OREANDA-NEWS. January 26, 2011.  Gazprom is one of the few Russian companies that have implemented a cash pooling system. Andrey Kruglov, Deputy Chairman of the Management Committee – Head of the Department for Finance and Economics in his interview to the Gazprom website Editorial Board discourses on how the system has been created and its advantages.

What is cash pooling? What is the global and Russian corporate experience in implementing such a system?

In simple terms, cash pooling is a system that enables a parent company to promptly manage accounts within the group of companies. That is to say, cash pooling allows for centralized cash flow management inside the group.

Such a system features undeniable advantages. It is clear that some subsidiaries accumulate the temporary surplus funds available as at the end of the working day while the others need to raise short-term bank loans to cover the low cash balance. The cash pooling system allows minimizing the need for additional short-term loans and, therefore, the respective costs and interest rates. Besides, the system facilitates cash flow accounting inside the group providing the company management with current information about it.

The system participants’ cash can be consolidated in either a virtual (notional) pool or a real pool. When arranging a virtual pool, the participants’ accounts are combined without actual accumulation on a master account. As a matter of practice, a virtual pool is created prior to the real pool system.

A real pool requires fund transfer from the participants’ accounts to the master account in the end of the banking day with further funds distribution among the participants on their accounts and according to their needs.

Either option has its advantages and disadvantages that should be considered when making the final managerial decision.

I should mention that large international corporations such as Total, ExxonMobil and GDF-SUEZ have long been using the cash pooling system as an efficient tool to streamline their cash flow management procedures. The cash pooling system is among the banking products offered by almost every major international bank.

At the same time, Russian companies have shown their interest in such technologies just in the recent years, therefore it is still early to speak of any significant experience gained.

When did Gazprom launch its intra-Group liquidity management system?

We started implementing the cash pooling project in spring 2008. Initially, a decision was made to split the project up into a separate cash pooling system for Gazprom Group’s foreign companies and a cash pooling system for Russian subsidiaries.

There were several reasons. Firstly, as I have already mentioned, Russian companies do not possess sufficient experience in implementing such projects. We had to develop the business blueprint for the pool almost from the ground up in addition to the required software we were developing together with the bank. Secondly, the applicable Russian tax and currency regulations do not allow for a typical cash pooling system being widely used in the international practice. It concerns real pools to a greater extent since they are based on the idea of intra-group loans.

What banks became operators and what are Gazprom’s criteria for their selection?

We regarded selection of banks as a key project objective since cash pooling implies funds accumulation on the accounts of one or several banks, thus increasing potential credit risks of the Company. We studied the offers of eight major foreign banks that take leading positions in this banking services sector. A special set of criteria was elaborated to evaluate them: in particular, their offers were evaluated in terms of the bank reliability, cash management experience, country coverage and expertise in cooperation with the companies of Gazprom Group as well as the service cost.

Finally, we selected two banks for foreign pools – Deutsche Bank and BNP Paribas. The choice was confirmed by the KPMG experts that were consulting us on the project. Gazprombank was chosen as the clearing bank to form the notional pool for Gazprom Group companies due to objective reasons – its branched network best suits the needs of our subsidiaries. In addition, one of the main advantages of Gazprombank is the required communication platform – an automated remote banking system and a corporate clearing center enabling to deliver the project before long.

How is Gazprom’s cash pooling system arranged today, what are the participants?

At the moment, the centralized liquidity management system created by us comprises a number of cash pools.

The cash pooling system for foreign companies of Gazprom Group will soon be supplemented with a notional pool in addition to the real pool created in August 2009 and covering Gazprom Germania Group. It will be comprised of Gazprom EP International B.V., Gazprom Sakhalin Holdings B.V. and Gazprom Finance B.V. The real pool for foreign companies is based on Deutsche Bank, while the notional pool will be based on the Dutch branch of BNP Paribas.

Implementation of such a system for our foreign companies allows considering diverse types of activity among the participants of the pools, their structural peculiarities, different levels of short-term liquidity management systems and various tax regulations in a number of European countries. It is also very important for us that the chosen model maintains competition among the servicing banks. Moreover, credit risks of Gazprom Group are optimized.

As for Russia, the notional ruble pool is in successful operation here. It currently comprises 76 subsidiaries, branches and representative offices of Gazprom located in several time zones with another 10 organizations to join the system soon. By means of the pool we track the cash flow on the Company’s accounts providing all its participants with equal market conditions for funds placement.

Thus, we may proudly state that today Gazprom Group possesses a multi-banking, multi-currency cash flow monitoring and management system with a single center for operating data collection.

What challenges were tackled owing to the cash pooling system?

I would like to remind that our system was created during the global economic crisis. The mere fact that we had managed to mitigate the adverse impact of this tough period on Gazprom’s cash flows witnessed the practicability of our decision to initiate the project.

Having introduced the system, we improved the short-term planning in Gazprom’s subsidiaries and increased the profitability of the Company’s funds placement operations. The system enhanced the efficiency of the Company’s temporary surplus funds placement by some 40 per cent. We also managed to create favorable conditions for raising concessionary rate short-term loans by Gazprom. The maximum amount of such a loan is RUB 25 billion.

What is the outlook of this system in Gazprom?

Our cash pooling system is not static – it is adaptable to changing conditions, so it has the potential for further development. In particular, we are currently planning to create a notional currency pool on the basis of Gazprombank alongside the existing notional ruble pool.

Moreover, work is underway to develop a centralized liquidity management system on the basis of the Rossiya bank servicing some large subsidiaries of Gazprom, like Gazprom mezhregiongaz and Gazprom komplektatsiya.

Concerning foreign companies, we are working over the real pool arrangement in Gazprom EP International B.V. on the basis of BNP Paribas.