Regent: Gaz Fund Risked Investments

HONG KONG -- The head of a controversial offshore fund that planned to invest in Russia's gas monopoly Gazprom said Monday his firm abandoned the scheme to protect long-term interests totalling up to $1 billion in Russian equity markets, and suggested the scheme had originally been Gazprom's idea.

"We've had to sacrifice the smaller interest in Gazprom to the much bigger interest we've got in Russia overall," said Jim Mellon, Regent Pacific Group's managing director.

Hong Kong-based Regent Pacific decided to back away last week from a dispute with Gazprom over a $200 million fund designed to invest in the domestic shares of the gas


"We don't want to get into a lengthy legal battle and jeopardize our [other] Russian funds," Mellon said.

"Gazprom is the biggest company [in Russia] and we certainly don't want to go up against them," Mellon said.

Mellon defended the scheme on Monday as "completely legal," but said Regent backed away from a dispute with Gazprom after it asked Regent not to buy the domestic shares.

"There was never any question of foreigners getting their direct hands on the shares," said Mellon.

Gazprom restricts foreign investment to 9 percent of share capital, which it issues in the form of American Depositary Receipts.

These ADRs trade at three times the value of the domestic shares, which Regent's fund hoped to purchase through subsidiaries in Russia.

"If you consult any lawyer they'll tell you our scheme is absolutely watertight, completely legal, but from a practical point of view it's all very well for Regent to go up against Hambros Bank, but it would be very foolish of us to go up against Gazprom," he added.

Regent owns between 3 and 4 percent of British bank Hambros and has been arguing forcefully that the bank is better broken up.

Mellon said that while Hambros might enjoy prestige as one of Britain's last remaining independent merchant banks, it cannot compare with Gazprom, which includes among its former executives Russia's current prime minister and energy minister.

Regent's Gazprom fund hoped to attract fund holders keen to arbitrage the ADRs and the domestic share prices.

"I suppose the worry that Gazprom had was that people might sell the ADRs or alternatively not buy the next issue of ADRs and buy our fund instead, which was the same issue but at a much lower price," said Mellon.

"Or alternatively, if you were a hedge fund, you might go short the ADRs and long our fund and seek to exploit the gap."

So far, only 1.5 percent of the foreign allotment of 9 percent of share capital have been issued, Mellon said.

However, Mellon argued that the fund was Gazprom's idea in the first place and based on an arbitrage, long practiced by Russian brokers.

Timing was probably the root cause of the difficulty.

"Only once we got the money did they come out against it," Mellon said. "One suspects it's definitely in their interest longer-term to have the local share price higher versus the offshore price.

"In the immediate term it's not in their interest because they wanted to raise more ADRs."

Gazprom's domestic shares were trading at about $0.645 Monday against $0.53 last week. The London-traded ADRs, equivalent to 10 underlying shares, at $17.35 against more than $20.00 last week.