Gazprom has slashed its dividend at the order of the Russian Government as the utility struggles with a cashflow squeeze caused by falling gas prices and shrinking exports.

The world’s biggest gas company, which boasts a quarter-share of the European market, said that it would cut the payment to its investors by 86 per cent to a mere 37 kopecks per share — ¾p in sterling terms.

In a statement issued by Gazprom’s board yesterday, the decision to make a drastic cut in dividend was made “pursuant to the Russian Government’s directive”.

Gazprom’s profits rose by 11 per cent last year to almost $24 billion (£15.7 billion), but the energy company warned in February that it expected a drop in income this year amid falling gas prices and volumes. It then predicted a 5 per cent reduction in export volumes to Europe as the recession curbed demand. Last month, Valeri Golubev, the deputy chief executive of Gazprom, said that gas output would fall by 10 per cent because of lower demand. Gas output would remain subdued for a period of four to five years.

The Russian utility, which boasted last year that it would be the world’s biggest company in five years, with a market value of $1 trillion, has suffered a rapid fall from stock market grace. Its market capitalisation has tumbled from $300 billion to $122 billion as investors shied away from political risk, the crisis in the Russian financial markets and Gazprom’s swollen borrowings and shrinking revenues.

Gazprom has a capital expenditure budget of almost $30 billion, but the company had debt of $48 billion in June last year. The worry is that the company will be unable to finance its projects if it continues to pay out large sums to its investors. The Russian Government’s directive to Gazprom to sacrifice the payment to investors highlights the political sensitivity in reduced activity at Russia’s biggest company. “They desperately need to keep up domestic spending,” Christopher Granville, Russia analyst for Trusted Sources, said.

Meanwhile, Gazprom needs to maintain capital expenditure in upstream projects to replace the dwindling output of some of the company’s oldest gasfields. Declining production at Gazprom’s three biggest fields — Yamburg, Urengoi and Medvezh’ye — prompted the company to start developing its reserves in the Yamal Peninsula within the Arctic Circle.

“They have to bring on the first new \ field by 2011 or they won’t have enough gas to fulfil their contract obligations,” Mr Granville said.

The company which once flirted with the notion of bidding for Centrica, the owner of British Gas, is now focused on nuts and bolts issues relating to the delivery of gas to Russian consumers and foreign customers.

The initial development of the Bovanenkovskoye field, which holds 4.9 trillion cubic metres of reserves, requires the construction of 2,400km (1,490 miles) of pipeline from the Siberian wilderness into the Russian gas transit system. Hedging its bets, Gazprom has been signing up deals with Azerbaijan and Turkmenistan, purchasing long-term gas at high prices to ensure that the company has sufficient supplies to meet its obligations to European consumers.

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