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Business Watch: February 18, 2003


18 February 2003, Volume 3, Number 6
ENERGY
FUTURE UNCLEAR FOR GAZPROM SUBSIDIARY
The fate of Gazprom subsidiary Mezhregiongaz (MRG) remains unclear amid plans to shift its chief business to the parent company. Gazprom CEO Aleksei Miller signed an order on 30 December transferring control of domestic natural-gas sales from MRG to Gazprom. The 4 February meeting of Gazprom's board, under the influence of board member and Economic Development and Trade Minister German Gref, moved to "rework and change" the order, Neftegaz.ru reported on 10 February. MRG General Director Andrei Karklin then took the unusual step of speaking publicly on 10 February of the need to reform parent company Gazprom, prompting a source in the gas monopoly to tell "Vedomosti" on 11 February that "MRG's management is going all the way to keep its gas-selling business." Not everyone is happy with MRG's conduct of that business. Unified Energy Systems head Anatolii Chubais complained in an official letter to Aleksei Miller that MRG forced customers to conclude contracts with suspicious third-party firms at inflated prices, noted business journalist Yuliya Latynina wrote in "Novaya gazeta" on 10 February. Meanwhile, Gazprom is pressing on with its attempt to cut MRG down to size, despite the board's decision to review Miller's 30 December order. "Vremya novostei" reported on 14 February that Gazprom management is making no efforts to "rework and change" the order, preferring instead to do all it can to implement it. DK

OFFICIALS HAGGLE OVER OIL-FIELD STARTING PRICE
Only days after the Natural Resources Ministry proposed a starting price of $900 million for rights to the Talakan oil and gas field, the Economic Development Ministry has weighed in with a recommendation to start the bidding at $100 million-$150 million, "Vedomosti" reported on 10 February. The Talakan field contains 124 million tons of oil and 47 billion cubic meters of gas. A December auction failed to take place when officials deemed the starting price of $56 million too low and investment requirements totaling $350 million too high. Meanwhile, RosBusinessConsulting (RBK) wrote on 10 February that the conflict between the two ministries over the starting price was a show intended to delay the auction until the cabinet makes up its mind about pipelines in Eastern Siberia. State pipeline monopoly Transneft wants to connect Angarsk to the port of Nakhodka, while oil major Yukos wants to link Angarsk to Daqing in China. Russia's privately owned oil companies favor the shorter Chinese route, which would give them a chance to expand exports quickly. If the Yukos project takes precedence, Talakan will likely end up in private hands. But if the Nakhodka project goes ahead, the state's Rosneft or Gazprom might get first dibs on Talakan. The cabinet is expected to discuss the matter at a 13 March meeting. No date has been set for the Talakan auction. DK

ROSNEFT SHELLS OUT $600 MILLION FOR SEVERNAYA NEFT
Rosneft President Sergei Bogdanchikov and Severnaya Neft owner and Federation Council member Andrei Vavilov confirmed Rosneft's purchase of 100 percent of Severnaya Neft for $600 million, RBK reported on 12 February. The news confirms rumors that have circulated since Vavilov announced the sale of his oil company on 20 January (see "RFE/RL Business Watch," 28 January 2003). The acquisition of Severnaya Neft boosts Rosneft's hydrocarbon reserves by 120 million tons, "The Moscow Times" reported on 13 February, and makes it the inheritor of thorny legal disputes over an additional share emission and the right to develop the Val Gambutsev oil field. While industry observers felt that Rosneft's status as a state-owned company is likely to aid it in resolving Severnaya Neft's legal difficulties, most opined that $600 million was too much to pay for the company. Analyst Stephen Dashevksii commented sarcastically to "Vedomosti" on 13 February, "Until now, the feeling was that the worst management was at Gazprom, but now [Rosneft President] Bogdanchikov can provide some serious competition." With Severnaya Neft's legal woes behind him, Vavilov had a simple response when "Vedomosti" asked him what he plans to do with the proceeds from the embattled oil company: "I'll give all the money to my wife." DK

IRAQ ABSOLUTELY, POSITIVELY CANCELS LUKOIL CONTRACT
Iraqi Oil Minister Samir Abd al-Aziz al-Najm told reporters in Baghdad on 10 February that LUKoil's contract to develop the West Qurna oil field is terminated with no room for discussion, "Energy Intelligence Briefing" reported the same day. While the minister's comments would appear to remove any ambiguity over the multibillion-dollar contract, LUKoil President Vagit Alekperov claimed on 10 February that the contract is still valid, Interfax reported the same day. Iraq first canceled the contract in December, claiming that LUKoil had failed to fulfill its contractual obligation to develop the field; the oil company cites UN sanctions that prevent it from moving ahead. Iraqi officials have also accused LUKoil of conducting secret negotiations with the Americans about business in post-Saddam Iraq, "Vedomosti" reported on 11 February. Russian-Iraqi oil ties have been equal parts politics and economics of late, and al-Najm's 10 February remarks continued the tradition. "We hope that Russia will use its veto right to prevent military aggression," the minister told reporters. "Russians are our friends, and we know that they always take correct position to avoid military operation against Iraq," "Energy Intelligence Briefing" quoted him as saying. DK

COMMUNICATIONS
CHECHNYA TO GET CELLULAR OPERATOR
Megafon spokeswoman Marina Belashova told IA Regnum on 14 February that the Moscow-based cellular operator will begin offering its services to subscribers in war-torn Chechnya on 15 February. Services will be provided by Mobikom-Kavkaz, Megafon's operator in the North Caucasus, under the commercial auspices of Chechenelektrosvayz and Chechen Cellular Communications. Subscribers will pay 700 rubles ($22.12) to connect, a monthly fee of 640 rubles, and 6 rubles per minute for calls within the Southern Federal District. Initially, the network will cover some 1,000 subscribers, mainly government officials, "Vedomosti" reported on 13 February. According to the newspaper, the ostensible aim of the project is to demonstrate that Chechnya has become safer and more stable. Even so, for security reasons, Megafon will not open an office in Chechnya. The expansion in cellular service marks a quantum leap for the ravaged republic's communications infrastructure. "Kommersant" reported on 13 February that a digital telephone exchange recently began operating in the capital city of Grozny with a capacity of 1,500 numbers. The actual number of subscribers, all state offices, is a little more than 250. The Mobikom-Kavkaz network will start out with 17 base stations covering 70 percent of Chechnya, Interfax reported on 13 February. The operator hopes to increase the number of base stations to 286 by year's end. DK

FINANCE
MINISTER PROTESTS PENSION PLAN
Economic Development and Trade Minister Gref took the unprecedented step of protesting a government decision post facto in a letter to Prime Minister Mikhail Kasyanov, "Kommersant" reported on 11 February. The minister's displeasure centered on a decision to make state-owned Vneshekonombank (VEB) the management company for "default" pension savings. (Beginning on 1 January 2004, Russian citizens will be able to designate a company to manage their pension savings; those who fail to do so will have their savings managed by a "default" company selected by the state.) In his letter, Gref pointed to possible contradictions in VEB's roles as manager both of pensions and the state's foreign debt: 1) in the event of a collection effort, the country's creditors could conceivably target pension funds; 2) VEB's debt-servicing functions will spur it to minimize expenses through low rates, while its pension-management functions will encourage it to maximize returns on the same securities. Gref's Economic Development Ministry supports the creation of a separate entity to manage "default" pensions, which could total $5 billion annually, "Vedomosti" reported on 11 February. Sergei Kabalkin, director of the nonstate pension fund Interros Dostoinstvo, told the newspaper, however, that the problem of "default" pensions is a temporary issue that will fade quickly as citizens select management companies. Meanwhile, "Vremya novostei" saw intrigue in the leak of Gref's letter to both "Kommersant" and "Vedomosti." The newspaper reported on 12 February that Gref's missive was circulated by the Finance Ministry to embarrass Gref before a key 27 February cabinet meeting on tax policy. The two ministries have been at odds on the issue, and a public disagreement with the prime minister is unlikely to have increased Gref's standing in official circles. DK

REGULATION
FISHY QUOTAS SINK HEAD OF STATE FISHERIES COMMITTEE...
Prime Minister Kasyanov temporarily suspended State Fisheries Committee Chairman Yevgenii Nazdratenko on 14 February for the latter's role in a scandal over quotas that has paralyzed commercial fishing in Russia's Far East, RIA-Novosti reported the same day. [Kasyanov the following day signed an order dismissing Nazdratenko from the post, according to Interfax.] Events began in January with a row over the assignment of "free" fishing quotas, when fisherman in the Far Eastern Primorskii Krai took to the streets to protest what they say as unfair distribution. ("Industrial" or "free" quotas are assigned by a state committee, while "commercial" quotas are sold at auction.) Primorskii Governor Sergei Darkin was able to obtain an increase in his region's quotas after a trip to Moscow, but Nazdratenko, the region's former governor, subsequently refused to approve the new quotas. He called for a redistribution by 15 February, grounding Primorskii Krai's fishing fleets and setting off a wave of protests, "Kommersant" reported on 15 February. Darkin and Nazdratenko have traded accusations that each is using the quotas to aid pet fishing firms and further his own business interests. Fishermen kept from the sea by the bureaucratic wrangling now have until 1 April to make what they can of the season, "Izvestiya" reported on 14 February. Corruption has plagued Russia's lucrative fishing industry, and made the State Fisheries Committee a lightning rod for criticism. Nazdratenko himself gained a reputation for scandal during his tenure as Primorskii Krai governor. Boris Reznik, a member of the State Duma's Anticorruption Committee, told "Izvestiya" that he hopes the temporary suspension will become permanent and called Nazdratenko "a disaster for the entire fishing industry." DK

...AS MEAT QUOTAS RAISE QUESTIONS
The impending introduction of quotas for meat importers is raising questions about fairness and concerns over possible price hikes. Deputy Minister of Economic Development Maksim Medvekov explained the details of the new quota system to importers at a closed meeting on 10 February, "Kommersant" reported the next day. Quotas go into effect on 1 April. Over the remaining three-quarters of 2003, importers will be able bring into Russia 337,500 tons of pork, 315,000 tons of beef, and 744,000 tons of poultry. Tariffs for pork are set at 15 percent of declared value (but no less than 0.25 euros per kilogram) and 80 percent (but no less than 1.06 euros per kilogram) over quota; for beef at 15 percent (but no less than 0.15 euros per kilogram) and 60 percent (but no less than 0.6 euros per kilogram) over quota; no over-quota poultry imports are permitted. Quotas for individual importers will be based on meat-import statistics for 2000-02 as recorded by the State Customs Commission. Dmitrii Gordeev, who heads import company MeatLand, told "Gazeta" on 10 February that government ministries will have to act quickly to assign quotas and issue permits or "catastrophe is unavoidable and prices will go up by 30 percent to 50 percent in April and May." Others fear that the assignment of quotas will open the door to speculation with import licenses, despite officials' promises to make the process as transparent as possible by providing up-to-the-minute information on ministry websites, "Vedomosti" reported on 11 February. DK

INVESTMENT
TOTALFINAELF EYES $3 BILLION INVESTMENT IN RUSSIAN OIL
Francois Rafin, general director of TotalFinaElf's Russian affiliate, announced on 11 February that the French oil giant is ready to invest $2 billion-$3 billion in the Vankor oil field as soon as it completes a problematic share acquisition, RBK reported the same day. TotalFinaElf purchased a 52 percent stake in Yeniseineft, which holds the license to develop the Vankor field, from the Anglo-Siberian Oil Company in April. A number of minority shareholders, among them oil majors Yukos and Rosneft, have blocked the deal, "Vremya novostei" reported on 13 February. Krasnoyarsk Governor Aleskandr Khloponin has promised TotalFinaElf assistance in the matter, and "Vremya novostei" quoted Khloponin deputy Lev Kuznetsov as assuring the French that "all disputes over the controlling stake in Yeniseineft will be resolved according to law." Rafin told journalists on 11 February that, in the event of a successful resolution, TotalFinaElf is prepared to invest $2.5 billion-$3 billion to develop the field, which holds 125 million tons of oil and 76 billion cubic meters of gas. As proof of TotalFinaElf's commitment to the project, Rafin told "Rossiiskaya gazeta" in a 8 February interview that the company has already placed the funds necessary to develop the Vankor field in escrow for immediate access as soon as the shareholder issue is resolved and the share acquisition goes through. DK

AROUND THE CIS
FATF LIFTS UKRAINE SANCTIONS
The Paris-based Financial Action Task Force on Money Laundering (FATF) announced in a 14 February press release on the organization's website (http://www1.oecd.org/fatf/) that it has "decided to withdraw the application of additional countermeasures with respect to Ukraine as a result of the recent enactment by Ukraine of comprehensive anti-money-laundering legislation." Although Ukraine will remain on FATF's "blacklist" of noncooperating countries until it has "effectively implemented" the new legislation, the decision lifts onerous sanctions that could have left Ukraine in a state of financial isolation. FATF imposed the additional sanctions on 20 December. On 6 February, the Ukrainian parliament passed a new law to combat money laundering, "Kommersant" reported on 15 February, and imposed strict criminal penalties for attempting to legalize ill-gotten gains. DK

LUKOIL LINKS UP WITH KAZMUNAIGAZ TO EXPLORE CASPIAN
LUKoil announced in a press release on the company's website (http://www.lukoil.ru/) that President Alekperov signed a memorandum of understanding on 10 February with Lyazzat Kiinov, president of Kazakhstan's national oil company KazMunaiGaz, to cooperate on exploration and production in Kazakhstan's sector of the Caspian shelf. LUKoil will finance the exploration, but the two companies will split development costs. Extractable reserves in the Central and Khvalyn fields are estimated at 100 million tons of oil, "Kommersant" reported on 11 February, and LUKoil's exploration investments could total $150 million-$170 million. The two companies are to create a special group within two weeks to oversee their joint work on the project. DK

IN FOCUS
REFORM HORIZON
It seemed like old times on 14 February as the State Duma voted on creating a free market of electrical energy in Russia: reform, Chubais, communists grumping about the ruin of the homeland, westward-gazing liberals wagging fingers at oligarchic corruption. But Putin-era parliamentarians are generally a more business-like lot than their troublesome predecessors (even if many of the faces remain the same), and the centrist-dominated State Duma passed the six-bill reform package with enough peeps of discontent to give the next day's papers something to print and enough spare votes to keep the Kremlin happy. With the third reading a formality that could take place as early as 21 February and passage through the Federation Council assured, only the president's signature awaits before, well, before the vexing question of what happens next.

The eventual aim of the reform is to call into being a genuine market for the sale of electrical power, to which end the reform's authors envisage a gradual, controlled expansion of free trade in electrical power during a transition period. The state utility Unified Energy Systems (EES) is to be carved up into separate-grid, power-generation, marketing, and dispatch divisions, with the state keeping a controlling stake in the national grid. Elaborate controls at all stages will safeguard ordinary citizens from jarring price hikes and prevent the nation's power-generating assets from falling into the greedy hands of a select few.

Misgivings over the track record of "controlled transition" in post-Soviet Russia and fears of unhealthy oligarchic interest in EES's power-generating assets are not the only flies in the ointment. A January poll by the Russian Center for Public Opinion and Market Research (http://www.wciom.ru/) showed that 48 percent of Russian citizens consider rising prices the country's most pressing problem. (Next came crime, with 30 percent of respondents listing it first.) How to deal with this social ill? Forty-eight percent agree that "It is imperative to establish strict control over prices and salaries"; 31 percent that "The economy must be organized so that there are no monopolies and there is competition in all areas"; and 29 percent that "It is necessary to return to the planned economy and return the state's property."

With so many Russians afraid of further price increases, and such weak support for market mechanisms as the way to stave them off, reform of the sort envisaged for electrical energy would appear to depend on a rousing demonstration of top-down political will in the grandest tradition of Peter the Great's compulsory "liberalization" (with allowances for the limitations of representative democracy, of course). The current reform packet, however, defers the liberalization of the power market until 1 July 2005, safely after the presidential elections that are expected to usher in a second term for Vladimir Putin. And "Kommersant" reported on 15 February that Economic Development and Trade Minister German Gref has suggested the possibility of prolonging the transition period until 2008.

In a classic Soviet-era joke, a lecturer tells students, "Communism is on the horizon." The students ask, "What's the horizon?" The lecturer replies, "It's the imaginary line where the sky meets the earth that moves away from us as we try to approach it." DK

SIXTH PROFIT CENTER
Big money always grabs the headlines, and on 11 February British Petroleum (BP) dug Russian business out of the emerging-market doldrums for some front-page attention with a $6.75 billion announcement. BP's press release (http://www.bp.com/) explains that the Anglo-American oil giant is teaming up in a "strategic partnership" with Russia's Alfa-Group and Access-Renova (AAR). AAR will contribute the Tyumen Oil Company (TNK) and Sidanco, as well as a number of lesser assets; BP will pony up $3 billion when the deal is closed (summer 2003), following up with three annual installments of $1.25 billion in BP shares. BP and AAR will each hold a 50 percent stake in the resultant company, tentatively dubbed Newco until the PR wizards meld the brands. Newco will produce 1.2 million barrels of oil a day and boast reserves of at least 5.2 billion barrels.

The deal marks a bold new commitment to the Russian oil sector from a company that has first-hand knowledge of the risks involved. BP paid $571 million for a 10 percent stake in Sidanco in 1997, only to become mired in a rancorous dispute with TNK. BP eventually wrote off $200 million of its investment, all the while crying bloody murder over dastardly corporate malfeasance in the lawless east.

The tone could not have been more different at a jubilant 11 February press conference by BP Group Vice President Robert Dudley, Alfa-Group Chairman Mikhail Fridman, and Access-Renova head Viktor Vekselberg. Fridman touted the deal as "the biggest in Russian history," "The Moscow Times" reported on 12 February. In an apparent reference to the partners' messy prehistory, he went on to explain to journalists, "Russia has stopped being associated with instability and nontransparency."

Be that as it may, the deal features extensive built-in safeguards. Newco's shareholder agreement will be subject to English law, "The Guardian" reported on 12 February. Each side will appoint five members to the 10-member board of directors, and unanimity will be required for all decisions. The CEO will hail from AAR, while Newco's president will represent BP. BP will supply the bulk of the management team, Gazeta.ru reported on 11 February. AAR is contractually bound to its stake until at least 2007. Any disputes that arise are subject to Swedish arbitration, Robert Dudley told "Vedomosti" in a 13 February interview.

Reactions reflected the discreet charm of nine-figure sums. The deal is "a major vote of confidence in President Vladimir V. Putin's economic reforms," "The New York Times" crowed on 12 February (without going into any greater detail on said reforms). An 11 February editorial in the normally grumpy "Vedomosti" admitted that "the BP deal is capable of stimulating an influx of foreign investments into Russia, and this will be an accomplishment of Vladimir Putin's economic policy."

Some griped, of course. "Kommersant" reported on 12 February that one oil-company representative responded to a query about the deal with a sarcastic question: "Can we talk about selling out the homeland?" "The Moscow Times" added a critical perspective the same day, quoting Alfa Bank chief strategist Chris Weafer: "No single country that is considered to be dependent on any single source of income has ever seen a substantial flow of investment into their economy outside 'that' source of economic reliance. Never."

While it is difficult to say on the basis of a single deal, no matter how vast, whether Putin's economic policy has wrought an investment sea change or whether rivers of money will flow to less immediately lucrative sectors of the Russian economy, something is undoubtedly afoot. And Viktor Vekselberg knew exactly what it was when he told "Vedomosti" in a 12 February interview that the new alliance will pave the way for TNK to expand internationally, "primarily because with the addition of a new shareholder the price of borrowing will go down significantly for our company."

Vekselberg said much the same thing about a deal he pulled off a little over a month ago in his capacity as president of SUAL, the world's sixth-largest producer of aluminum. "RFE/RL Business Watch" reported on 21 January that SUAL is joining forces with English investment company Fleming Family & Partners (FF&P) to create a new holding company. Vekselberg explained at a 15 January press conference that the deal will ease SUAL's access to "cheap big money."

As Russia's financial-industrial groups look to expand beyond their current circumstances, the "cheap big money" will be increasingly important. The easiest access to it will come through alliances with major Western players. Observers eager to see in such deals the long-awaited proof that Russia is "making it" might do well to note that, for example, FF&P's other major interests are in Cuba and Mozambique, while BP announced that Newco will be the sixth of a group of new "profit centers" that include Trinidad, Angola, and Azerbaijan.

The Newco deal with its $6.75 billion is, of course, good news for Russian business. It is also a sign. Not so much that a new era of milk and honey is dawning over the Urals, but that the upper echelon of multinational capital is reaching out to form alliances and partnerships with Russia's restless financial-industrial groups. The heavy hitters in BP's sixth profit center are getting their second wind. DK

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