22 June 2014, 15:17

Gazprom strategy: swapping dollar bonds for gas pipelines

Gazprom strategy: swapping dollar bonds for gas pipelines

After the new contract between Gazprom and CNPC was signed, the western media was quick to claim that Russia's gas giant would not be able to fund the pipeline needed to deliver natural gas to China.

Russia though has managed to find an ingenious way around the problem. According to Russian media, Gazprom's China pipeline will be financed by the state.

To a limited extent, the skeptics may have been right. For a company with a capitalization of roughly 100 billion dollars, financing a 55 billion dollar pipeline from Siberia to China would indeed be difficult. However, Gazprom is not an ordinary company because it can often count on help from its main shareholder, Russia. According to RIA Novosti, Alexey Ulyukaev, the economy minister, believes that the assets of the National Wealth Fund should be used to pay for the pipeline to China to be built. "It isn't a capital increase for Gazprom per se, but Gazprom can create an SPV for this particular project and the National Wealth Fund can invest in it", he told the press.

The National Wealth Fund is a Russian sovereign fund that manages surplus income from oil and gas exports. According to fund rules, at least 45% has to be invested in dollar-denominated instruments issued by the US Treasury or financial institutions like Federal Home Loan Mortgage Corporation (Freddy Mac) or Federal National Mortgage Assosiation (Fanny Mae). In order to help Gazprom built its pipeline to China, the National Wealth Fund would have to sell some of its dollar-based assets. Basically, the Russian government is swapping investments in American debt for investments in gas infrastructure to link Russia with China.

Spending money from the National Wealth Fund on a pipeline may be seen a risky investment, compared to the supposedly safe dollar bonds, but a thorough risk assessment would produce a different conclusion. Unlike US T-bills, the pipeline to China can't be targeted by western sanctions. The pipeline can't be "frozen" or confiscated. Putin's advisor, Sergey, believes that if the US does escalate its sanctions against Russia, all treasury bills held by the Russian state would be written off. If that were true, paying for Gazprom's pipeline with funds raised by selling dollar-bonds would be a thoroughly prudent move. In a world plagued by political and financial risks, tangible assets, like a pipeline to the world's biggest energy consumer, could well prove to be the best investment.

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