Accessibility links

Business Watch: March 18, 2003


18 March 2003, Volume 3, Number 10
ENERGY
MOSCOW REACHES AGREEMENT WITH SIBNEFT OVER REFINERY
Oil major Sibneft announced in a 12 March press release that it has signed an agreement to end its conflict with Moscow's Central Fuel Company (TsTK) over the Moscow Refinery. The city of Moscow holds a controlling stake in the refinery through the TsTK, and Sibneft owns 38.5 percent through Millhouse Capital, while Sibneft ally Tatneft holds another 8 percent. The two sides fought bitterly for control of the refinery in 2002, bringing it to the brink of closure on several occasions. The agreement represents "a return to the situation that existed at the refinery before the conflict began," "Kommersant" wrote on 13 March, with the city of Moscow holding five seats on the board, Sibneft four, and major decisions taken jointly. "Vremya novostei" dubbed Sibneft's Roman Abramovich the winner, noting that the politically influential oilman and Chukotka governor "managed to get what he wanted: access to the actual management of the refinery." "Vedomosti" saw things differently, writing, "Moscow Mayor Yurii Luzhkov succeeded in retaining control of the capital's refinery." Meanwhile, Aton analyst Steven Dashevskii noted to "Vedomosti" that the peace might prove uneasy: "Such alliances are never solid, and Sibneft will probably make more efforts to consolidate this asset." DK

TRANSNEFT TURNS DOWN VENTSPILS OFFER
Russian pipeline monopolist Transneft turned down an offer to acquire a stake in Latvia's oil-starved Ventspils port, "Vedomosti" reported on 14 March. Ventspils has been reduced to accepting oil shipments by rail since Transneft closed off pipeline exports to the port in January, sparking allegations that Transneft is trying to bully port owners into a cut-rate sale. Ventspils Nafta owners offered Transneft a $200 million joint venture on the basis of the port's crude-oil transshipment facilities. Trust and Investment Bank analyst Vladislav Metnev told "Vedomosti" that Transneft's refusal is likely an attempt to drive down the price. "Kommersant" reported a slightly different version on 14 March, indicating that Transneft rejected an offer to buy Latvia's 47 percent stake in Ventspils Nafta because it would not provide complete control over the port. Ventspils Mayor Aivars Lembergs spoke out angrily about the situation in a 13 March interview with regions.ru, saying, "If I turn off the electricity and then tell you that I want you to sell me half the house or you'll sit in the dark, that's not business. There's a different word for that." DK

DECISION DELAYED ON PIPELINE PROJECTS
A 13 March cabinet meeting postponed a choice between two pipeline projects until 1 May, "The Moscow Times" reported the next day. Mikhail Khodorkovskii's Yukos has plugged a pipeline from Eastern Siberia to Daqing in China, while state-owned Rosneft wants to connect Siberia and Nakhodka with an eye to the Japanese market. Sergei Grigorev, head of state-owned pipeline monopolist Transneft, told "Vremya novostei" on 13 March that it might be best to combine the two projects, first building a pipeline to Daqing and then constructing a branch to Nakhodka. Prime Minister Mikhail Kasyanov also spoke out in favor of a combined project on 14 March, "Vedomosti" reported on 17 March. The pipeline decision raises the issue of private investment. Pipelines are currently state-owned, and while private-sector oil companies are ready to invest in pipelines (on the condition that they would later own them), the state is unwilling to give up what "Vedomosti" described on 13 March as a "powerful tool for influencing oil companies." A group of experts told "Rossiiskaya gazeta" on 13 March, however, that "the expansion of the Russian economy is directly dependent on the appearance of private oil pipelines." In an illustration of the need to boost export capacity, Transneft's overburdened pipeline system began turning away 733,000 barrels of crude per day on 7 March, "Petroleum Intelligence Weekly" reported on 12 March. DK

STAGE SET FOR GAZPROM-SHARE LIBERALIZATION...
Gazprom announced in an 11 March press release that the company, its subsidiaries, and the state control more than 51 percent of the gas monopolist's shares, marking the completion of the "first stage in Gazprom's move toward liberalizing the market for its shares." Analysts were quick to point out that this is not exactly the same thing as direct controlling stake. "It's hard to see how a reform of the Gazprom share market can start unless 51 percent of the monopoly's shares belong directly to the state," Troika Dialog analyst Kakha Kiknavelidze told "Gazeta" on 11 March. Aton analyst Steven Dashevskii told "The New York Times" on 12 March, "Common-sense ideas are finally being implemented, but there is still a very, very long way to go." The aim of Gazprom-share liberalization is the abolition of the so-called ring fence, under which foreigners can only purchase shares through American Depositary Receipts (ADRs). The practice has led to price discrepancies -- $0.85 per domestic share, $1.30 through ADRs -- and gray schemes in which foreigners acquire shares through Russian middlemen. DK

...AS RUHRGAS LOOKS TO INCREASE STAKE
Germany's Ruhrgas plans to increase its stake in Gazprom from 5.5 percent to as much as 10 percent, "Kommersant" reported on 11 March. By upping its stake in the gas giant, Ruhrgas hopes to guarantee itself a seat on Gazprom's board of directors, "Gazeta" reported on 11 March. "Nefte Compass" reported on 12 March that Ruhrgas has already increased its stake to 5.7 percent, purchasing the additional shares through Russian-registered Gerosgaz to avoid the "ring fence." Steven Dashevskii told "Vedomosti" on 12 March that the move makes sense: "When the [domestic and foreign] markets are united, Ruhrgas won't be able to buy Gazprom shares so cheaply." A source "close to Gazprom" cast doubt on Ruhrgas's plans, however, telling the newspaper that picking up another 3-4 percent might be unrealistic: "Such a big stake isn't out on the market, and the state doesn't intend to part with its shares." DK

FINANCE
PROBLEMS CONTINUE FOR ALOR INVEST
The Federal Securities Commission (FKTsB) dealt Internet broker Alor Invest a new blow on 12 March, returning its depositary and securities-management licenses, yet suspending its broker's and dealer's licenses, Finmarket reported the same day. Alor Invest's troubles began when the FKTsB suspended its licenses on 19 March (see "RFE/RL Business Watch," 25 February 2003) for alleged market manipulation. FKTsB spokesman Ilya Razbash told "Vedomosti" on 13 March that the two licenses were suspended for a second time after an unannounced inspection revealed that "Alor Invest was buying and selling the same futures to create the impression of activity at the Moscow Interbank Currency Exchange." A representative of the National Association of Securities Market Participants (Naufor) told "Kommersant" on 13 March, "It seems that the FKTsB doesn't really understand what it's doing.... I seriously doubt that it will be possible to prove manipulation under existing legislation." The FKTsB will take one month to decide whether or not to annul Alor Invest's license. DK

COMPANIES
ITERA HEAD LATEST TO REVEAL HOLDINGS
Igor Makarov, president of natural-gas company Itera, added his name to the growing list of Russian businessmen who have revealed their holdings in the companies they control, telling reporters at a 12 March press conference that he owns 46 percent of Itera, "Vedomosti" reported the next day. The stake is likely worth $400 million-$600 million. Makarov declined to provide exhaustive information on other shareholders, explaining, "I don't want what happened to LUKoil to happen to our shareholders," an apparent reference to the kidnapping of LUKoil Vice President Sergei Kukura, "Kommersant" reported on 13 March. Makarov's decision to reveal his stake in Itera came in the context of an announcement that the gas company is conducting negotiations with an eye to a public offering in the future, neftegaz.ru reported on 13 March. DK

BELL TOLLS FOR TOLLING?
The Commission on Protective Measures for External Trade headed by Vice Premier Aleksei Kudrin recommended ending external tolling in the aluminum industry in 2004, "Vremya MN" reported on 13 March. Under external tolling, imported raw material is processed in Russia and exported with no payment of the value-added tax (VAT). Of the 3.343 million tons of aluminum produced in Russia in 2002, tolling affected some 2 million tons, "Vedomosti" reported on 13 March. The commission also proposed eliminating the 5 percent export duty on aluminum and 5 percent import duty on alumina (which is processed into aluminum). The aluminum industry reacted with predictable displeasure. Aleksandr Bulygin, who along with Oleg Deripaska runs aluminum giant Rusal, told "Kommersant" on 13 March that the elimination of tolling will force Rusal to cut 20,000 jobs in 2004 in order to save $120 million. "Gazeta" reported the same day that experts estimate that the change could cost Rusal, which produces two-thirds of Russia's aluminum, up to $700 million annually. As for who gains, analysts polled by "Kommersant" were undecided. A government source told "Gazeta," however, that the potential tax gains could run into the hundreds of millions of dollars. One notes that previous attempts to end external tolling have failed. In this regard, a Rusal representative told "Vedomost," "Since there's still no government resolution, we have a chance to make our arguments to the necessary officials." DK

SUKHOI TO BUILD REGIONAL JET
Rosaviakosmos announced on 12 March that aircraft manufacturer Sukhoi, famed for its fighter jets, will lead a consortium to produce Russia's new regional airliner, "Kommersant" reported the next day. Together with U.S.-based Boeing and Russian design offices Ilyushin and Yakovlev, Sukhoi will offset the $600 million cost of designing, producing, and testing the Russian Regional Jet (RRJ) with $120 million from the Russian budget. The Sukhoi-led consortium beat out competitors Tupolev and Myasishchev for the honor of replacing the venerable TU-134 on domestic routes. Slated for production by 2007, Sukhoi hopes to sell hundreds of the new jets at a price between $10 million and $20 million, "The Moscow Times" reported on 13 March, noting that Air France has also expressed an interest in the jets. Sukhoi plans to offer 60-, 75-, and 95-seat models of the plane. According to "Kommersant," the only cloud on the horizon comes in the form of Ukraine's AN-148, a similar aircraft that could reach markets in 2005, two years earlier than the RRJ. DK

INVESTMENT
VOLVO TO BEGIN TRUCK PRODUCTION IN RUSSIA
Volvo Truck Corporation will open a production facility in Zelenograd on 20 March, RosBusinessConsulting (RBK) reported on 11 March. The factory is a joint venture between Volvo (66 percent) and AFK Sistema (34 percent). The two sides have not disclosed the size of their investments, but "Vedomosti" reported on 12 March that Volvo has put $10 million into the project. The factory will produce 350 heavy trucks annually. DK

COMMUNICATIONS
MTS GEARS UP FOR EASTERN EXPANSION
Moscow-based cellular operator Mobile TeleSystems (MTS) hopes to expand beyond the bounds of the former USSR to such countries as India, Iran, Pakistan, and Lebanon, "Vedomosti" reported on 11 March. According to the newspaper, the company has already created analytical groups to develop strategies for entering these distant new markets. Vladimir Evtushenkov, who heads MTS's top shareholder AFK Sistema, recently visited India to conduct on-the-ground research. Sources in the embassies of India, Iran, and Pakistan confirmed to the newspaper that they are aware of MTS's plans. Analysts told "Vedomosti" that, cultural differences aside, MTS will find its homegrown Russian experience useful as it expands eastward. Deutsche Bank analyst Yulii Matevosov explained, "The situation in India is similar to Russia: lots of ground, poor population." MTS's most recent expansion was into Ukraine, where the company acquired a 57.7 stake in Ukrainian Mobile Communications, the country's second-largest cellular operator, for $194.2 million. Ukrainian authorities registered the deal, which was sealed in February, on 4 March, MTS reported in a 7 March press release. DK

SISTEMA TO REGAIN MTS STAKE FROM DEUTSCHE TELEKOM
AFK Sistema reached an agreement with Deutsche Telekom (DT) on March 12 on an option to purchase a 10 percent stake in MTS from the debt-ridden German telecom giant, RBK reported the same day. DT currently controls 40.1 percent of MTS, while Sistema controls 40.4 percent. The option, which extends through 30 September, will give Sistema a controlling stake. Looking to ease a 61.1 billion-euro ($67.4 billion) debt burden, DT will sell an additional 5 percent stake in MTS on the open market, reducing its overall holdings to 25.1 percent. DT Vice President Hans Ehnert told "Kommersant" on 13 March that DT is still committed to MTS despite the sales: "It's very important for us to remain a strategic partner in Eastern Europe's largest mobile communications company, especially since Russia is a priority market for us." Troika Dialog analyst Evgenii Golosnoi told "Vedomosti" on 13 March that Sistema came out ahead in the deal. Sistema "gains control but doesn't buy anything extra," Golosnoi said, stressing that DT would get more by selling Sistema the entire 15 percent. The current market price for a 10 percent stake in MTS is $425 million. Sistema will likely exercise its buy option after a planned $300 million Eurobond issue later in the year. DK

AROUND THE CIS
DUAL DEALS BOOST CHINA'S PRESENCE IN KAZAKHSTAN
China's Sinopec announced on 11 March that it has acquired BG Group's remaining 8.33 percent stake in Kazakhstan's Kashagan oil field for $615 million, only days after China National Offshore Oil Corp. bought an identical stake from BG Group for the same price, "Nefte Compass" reported on 12 March. The moves mark a major Chinese effort to diversify the country's oil-supply base away from the Persian Gulf region, currently the source of 60 percent of China's oil imports. The two acquisitions once again raise the prospect of a West-East pipeline from Kazakhstan to China. "The New York Times" quoted CNOOC chief financial officer Mark Qiu on 12 March as saying that a new pipeline route would be needed as the oil fields near full production in coming years. Lyazzat Kiinov, president of Kazakhstan's state oil company, seconded him, saying, "China is a huge market and of course a pipeline needs to be built in that direction." The Kashagan oil field could contain up to 13 billion barrels of oil equivalent, AFP reported on 12 March, but the true extent of reserves will only become clear when the project begins operating in 2006. The Sinopec and CNOOC acquisitions are subject to approval by the other members in the consortium -- Eni, Exxon Mobil, Royal Dutch/Shell, TotalFinaElf, ConocoPhillips, and Inpex -- which have preemption rights, meaning that they can buy BG Group's stakes themselves under matching terms if they choose. DK

IN FOCUS
THE HUMAN FACE OF TAXES
Perhaps the most human feature of government is that no government ever has quite as much money as it would like. As an unexpectedly entertaining 13 March cabinet meeting demonstrated, nothing throws this familiar, if hardly charming, foible into such sharp relief as tax reform.

The Ministry of Finance had been scheduled to present its vision of tax reform for 2004 at the meeting. On the eve of the event, "Vedomosti" boldly opened an editorial on the subject, "The oligarchs' nightmare has become a reality." The nightmare, of course, is a tax hike, and precisely where it hurts Russia's oil-besotted tycoons most. A separate article detailed the provisions: tying export duties more directly to the market price of oil, taxing resources assigned to companies before 1993 (when more competitive, and costly, licensing procedures were introduced), and raising the production tax (officially known as the "tax on mineral production," or NDPI). If implemented, the plan would increase the tax burden on the oil industry from 33 percent to 36 percent, "The Moscow Times" reported on 14 March.

Oilmen were shaking their heads in dismay before the meeting commenced. "When the government talks about social justice and collecting the oil rent, it's infuriating. Let them raise all the taxes three times, as long as they guarantee that this is the last time. Then let's see who survives in three years," a highly placed industry source told "Vedomosti."

Taxes on the oil business were to have been only one part of the Finance Ministry's 13 March report, of course. But the Finance Ministry never had a chance to present its recommendations. Prime Minister Mikhail Kasyanov stopped Deputy Finance Minister Sergei Shatalov on his way to the rostrum, "Kommersant" reported on 14 March. An irritated Kasyanov waved off the report: "We've already familiarized ourselves with your materials. What the Finance Ministry has presented can't be called tax reform."

The remainder of the meeting went as poorly as it had begun for the beleaguered Finance Ministry. Presidential adviser Andrei Illarionov noted caustically that, according to International Monetary Fund data for 94 countries, only Lesotho, Croatia, and Belarus place a heavier tax burden on each individual citizen. Economic Development Minister German Gref asked about free economic zones, a pet project of his that the Finance Ministry had promised to include in its tax-reform package to offset Gref's objections to other provisions. "Where is this point?" Gref queried. "I crossed it out," Finance Minister Aleksei Kudrin told his colleague in a reply that bodes ill for the recent truce between the two occasionally warring ministries.

The sole concrete result of the discussion that failed to take place was a tentative agreement to reduce the value-added tax from 20 percent to 18 percent in 2004. In sum, Kasyanov gave the Finance Ministry until April to develop new proposals so that they could be squeezed into parliament's spring session.

When the combined, if not concerted, efforts of the Finance Ministry and Economic Development and Trade Ministry finally produce a more coherent plan for tax reform, its final provisions on oil industry taxation will prove a useful indicator of precisely what role that industry plays in Russian political life. Troika Dialog chief strategist James Fenkner told "The Moscow Times" of 14 March, "I wouldn't be surprised if the government does not find enough arguments to raise taxation for this politically important sector before the election." Understandably, the oil sector can only be expected to put its financial clout at the disposal of the political sector if no populist "soak the rich" schemes are in the offing. Alternately, one might argue that the political class stands to gain more from asking oilmen to contribute directly to its own war chest than from telling voters that it will force oilmen to contribute more to the public's coffers.

Should an oil-sector tax hike skirt the political reefs and arrive in parliament, it could prove equally instructive. Igor Dines, a member of the Budget Committee and proponent of raising taxes on the oil industry, told "Vedomosti" on 13 March, "The oil lobby is more than tangible in parliament. We'll see how many votes the government can really count on in the Duma." DK

MEAT GRINDERS AND FURNITURE SETS
As revenues from a booming oil business slosh through the Russian economy, they are bound to seek an outlet. One outlet is credit. A recent study by consulting firm Unicon's Center for Macroeconomic Research (TsMEI) shows that the total amount of credit extended by Russian banks to nonfinancial enterprises and organizations in 2002 rose 35.4 percent and exceeded $50 billion. Hard-currency loans increased more than 50 percent; ruble-denominated loans went up 28.6 percent.

As banks hand out more loans, however, they are finding fewer and fewer tried-and-true clients. Dmitrii Lepetikov, a specialist at the Development Center, told "Izvestiya" on 6 March, "There are no more large, reliable borrowers out there.... The good clients are energy exporters, and they can get credit easily in Europe by putting up future oil shipments to Europe as collateral. That's why banks have to pay attention to more difficult sectors of the economy now." As banks turn to those sectors and begin to attract riskier clients, they will have to develop subtler means of evaluating potential borrowers and mechanisms for coping with a likely increase in bad debts.

Individual loans are also on the rise. According to TsMEI, Russians borrowed 142.2 billion rubles ($4.53 billion) last year, a figure that includes business development loans to individual entrepreneurs. The majority of loans -- 81.5 percent -- were denominated in rubles.

An indication of consumer credit's growing popularity is the success of Czech-owned Home Credit, which provides short-term loans (four months to two years) to consumers looking to purchase anything from "a meat grinder to a furniture set," as "Izvestiya" wrote on 13 March. Home Credit has branched out from Moscow to Samara and Nizhnii Novgorod. It plans to set up shop in St. Petersburg this month. Aleksandr Kurakin, CEO of the Moscow-based bank that is the lynchpin of Home Credit's Russian operations, told St. Petersburg business newspaper "Delevoi peterburg" on 20 February that Home Credit, which arrived in Russia in mid-2002, is on track to do $10 million business in its first year. Kurakin said that Home Credit will increase its volume to $70 million-$80 million within a year or two.

The tough nut to crack for those who would like to see Russia move to a more credit-oriented financial system is the vast imbalance between loans and savings. If Russians borrowed 142.2 billion rubles in 2002, they still kept 1.2 trillion rubles, or eight times the amount they borrowed, in savings accounts. And that's not all -- by some estimates, an equal sum is kept squirreled away under floorboards and beds by citizens who have learned the hard way that a bank is not always the safest place for their money.

Study after study has coveted the rubles and dollars under those beds and floorboards, wondering how they can be coaxed out into the economy and exchanged for meat grinders and furniture sets. Home Credit's early success, and the general trend toward a slow expansion of the credit economy, indicate that instead of asking when Russians will start spending, studies should have been asking when Russians will start borrowing. The answer to that question appears to be "now." DK

XS
SM
MD
LG