

Government reformers and fund managers disagree, saying the combination of two separate wasteful monopolies in need of huge investments will not generate more cash for shareholders.

Analysts had regarded the much-delayed restructuring of UES as a benchmark for a shakeup at Gazprom, which has now been shelved.

"What's happening with Gazprom is the symptom of the absence of reforms," said Ivan Mazalov, analyst at Moscow-based fund management firm Prosperity Capital.

Mazalov calculated that a 10 percent stake in UES alone had cost Gazprom around $1.4 billion.

"Basically, Gazprom scooped 10 percent from everyone's gas bill to purchase UES. I don't think this should be the purpose of this regulated monopoly," he said.

"These companies don't really have any profit-maximization incentive. The more they spend, the more they can argue they don't have enough funds and the more they will argue they'll need higher tariffs. This is just a vicious circle."

Gazprom, the world's largest producer of natural gas, is Russia's biggest hard-currency earner and supplies more than a quarter of Europe's gas needs.

A blocking stake in Mosenergo would give Gazprom influence over the utility's restructuring and could help it gain control over some of the spinoffs.

Mosenergo supplies nearly all of the power for Moscow and the nearby region, as well as 70 percent of the capital's heat. It generates about 7 percent of Russia's electricity.

"The single biggest boost to Russia's economic growth is going to come from restructuring the gas sector," Mazalov said. "The longer it will take to solve Gazprom's issues, the more economic value will be wasted for this country."