UPDATE 2-Nornickel considers $2 bln buyback in compensation for lower dividend

* $2 bln share buyback possible by the end of 2021

* Board recommends 2020 final dividend of $2.1 bln

* Nornickel shares up 1.5% in Moscow

* Miner to allocate 0.5% for its employee program (Adds details, quotes, context)

MOSCOW, April 9 (Reuters) - Nornickel’s major shareholders have agreed to propose a $2 billion share buyback to the board this year, the Russian metals producer said on Friday, partial compensation for a smaller than expected final dividend.

The group, a leading nickel producer and the world’s largest producer of palladium, was fined $2 billion following a fuel spill last year in the Arctic, Russia’s worst environmental disaster and one which infuriated President Vladimir Putin.

Though Nornickel’s shares have risen since the spill, they have been hit by a list of other incidents since February.

Nornickel said its board had agreed a final dividend for 2020 of 1,021.22 roubles ($13.25) per share, or about $2.1 billion, after its largest shareholder and chief executive Vladimir Potanin proposed that the award be minimised.

A long-term agreement between Potanin’s Interros Holding and aluminium producer Rusal suggests that Nornickel could have recommended the final dividend of $3.5 billion for 2020, in addition to its 9-month payment of $1.2 billion.

Nornickel said the goal of the share buyback was to support the company’s market capitalisation. “The major shareholders consider the buyback expedient when the company is fundamentally undervalued by the market,” it said.

Rusal, for which dividends from its 27.8% stake in Nornickel are an important source of income, said in a separate statement that it was satisfied with the decision, “taking into account all the specifics of the period”.

Nornickel shares were up 1.5% in Moscow on Friday, outperforming a 0.6% fall in the broader index.

The company plans to invest $27 billion between 2021 and 2030 in production growth and improving its environmental footprint.

Nornickel also said it expects to allocate 0.5% of Nornickel’s outstanding shares to a long-term employee compensation programme it is currently preparing. (Reporting by Polina Devitt and Anastasia Lyrchikova; Editing by Jason Neely, Emelia Sithole-Matarise and Jan Harvey)