Moscow considers legislation to squeeze dividends out of state companies

By bne IntelliNews March 12, 2012

Graham Stack in Moscow -

Russian ministries are mulling a move to legally require state companies to pay 25% of consolidated earnings as dividends. It's a move that could potentially revolutionize the investment case for some of the country's giant corporations.

The plan, under consideration by the Ministry of Finance and Ministry of Economy, may be made obligatory for all state companies, with exceptions granted only in the case of a special government decree signed by the prime minister, reports Vedomosti. Currently, there is a guideline policy for companies to pay out 25%, but no legal requirement and no enforcement to include subsidiaries, whilst many officials can approve exceptions.

Therefore, the proposal could prove radical for some state-owned giants that have traditionally retained a niggardly dividend policy, in particular oil pipeline monopolist Transneft, say analysts. Potentially paving the way for a flotation of a minority stake, the news led to a 6.2% jump in the company's shares on March 11 (the markets were open due to a national holiday on March 8 and 9), albeit on low trading volume.

The proposal could be "close to revolutionary" when it comes to the investment case for Transneft's preferred shares, according to VTB Capital analysts.

However, the devil, as ever, is likely to be in the details. The finance ministry is reportedly in favour of obligating companies to use IFRS accounting, thus automatically including subsidiaries' results when calculating the profit on which the payouts will be based. However, the economy ministry apparently wants to retain RAS (Russian Accounting Standards), but use the government's representation on company boards to ensure the inclusion of subsidiary profit.

There is currently a general policy of 25% payouts, but no legal obligation, and many companies only apply it under RAS, allowing them to calculate the 25% dividend solely based on the results of head office. That has allowed Transneft, for instance, to payout just 1% of its IFRS net income in past years.

There's no question Transneft can afford the $1.6bn that the 25% consolidated payout would require for 2011. The company is slated to earn at least $2bn in free cash flow in 2012 after years of heavy investment outlays, and is already sitting on a $9.5bn cash pile.

However, analysts at VTB still forecast resistance. "We expect that management will likely oppose this and point to its very active investment phase and extensive capex needs until 2015," they write. "We thus believe the chances that the government will grant an exception for Transneft are quite high."

At the same time, the new dividend policy would be truly remarkable if implemented in combination with a float of Transneft stock. Such a move has been mulled as part of the state's massive planned privatization drive, but with markets bombing due to the Eurozone crisis, question marks have been raised over the timing. Influential "energy tsar" and deputy prime minister, Igor Sechin, has called for a postponement until markets recover.

While most of the attention has focused on Transneft's possible transition to an investment-friendly company, state banks will also be affected, point out Troika Dialog analysts. "It is not clear whether Sberbank would be affected, given it is controlled by the Central Bank," they write in a note. "Ultimately, given its systemic importance, we imagine Sberbank would have strong bargaining power in this matter."

On the other hand, VTB could struggle due to a more precarious capital position. "Higher dividend payment requirements, if introduced, would be difficult for the bank given its already tight capital position, with its Tier 1 ratio at 9.2% as of [the first three quarters of 2011]," the analysts suggest.

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