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. Last Updated: 07/27/2016

Waiting for the Gazprom Boom

Shares in gas monopoly Gazprom could join the ranks of the most widely traded in the developing world if the government ditches restrictions on foreigners buying the stock, say analysts and fund managers.

President Vladimir Putin, who secured a second term in a landslide election win this month, is believed by some analysts to have already made up his mind to abolish curbs on foreigners investing freely in Gazprom.

If Russia goes ahead, it would give a boost to a stock market still in its infancy and could lead to an inrush of money as the world's leading fund managers stuff their portfolios with stock in the world's largest gas company.

"It would be a huge event for us," said Roland Nash, a strategist at Renaissance Capital in Moscow. "Suddenly it will take Gazprom from irrelevance to the second-most liquid stock in the emerging market universe."

Under a so-called "ring fence" arrangement, foreigners can only legally buy depositary shares in Gazprom, which supplies Europe with a quarter of its gas needs.

Freely floating depositary shares -- bundles of 10 ordinary shares which are listed abroad to facilitate foreign trading -- account for about 3 percent of Gazprom's shares and trade at a premium to local stock.

Germany's Ruhrgas also owns a small stake in the company and other foreigners are known to own local shares in a grey market. The shares are often held indirectly via investment companies whose sole assets are Gazprom shares.

Putin has hinted he wants to make Gazprom share-trading more transparent -- seen by many market players as a sign he is ready to scrap the ring fence -- and the government has done nothing to stifle market speculation that this is his ultimate aim.

"We believe that ... dismantling the ring fence -- the major obstacle to raising Gazprom's capitalization -- is on the government's to-do list," said UBS Brunswick in a research note.

Gazprom's local shares have risen 65 percent since the start of the year to $2.12 on Monday, driven by expectations of a surge in demand if the ring fence comes down.

The depositary shares were trading at around $39, up 50 percent since the beginning of the year.

Analysts say money could flood into the Russian market if the ring fence is completely scrapped. "Gazprom would become a proxy stock for Russia the way Petrobras is for Brazil," said Matthew Thomas, an analyst at Alfa Bank in London.

Gazprom is Russia's largest commercial enterprise, its shares are liquid and are widely held by domestic investors. It is seen as practically invulnerable because of its monopoly, which the government is unlikely to change any time soon.

International investors have expressed frustration at the limited range of shares listed on the Moscow stock exchange -- mainly oil and telecom stocks -- and say they do not fully reflect the scale and potential of the economy.

Russia's current weighting in the MSCI Emerging Markets index, used by fund managers to calculate their portfolio weightings, is 5.3 percent. That could rise to more than 7 percent if Gazprom share-trading were liberalized, analysts say.

China's oil and gas producer PetroChina is regarded as currently the most widely held emerging market stock.

However, Putin is unlikely to abolish limits on foreigners owning Gazprom shares until the government has direct control over at least 50 percent of the company, analysts said. It now owns only 38.37 percent of Gazprom.

"Russia cannot take any chances with Gazprom," said Eric Kraus, a strategist with Sovlink Securities in Moscow. "Gazprom provides a big chunk of the country's current account and budget surpluses, and it is a vital foreign policy tool."

Federal law forbids foreigners from owning more than 20 percent of Gazprom and would have to be amended in order for normal trading of Gazprom shares to take hold, analysts believe.

The government would need to show it had full control of Gazprom before asking the State Duma to change the law.

"To lift all restrictions, it would be necessary to demonstrate that the business could not be taken over by someone else," said Christopher Granville, chief strategist at UFG. "You have to show the state has control."

Analysts believe the authorities are weighing up various ways in which the government can raise its stake in Gazprom.

One option would be for 17.33 percent of Gazprom shares now held by the company's subsidiaries as treasury stock to be canceled, which would automatically increase the government's share to about 45 percent.

That would make it possible for the government to secure control by acquiring a further 5 percent on the open market.

"I think it's a certainty," Kraus said, referring to the likelihood of the ring fence's abolition. "Or at least as certain as anything can be in Russia."

But one analyst said the hopes were overstated.

"There is an element of wishful thinking in regard to a quick resolution of the ring fence," said Ivan Mazalov, at Property Capital Management. "Whenever I see Putin's on-the-record comments on this, he has always been ambiguous."