Finance Ministry Pushes IFRS while State Firms Push Back

told OGE. According to Sukhanov, dividend payments aren’t linked to net profit, but cash flow, which – besides profit – also factors in investment needs of a company.

There are companies in Russia’s oil and gas sector that can afford to pay higher dividends, but don’t want to do that, such as Gazprom, Transneft, Tatneft and Surgutneftegaz, thinks Sukhanov. These firms are able to increase dividend payments multiple times without hurting their financial standing. There are also companies that are already paying high dividends, such as Bashneft, and then there are those whose investment cycles are peaking and they can’t pay high dividends, but you can expect them to pay substantially more after reducing their investments. These include LUKOIL, Gazprom Neft and NOVATEK. “Potentially, Rosneft’s dividends could also be higher, but the company’s future investment program is so complex and its current debt burden so heavy that you can’t expect dividend growth in the nearest perspective,” Sukhanov said.

Dividends yield is only one among a number of factors that make a company attractive for investment. “With all other parameters equal, higher dividend yield will indeed spur growth of investor interest for Russian companies’ stock,” Sukhanov concluded.

Andrei Verkholantsev, head of Analytical Dept. at Kapital managing company also notes consistent growth of dividend payments in the industry. As an example among private companies he picks LUKOIL, which over a number of years has been implementing the policy of gradual dividend growth. “For instance, they spent 18 percent of their net profit in 2010 to pay dividends, whereas two years later dividends amounted to 23 percent of the profit,” says Verkholantsev.

Alfa Kapital managing company analyst Andrei Shenk thinks that you need to differentiate between state companies where a certain threshold on dividend payments – either as per IFRS or Russian accounting standards – may be prescribed by law, and private companies where dividend policy is defined by shareholders. “Today, the majority of private companies have a clearly defined dividend policy that envisions payment of dividends as per IFRS or U.S. GAAP reporting standards, and the issue of switching [to those standards] is basically on the state companies’ agenda,” he explains. 

Considering the growing cost of borrowing in foreign markets, the switch to mandatory dividend payments amounting to a certain level of net profit as per IFRS could prove to be inefficient solution, thinks Shenk. “The ‘net profit’ indicator itself does not take into account a company’s investment flows, which, as a rule, are fairly big in the oil and gas sector and there is a risk that a situation might emerge when dividend payments would require borrowings, which might hurt performance indicators,” says the analyst. Ultimately, he adds, it’s impossible to say what share of profit should be allocated across the board to pay dividends since a multitude of factors should be evaluated separately for every company. 

“In regard to attracting investments, a high dividend yield may generate investors’ interest, but only if dividend growth doesn’t affect the balance and lower