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Business Watch: March 25, 2003


25 March 2003, Volume 3, Number 11
ENERGY
SIBNEFT TO PAY RECORD DIVIDENDS
Oil major Sibneft's board of directors has recommended that a 15 May shareholders meeting approve a record $1.09 billion dividend payment, "Gazeta" reported on 17 March. The payout of $0.23 per share, virtually all of the company's $1.1 billion 2002 net profit, would be the largest ever by a Russian company. Sibneft holds the current record with a $983 million dividend payout in 2001. Sibneft spokesman Aleksei Firsov explained to "Kommersant" on 15 that the company's dividend policy reflects high profits and the current low cost of borrowing: "Interest rates are low now, around 10 percent, and there's no reason to hold on to these funds." Chukotka Governor Roman Abramovich, who owns a 44 percent stake in Sibneft, will receive a tidy $480 million in dividends, "Gazeta" reported. Analysts differed on how the politically influential oilman will spend the windfall. Aton brokerage analyst Steven Dashevskii told "Vedomosti" that Abramovich and his partners might invest in the electrical-energy sector. Prospekt analyst Dmitrii Tsaregorodtsev told "Gazeta" that Abramovich is looking to develop Planeta Management Service, a food-industry holding company. DK

HIGHER EXPORT DUTY FOR OIL AND PETROLEUM PRODUCTS
Prime Minister Mikhail Kasyanov signed into law on 17 March a resolution raising export duties on oil and petroleum products, Interfax reported the same day. Export duties will rise from $25.9 to $40.3 per metric ton for crude oil and from $23.3 to $36.3 per ton for petroleum products. The higher duties go into effect on 1 April. DK

IRKUTSK GOVERNOR INVITES GAZPROM
Irkutsk Governor Boris Govorin announced on 17 March that he wants to bring in gas monopolist Gazprom to speed up the development of the 1.9 trillion-cubic-meter Kovytka gas field, "Vremya novostei" reported on 18 March. Irkutsk Oblast is prepared to sell Gazprom its 11.6 percent stake in Rusia Petroleum, which owns the license to develop Kovytka. A Gazprom representative told "Vedomosti" on 18 March, however, that the company would be interested in developing Kovykta only in the context of a comprehensive plan for the development of all of eastern Siberia. Current partners in Rusia Petroleum are British Petroleum (32.95 percent), Tyumen Oil Company (29.11 percent), Interros (25.71 percent), and Irkutsk (11.66 percent). The development of the Kovykta gas field has lagged, leading both Gazprom, in which the state holds a majority stake, and Governor Govorin to suggest that the state should take a more active role in ensuring its timely exploitation, "Kommersant" reported on 20 March. DK

TRANSNEFT MOVES TO HIKE EXPORT CAPACITY
Prime Minister Kasyanov signed a resolution on 17 March approving plans for state-owned pipeline monopolist Transneft to boost export capacity through the Baltic Pipeline System from 12 million tons per year to 42 million tons per year by 2005, "Vedomosti" reported on 20 March. Additional pumping stations could further increase the pipeline's capacity to 50 million tons per year. Transneft Vice President Sergei Grigorev told the newspaper that the company plans to borrow $1.2 billion to $1.3 billion to finance the project. With oil production setting new records, Russia faces an export-capacity crisis. Energy Minister Igor Yusufov recently wrote to Deputy Prime Minister Viktor Khristenko that oil companies have filed applications to transport 424 million tons of oil through the Transneft pipeline system in 2003, "Izvestiya" reported on 20 March. Transneft, which transported 353 million tons in 2002, lacks the capacity to satisfy all of the applications. For their part, oil companies insist that only new, large-scale projects can ease the export crunch. Yukos spokesman Aleksandr Shadrin told "Kommersant" on 19 March that proposed pipelines to Murmansk and China could solve the problem. The pipeline from Siberia to China alone could increase export capacity by 30 million tons annually. A government decision on the projects is due on 1 May. DK

FINANCE
OFFSHORE REPORT CAUSES FLURRY OF ANXIETY
An offhand remark by Igor Kostikov, head of Russia's Federal Securities Commission (FKTsB), on 15 March and a report in "Kommersant" three days later set off a brief spate of panic in the Russian business community. According to the newspaper, Kostikov told attendees at a Geneva conference that an agreement between the Cyprus Central Bank and the FKTsB provided for the exchange of information about the beneficiary owners of Russian companies registered on the island. According to "Kommersant," more than 30 percent of Cyprus's offshore companies are of Russian origin, and their owners have no desire to see any information about their Cyprus holdings revealed to Russian authorities. The vice president of an investment firm explained to the newspaper, "We could see an explosion of criminal cases over profit concealment, tax evasion, and violations of legislation on acquiring shares in foreign companies." Business daily -- and "Kommersant" competitor -- "Vedomosti" countered on 19 March with a story explaining that the "owners of Cyprus offshores can breathe easy." FKTsB spokesman Ilya Razbash told the newspaper that Kostikov's remarks were "nothing close to what 'Kommersant' wrote about yesterday." The brouhaha broke out over a 21 March 2002 memorandum that permits information exchange "in accordance with the legislation" of both countries but only with the permission of courts. Deloitte & Touche CIS partner Aleksandr Bragin told "Vedomosti," "Cyprus remains a completely safe jurisdiction as far as information disclosure goes." DK

VISA TOUGHENS MEMBERSHIP STANDARDS...FOR BANKS
The board of Visa Russia decided on 19 March to prohibit nonmember banks from servicing Visa cards through ATMs or cash disbursement points, "Kommersant" reported the next day. Of the approximately 460 Russian banks that currently service Visa cards, only 218 are system members. The remaining 250 banks will have until 1 January 2004 to pay a $5,000-$10,000 fee and become system members. After that date, Visa will enforce its rules through system members, fining them for allowing other banks to service Visa cards as their agents. Rosbank First Deputy Vice President Vladimir Golubkov told "Vedomosti" on 20 March that the move is an indicator of increasing competition on the card market: "When the market was getting started, there weren't enough cash disbursement points. Now there's competition, and banks that pay Visa dues want to protect their investment. So if you want to work, join Visa." Visa also plans to eliminate sub-acquiring, whereby nonmembers service Visa cards for commercial transactions by becoming agents of a bank. Beginning on 15 April, Visa will fine banks that allow sub-acquiring, "Gazeta" reported on 21 March. Impexbank's Pavel Ivanov explained to "Kommersant" that the agent and sub-acquiring arrangements are peculiar to the Russian market. "The situation in our country is a significant departure from Visa rules," he told the newspaper, "and now they want to put things in order." DK

COMPANIES
CONFLICTS RESOLVED, ILIM PULP AIMS TO CONSOLIDATE
Emboldened by its rebuff of a hostile takeover, timber-industry holding Ilim Pulp Enterprises plans to consolidate its assets with an eye to a public offering, "Vedomosti" reported on 18 March. A Moscow court rejected on 18 March a final appeal on a complicated share-acquisition case, sealing Ilim Pulp's victory over structures affiliated with aluminum tycoon Oleg Deripaska and St. Petersburg banker Vladimir Kogan, ABN reported the same day. Deripaska and Kogan had tried to gain control over Ilim Pulp's Kotlas Pulp-and-Paper Mill. Ilim Pulp now plans to bring the Kotlas mill together with three other mills to create a single company, eventually floating 10 percent-15 percent on the New York Stock Exchange. Ilim Pulp has set aside $7 million to buy out the 3.5 percent stake that belongs to minority shareholders, which would value the new company at $200 million. Zenit Bank analyst Sergei Suverov told "Vedomosti" that the figure is low. He noted, however, that this is the first major consolidation in the timber industry, recalling that when oilmen consolidated their holdings, they "simply tossed minority shareholders aside." DK

VIMM-BILL-DANN SALES RISE, PROFITS DISAPPOINT
Russian juice-and-dairy firm Vimm-Bill-Dann's (VBD) revenues grew faster than its profits in 2002, Finmarket reported on 17 March. The company's 2002 financial results to U.S. generally accepted accounting principles showed sales rising 22.3 percent year-on-year to $824.7 million; net profit, 12 percent to $35.7 million; and EBITDA, 13 percent to $83.3 million. VBD spokesman Sergei Plastinin explained that 2002 was a year of "an aggressive regional expansion strategy aimed at opening up fast-growing new markets and increasing our presence there." Troika Dialog analyst Andrei Ivanov told Reuters on 18 March that the profit results "are a bit disappointing overall." VBD financial director Vladimir Preobrazhenskii explained to "Vedomosti" on 18 March that the company plans a minimum of $136 million in capital investment in 2003 and is looking to expand into the bottled-water market. A 17 March article in "Ekspert" noted that the volume of the bottled-water market is already half that of the juice market, with an annual growth rate of 80 percent as opposed to 10 percent-15 percent in the juice sector. DK

FINAL RESOLUTION FOR FEUDING CONFECTIONERS?
The warring parties in the yearlong conflict over Moscow-based confectioner Babaevskii announced an amicable resolution on 15 March even as the Antimonopoly Ministry voiced concerns over the agreement, "Izvestiya" reported on 18 March. The two sides agreed that Babaevskii will become part of Guta Group's United Confectioners management company, which already runs two other key Guta Group confectionery assets, Rot Front and Red October. Babaevskii management will retain two seats on the concern's new board of directors, with six seats going to Guta Group and one to the city of Moscow. The sides also reached a settlement on Babaevskii's $40 million debt to Guta Group. The deal could bode ill, however, for Alliance Group, which gave Babaevskii a $14 million loan in the heat of the conflict, so that the concern could pay off its debts to Guta Group. An unidentified Guta manager told "Vedomosti" on 18 March, "we don't consider [this credit] legal, and we don't intend to return anything." For its part, the Antimonopoly Ministry expressed concern that the consolidation could limit competition and promised a careful study of the deal, RosBusinessConsulting reported on 21 March. If the deal goes through, it will be the largest-ever merger on the Russian confectionery market, producing a company with annual turnover of $500 million and control over one-quarter of the sweets market, "Kommersant" reported on 17 March. DK

ALUMINUM-INDUSTRY INVESTMENT, EXPANSION
Russia's second-place aluminum producer Sual will spend $2.1 billion to build a new aluminum plant in the Komi Republic, Komiinform reported on 21 March. Vladimir Kremer, director of the newly created Komi Aluminum, which will be the project operator, said the complex will produce 1.4 million tons of alumina and 300,000-500,000 tons of aluminum per year when it begins putting out metal in 2008. Sual recently entered into a partnership with the British investment company Fleming Family & Partners (FFP), and FFP representative Mark Garber told "Vedomosti" on 21 March that while FFP and Sual are looking for a strategic partner, they are prepared to finance the project independently. Meanwhile, a representative of Russian Aluminum -- the country's top producer, and the second-largest in the world -- announced on 20 March that the company hopes to become the biggest in the world by 2012, Reuters reported. Construction directorate head Ilay Akhmetov explained that RusAl plans to overtake the world leader, U.S.-based Alcoa, by building new smelters to boost production capacity by 1.37 million tons. RusAl produced 2.48 million tons in 2002; Alcoa topped that with 3.42 million tons. DK

COMMUNICATIONS
MOBILE-PHONE SALES DOUBLE IN 2002
A recent study by research company International Data Corporation shows that mobile-phone sales in Russia doubled in 2002 and exceeded $1.2 billion, Interfax reported on 18 March. Russian consumers bought some 9 million phones in 2002, as compared to 4.1 million in 2001. Germany's Siemens was the most popular producer with more than 30 percent of the market. The average price of a mobile phone dropped from $136 to $133. But some market analysts had doubts about the study, "Vedomosti" reported on 18 March. ACM Consulting analyst Anton Pogrebinskii told the newspaper that actual sales were likely higher as a result of "gray shipments, which account for about 40 percent of all retail sales." DK

INVESTMENT
EFES TO ACQUIRE AMSTAR IN UFA
Turkish brewer Efes announced on 14 March that it plans to purchase the Amstar brewery in Ufa, "The Moscow Times" reported on 17 March. The parties involved were mum on the size of the deal, but United Financial Group analyst Aleksei Krivoshapko told "Vedomosti" that the brewery will cost Efes at least $50 million. Amstar is one of Russia's larger independent brewers, accounting for 0.8 percent of the national market. Efes will add Amstar to a Russian portfolio that currently includes the Moscow-Efes Brewery and a carbonated-beverage factory in Rostov. The deal could be completed by mid-April. DK

AVTOVAZ TO JOIN UP WITH GM TO FOR OPEL PRODUCTION
General Motors will team up with troubled Russian auto giant AvtoVAZ to assemble the mid-range Opel Astra T-3000 at a joint venture in Tolyatti, Ria-Novosti reported on 19 March. The Astra will retail for $11,000-$12,000, making it a competitor for the popular Ford Focus, now assembled at a plant outside of St. Petersburg. GM representatives estimated last year that the joint venture will require investments of $60 million to $80 million to begin production, "Vedomosti" reported on 19 March. When production will begin is another question; AvtoVAZ CEO Vladimir Kadannikov told journalists that production would not begin in 2003, "The Moscow Times" reported on 19 March. The deal could be a boon to AvtoVAZ, which experienced an overproduction crisis in 2002, as Russian buyers increasingly opted for used and Russian-assembled foreign cars over homegrown manufacturers' Soviet-era offerings. GM is already involved in a joint venture with AvtoVAZ to produce the off-road Chevrolet Niva. DK

IN FOCUS
THE WAR OVER OIL
Christof Ruhl, the World Bank's chief economist for Russia, fell short of a sensation on 19 March when he unveiled the bank's annual report on the Russian economy. The report's diagnosis of an economy increasingly dependent on oil and gas exports merely makes it the latest in a long string of similar studies, reports, remarks, and regrets. But the Russian economy's oft-noted symbiotic relationship with oil has sparked anxiety and speculation against the backdrop of the U.S.-led war in Iraq and attendant jitters on world markets.

The cabinet's 20 March meeting, for example, reviewed the Economic Development and Trade Ministry's growth forecasts with an eye to the war in Iraq, "Gazeta" reported the next day. For starters, the cabinet raised its estimate of the 2003 average price of Russian Urals brand oil, a key figure for budget calculations, from $21.50 per barrel to $25.50. That done, ministers and their deputies expressed confidence that neither a short war nor a long one would inflict harm on the Russian economy. Economic Development and Trade Minister German Gref couched the dominant optimism in suitably reserved officialese: "Our reserve of stability is sufficient for us to hedge the short-term risks that might arise."

Presidential economic adviser Andrei Illarionov chimed in with a note of dissenting pessimism, forecasting in "Trud" on 21 March that war in Iraq could have long-term negative effects for the Russian economy. According to Illarionov, "oil fields in Iraq could be destroyed or damaged in the course of military action," interfering with shipments to world markets. Moreover, the war could destabilize the political situation in the region, leading to "changes in the ruling regimes of a number of countries that are major suppliers of oil to world markets." In Illarionov's scenario, skyrocketing prices would encourage even greater Russian dependence on oil even as they paved the way for a global economic slowdown.

Given the inherent unpredictability of oil prices, others focused on the fate of Russian economic interests in Iraq. Chief among those interests are Iraq's estimated $8 billion-$9 billion debt to Russia and a raft of contracts, some signed and others promised, with the current regime to develop Iraqi oil fields.

Iraq stopped paying its debts 13 years ago. "Vedomosti" reported on 18 March, however, that the prospect of war and regime change in Iraq has sparked renewed interest in the country's commercial debts in recent months. Approximately $11 billion in Iraqi debt -- mainly bank credits extended in the 1980s -- circulates on markets, and its value has jumped from $0.08 to $0.16 on the dollar over the past half year.

Though this indicates rising optimism that what is now worthless paper might soon gain value, it does not affect the sovereign debt Iraq owes Russia. Salah al-Shaykhli, who headed Iraq's Central Bank in the 1970s and is now a member of the opposition group Iraqi National Accord, provided some insight on that score in a 17 March interview with Reuters. Al-Shaykhli, who has worked with the U.S. Treasury Department on plans for debt resolution in post-Saddam Hussein Iraq, suggested that the former Yugoslavia's debt could offer an instructive example. Sixty-six percent of Yugoslavia's debt was written off. Al-Shaykhli called Yugoslavia "a very attractive model," adding, "definitely we would like to see some of [the debt] negotiated away."

Mikhail Zak, senior analyst at investment company Veles Capital, spoke to "Utro" on 22 March about the fate of Russian oil contracts in Iraq. Zak presented the war as a win-win situation for Russia, arguing that while the United States would be unlikely to risk relations with Russia by liquidating existing contracts, a continuation of Hussein's regime would also leave Russia "in a strong position."

A 22 March article on gazeta.ru was less sanguine, predicting a "vast redistribution of Iraqi oil reserves in which Russia can expect only losses." Yurii Shafranik, chairman of the Russian Union of Oil and Gas Producers, was more specific, telling the online newspaper that the cancellation of existing contracts would cost Russian companies more than $2 billion, with billions more lost in future revenues. In a textbook illustration of how economic interests can spawn political ambiguity, the article concluded, "Iraqi soldiers are, it seems, now fighting not only for Saddam, but for the interests of Russian oil companies."

Economic interests can also produce political clarity. In a 21 March comment to "Vechernyaya moskva," Valentin Fedorov, deputy directory of the Institute of Europe, suggested that a focus on economics could produce a radical shift in Russian foreign policy. "Our government is not doing what it should," Fedorov said. "I would recommend not struggling for peace on Earth but negotiating with the Americans so that our economic interests in Iraq are respected. That's what we should fight for, so that LUKoil comes out of this war with as few losses as possible." DK

THE SUM OF ITS PARTS
The latest plan to reform Russian natural-gas monopoly Gazprom proposes breaking it down into its component parts. Meanwhile, the sum of those parts continues to exert a force sufficiently powerful to stymie any attempt at reform.

The aim of reform is clear enough: to turn a debt-ridden, state-run behemoth that strangles competition into the cornerstone of a healthy, competitive free market for the production and sale of natural gas. The conditions are equally clear: keep cash from exports flowing into state coffers and prevent price shocks on the domestic market, where natural gas currently sells for about one-fifth the price it fetches in Western Europe.

At least that is the theory of it. In practice, reform has foundered less on principle than on process. A planned 26 December 2002 cabinet discussion of gas-sector reform fell through when Gazprom CEO Aleksei Miller sent a letter to President Vladimir Putin decrying the "destructive" proposals put forward by the Ministry of Economic Development. (The ministry's main idea was to begin reform by lopping a few limbs off the giant, such as the transport system and underground repositories.) The president nodded in assent, and everyone set about "reworking" and "rethinking" reform ideas in anticipation of a 19 March meeting.

In the interim, Gazprom celebrated its 10th anniversary, replete with gala concert and presidential address. In his address, the president stressed the need to maintain Gazprom as a "single organism." The monopoly's management has since taken the phrase as its slogan in its struggle against reform-inspired dismemberment proposals and "refers to it whenever it gets the chance," "Gazeta" reported on 20 March.

The 19 March discussion brought together the chief proponent of the status quo, Gazprom head Miller; the leading advocate of reform, Economic Development and Trade Minister Gref; and Prime Minister Kasyanov as referee. Before the meeting, Gref's ministry put forward a new reform plan that "Vedomosti" described on 17 March as "much more radical than its predecessor." No fireworks ensued, however. The prime minister listened, asked questions, and promptly dispatched all involved to fine-tune their proposals by 1 May, "Vremya novostei" reported on 20 March.

Former Economics Minister Yevgenii Yasin told "Kommersant" on 20 March that no one should expect any real reform of Gazprom until elections are over in 2004. Even so, the laws of the genre require further reform proposals. These may or may not lead to a real perestroika of Gazprom, but they are almost certain to provide insight into the mechanics of government. DK

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