Russian state companies retain escape clause in proposed order for 35% dividends

By bne IntelliNews May 13, 2013

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The Russian government is mulling an order that would oblige state-controlled companies to raise dividends further, as it seeks funds to help balance the budget, according to reports. However, officials and analysts question the effectiveness of the move unless companies are forced to report their financial results according to international standards.

The ministry of finance proposal to increase the dividend minimum to 35% of earnings is set to be discussed at a meeting with President Vladimir Putin this week, according to Bloomberg. However, analysts worry that the ongoing effort to get Russia's giant state companies to raise their payouts is meaningless without setting a concrete basis for calculating profit.

The government obliged state-controlled companies to payout 25% of net profit in November. However, while such an order would clearly be met with a spike in investor interest in the affected stocks in most markets, that did not materialize in Russia's low-valued equities, because the legislation allows companies to wriggle out of most dividends.

Both the 25% requirement and the mulled new 35% demand fail to insist that dividends are based on IFRS reporting standards. The vital point is that the alternative Russian Accounting Standards (RAS) do not have to be consolidated, meaning companies can leave the profit of subsidiaries out of the equation.

As analysts at VTB Capital point out, this makes a set requirement on a payout pointless. "This initiative is targeted at compensating for the lower than planned dividend income for the budget and signals the government's commitment to increasing the dividend receipt from state-owned companies, which is positive," they write. "At the same time, fixing a payout without fixing the base could only be a temporary measure. Vedomosti quoted a State Property Agency representative as saying that it would be better to keep the 25% threshold, but move gradually to IFRS net income as a base for calculating dividends."

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