Before the financial crisis, Gazprom CEO Alexi Miller boasted that his firm would be the first $1t market cap firm. Six years on, he’s only off by an order of magnitude: the company’s market cap is around $100 billion. Moreover, it sells for a comical 3x earnings (a little less, actually). The company’s capex is notoriously inefficient, and it is frequently cash flow negative. Other than that, it’s a financial marvel.
But that big China deal must surely have provided a boost for the company, right?
Apparently not. The other day Putin mooted the possibility that the company would have to be recapitalized by the state, i.e., receive an additional injection of capital from one of the state investment funds.
If the China deal were indeed favorable to Gazprom, it would have no problem financing the necessary investment in pipelines and greenfield production through the banks and/or the capital markets, rather than through the state. Putin’s suggestion of state funding strongly suggests that the economics and the risks of the deal are not favorable, and the necessary investments could not be funded externally: direct state funding would also suggest that Russian state banks are either unwilling or unable to fund it (or both), which speaks ill for the economics of the deal, and perhaps the financial strength of the banks. A further implication of this is that politics rather than economics was the main driver of the deal (if it exists, in fact), and that as a project intended to achieve state objectives, the state must fund it.
Reinforcing this perceived need for state rather than external funding is the fact that obtaining outside funding would require Gazprom to divulge many more details of the deal than it has so far. This would be highly embarrassing to Putin and the government and Gazprom if these details show that Russia got the short end of the stick. So keeping the details out of public view by avoiding outside funding also suggests that there is something to hide, namely, that the Chinese exploited Putin’s needs.
If the government indeed recapitalizes Gazprom, it will be just the latest of a long line of economic policy failures. Another example of where politics or corruption/rent seeking has prevented Russia from putting its natural resource firms on a commercially sensible footing, and another example of where state funds that were generated by resource rents in the first place were ploughed back into inefficient state-controlled resource producers, rather than to help diversify the Russian economy.
This, my friends, is Putinomics. This is why Russia will remain on the hamster wheel from hell.