Putin's Gas Giant Puts Church and State Above Investors

(Bloomberg) -- In Vladimir Putin’s economic pecking order, investors in state-run Russian companies often come after church, country and even sports.

The board of gas giant Gazprom PJSC approved raising this year’s target for charitable donations 60 percent to a record 26.3 billion rubles ($438 million), bucking calls by minority shareholders to rein in costs, according to an internal document seen by Bloomberg. A company official, who asked not to be identified because the information isn’t public, confirmed the figure.

The biggest beneficiaries of the largesse include Russia: My History, a national chain of patriotic theme parks backed by the Kremlin and the Russian Orthodox Church, and sports enthusiasts in the Siberian city of Irkutsk, where the company built a training complex with an Olympic-size swimming pool.

The Moscow-based company has long frustrated investors by funding projects that make little economic sense, from supplying grain to North Korea in 2011 to building ski resorts for the Sochi Winter Olympics. Raising charity spending to the level of Exxon Mobil Corp., a U.S. peer with double the sales and seven times the market value, will likely undermine hopes the company is serious about cutting outlays, according to Pavel Kushnir, a Deutsche Bank AG analyst.

“For people like myself who believe cost control at Gazprom is improving, this increase in non-core expenditures is certainly negative news,” Kushnir said. “For those who have never changed their view that Gazprom is an inefficient company -- and unfortunately that’s the majority -- this news changes little.”

Gazprom, which has spent hundreds of millions of dollars turning its professional soccer club, Zenit St. Petersburg, into a national champion while also sponsoring German and Serbian teams, said it’s serious about curbing costs. Excluding “one-offs” like Russia: My History and the Irkutsk facility, donations this year will be less than last, its press service said.

Spending on ‘Others’ 

“Investors are pricing in such unorthodox spending and occasional favors for the state,” said Chris Weafer, a partner at Macro Advisory in Moscow. “We saw the practice widely used to fund the Sochi Winter Olympics and nobody expects this to change for the foreseeable future.”

Gazprom’s stock has fared the worst among Russia’s biggest oil and gas companies over the past three years, falling some 7 percent, compared with gains of about 60 percent and 45 percent for Lukoil PJSC and Novatek PJSC, the country’s biggest non-state oil and gas producers.

That’s due in part to a surge in the company’s reporting line that worries investors most -- “others,” which usually includes consulting, advertising and charity. Outlays in this category jumped 18 percent in the first half to 178 billion rubles. Gazprom doesn’t provide a full-year forecast for these costs.

Investors have also been put off by the company’s opposition to a Finance Ministry plan to boost dividends of state-run companies to half of net income. Gazprom paid out just 20 percent of profit for 2016, citing higher taxes and infrastructure investments, mainly in new export pipelines.

Gazprom said “most” of the increase in this year’s donations went to Russia: My History and the sports center in Irkutsk, a city of 624,000 in the eponymous region that will help fill a new gas link to China. The facility was opened for the Russian-Chinese Youth Games in 2015, then closed until recently.

The more ambitious project is the chain of history parks, which the Russian Orthodox Church says is aimed at encouraging patriotism. Since the first multimedia pavilion opened two years ago at VDNKh, a Stalin-era complex in Moscow once devoted to lionizing Soviet economic achievements, 17 others have appeared in cities across the country. Putin this month personally inspected a follow-up version of the display in a hall near Red Square.

The project’s spokesman, Alexander Tarasov, said funding comes from local governments and donors, only one of which he would identify: Gazprom.

“Gazprom cannot stand on the sidelines while great and glorious deeds are being done in Russia,” Deputy Chief Executive Officer Valery Golubev said at the opening of a history park in the Samara region this month.

--With assistance from Gregory L. White

To contact the reporter on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net.

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net, Torrey Clark at tclark8@bloomberg.net, Brad Cook

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