updated 5/17/2005 2:36:30 PM ET 2005-05-17T18:36:30

Russia abandoned plans to merge natural gas giant Gazprom with the state-owned Rosneft oil company on Tuesday, forcing it to come up with another means to take control of the world's largest gas producer.

The merger had been officially announced in September as the way for the state to receive a majority stake in Gazprom.

That would serve as the hotly awaited trigger for the company's remaining shares to be fully available to foreign investors — providing a much-needed boost to investment confidence battered by the politically charged dismantling of Russia's onetime top oil producer Yukos.

Gazprom said the government would acquire the 10.7 percent block required to lift its stake above 50 percent by paying cash for the shares. Analysts have said the stake could cost about $6 billion, according to Dow Jones Newswires.

The Economic Development Ministry clarified that the government would raise the money on the international capital markets, and settle these debts subsequently by selling off some of its 100-percent stake in Rosneft in an initial public offering.

"In this way, the state will become the direct owner of a controlling stake in Gazprom and a controlling stake in Rosneft," the ministry said.

The removal of restrictions on owning Gazprom shares would be finalized in September, Interfax reported, citing Gazprom board member Boris Fyodorov. A source in the company said this timeframe "could be trusted."

Gazprom shares closed higher on Moscow's RTS exchange.

The merger plans were thrown off course by Rosneft's acquisition last year of Yuganskneftegaz, the main production unit of Yukos that was auctioned off by the state to meet part of Yukos' multibillion-dollar back taxes bill.

Observers suggested that Rosneft management thereafter did not want to continue the merger because it would lose control of the massive cash flow from Yuganskneftegaz, which produces a million barrels a day — the same as OPEC member Indonesia.

Analysts had suggested that a cash deal — which had been rumored but not confirmed previously — would be welcome as a simpler way for the state to take a control of Gazprom.

Yuganskneftegaz was purchased at the auction by a shadowy shell company, which was acquired by Rosneft a few days later.

Chris Weafer, chief strategist at Moscow's Alfa Bank, said he expected foreign funds to pour some $6 billion into Gazprom as a result of its weighting changing in emerging market benchmark ratings from the share liberalization.

The hope in the Kremlin was that "the announcement would balance the damage done by the Yukos affair," he said.

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