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Business Watch: March 4, 2003


4 March 2003, Volume 3, Number 8
ENERGY
GAZPROM APPROVES BUDGET...
Gazprom's board of directors approved the company's 2003 budget and investment program on 25 February, "Kommersant" reported the next day. Though the final budget includes a number of cost-cutting measures, the cash-strapped natural-gas monopolist will still have to borrow to cover a 137.5 billion-ruble ($4.35 billion) deficit. Forecasting 2003 revenues of 1.04 trillion rubles, the budget provides for capital expenditures of 180 billion rubles and debt repayments of 193.2 billion rubles. The gas giant also plans to rid itself of 6 billion rubles' worth of noncore assets, although the board chose to leave untouched a controversial 2 billion-3 billion-ruble advertising budget and 38 billion rubles in operating expenses, "Vremya MN" reported on 26 February. The company will benefit from changes to tax legislation that will allow it depreciate $2.65 billion of its $19.86 billion worth of pipeline rather than the $1.2 billion it had originally foreseen, "The Moscow Times" reported on 26 February. The company's budget sparked conflict at an early-January board meeting between Economic Development and Trade Minister and board member German Gref and Gazprom CEO Aleksei Miller, with Gref advocating more stringent cuts. Gazprom is saddled with approximately $15 billion in debt, $6 billion of which comes due this year. The approved budget reflects a partial compromise, with capital expenditures reduced but disputed operating expenses left intact. DK

...AND RAISES EYEBROWS WITH MYSTERY MIDDLEMAN
Gazprom's contract with an obscure Hungarian firm to supply Turkmen gas to Ukraine in 2003-06 dredges up memories of murky schemes to divert profits, "Vedomosti" reported on 27 February. Under the terms of the contract, Eural TG -- founded on 6 December with $12,000 in start-up capital in the Hungarian town of Csabdi by Israeli citizen Zeev Gordon and three Romanian citizens under the direction of former Hungarian official Andras Knopp -- will pay Gazprom $470 million in transit fees annually and receive from Ukraine 13.7 billion cubic meters of gas with a market value of at least $600 million, making for a tidy profit of $130 million (or more, if the gas is sold on international markets). Gazprom drew criticism in the past for similar schemes with middleman Itera, and the company had promised to "cut out the middleman" and make its gas deals more transparent. Gazprom Deputy CEO Aleksandr Ryazanov told "Vedomosti" that the new arrangement gives both Gazprom and Ukraine's Naftogaz "equal additional revenues." Observers were not convinced. "The Moscow Times" reported on 28 February that "investors are up in arms" over the report. Hermitage Capital Management's Vadim Kleiner told the newspaper, "There is no reasonable explanation for this fact." United Financial Group's Pavel Kushnir seconded him, calling the deal "very, very strange." DK

LUKOIL REASSERTS CONTROL OVER AFFILIATE...
LUKoil announced in a 21 February press release that it acquired complete control of LUKoil-Perm, one of its main production assets. In the deal, 100 percent LUKoil subsidiary LUKoil Overseas purchased 100 percent of PFPG-Energy, the owner of a 27 percent stake in LUKoil-Perm. The $398 million purchase price made it the largest minority buyout in Russian history. LUKoil-Perm has proven assets of 208.8 million metric tons, RosBusinessConsulting (RBK) reported on 21 February, meaning that LUKoil paid $0.98 per barrel of reserves, slightly below the Russian average. Although the deal was audited by PricewaterhouseCoopers, analysts were quick to note a possible conflict of interest. PFPG-Energy does not publicize shareholder information, but both "Vedomosti" and "The Moscow Times" reported that President Andrei Kuzyaev holds a controlling stake. Kuzyaev is also the general director of LUKoil-Perm and president of LUKoil Overseas. As Troika Dialog analyst Valerii Nesterov delicately explained to "Vedomosti" on 25 February, "The form in which the company reported the deal raises a number of questions about its transparency." DK

...AND BURIES THE HATCHET WITH ROSNEFT
LUKoil and state-owned Rosneft have resolved all their disputes over assets, lenta.ru reported on 25 February. The agreement, signed by Presidents Vagit Alekperov and Sergei Bogdanchikov, settles their differences over joint ownership of Arkhangelskgeoldobycha, which holds right rights to produce oil and mine diamonds in Komi, as well as the Prirazlom oil field and the Shtokman gas field, "Vedomosti" reported on 25 February. Most importantly, LUKoil has agreed to end its long-running dispute with Severnaya Neft, recently acquired by Rosneft (see "RFE/RL Business Watch," 28 January and 11 and 18 February 2003), over a share issue that vastly reduced LUKoil's stake in the company and the development rights to the Val Gamburtsev oil field. The terms of the settlement were not made public. The resolution apparently confirms the wisdom of Severnaya Neft's former owner, Andrei Vavilov, who in January announced the sale of his oil company to journalists, gloating that LUKoil would lose all interest in legal wrangles with the purchaser. In a 26 February article, "Vremya novostei" suggested a connection between the truce and President Vladimir Putin's recent comments in support of Rosneft at a meeting with business magnates. Aton analyst Stephen Dashevskii told "Vedomosti," however, that the agreement was probably hammered out before the sale of Severnaya Neft. DK

FEDERATION COUNCIL ROUNDTABLE DISSENTS ON PRIVATE PIPELINES
A Federation Council roundtable on the development of Russia's overburdened pipeline system came out in support of private financing and ownership of new pipelines, "Kommersant" reported on 28 February. Valentin Zavadnikov, chairman of the Federation Council's Industrial Policy Committee, spoke of the need for legislation to regulate "the creation and operation of both federal and private pipelines." This stance contradicts Prime Minister Mikhail Kasyanov's early-January comments that pipelines will remain in the hands of state monopoly Transneft. A consortium of five oil companies wants to build a $4 billion pipeline from western Siberia to the deepwater port in Murmansk, and Yukos wants to build a link to China. "Vedomosti" reported on 28 February that the Federation Council roundtable was merely the opening round in a new lobbying effort by oil companies to push through new pipeline legislation permitting private ownership. With booming (private) production testing the limits of the existing (state-owned) transport system, the race for new export outlets, and the question of who controls them, promises to remain a hot topic. DK

FINANCE
EXCHANGE PRESIDENT STEPS DOWN
The board of the Russian Trading System (RTS) exchange announced in a 27 February press release (http://www.rts.ru/) that it accepted the resignation of Director Ivan Tyryshkin and named First Vice President Vladislav Streltsov acting president. Tyryshkin's departure comes amid a spat with the Federal Securities Commission (FKTsB) over the calculation of trading volumes and the division of transactions into "on-market" and "off-market." The FKTsB, which could revoke RTS's license if it fails to bring its practices into compliance with regulations, will review the case next on 5 March. Many observers linked the regulatory action, and Tyryshkin's subsequent resigation, to a dispute between Tyryshkin and FKTsB Chairman Igor Kostikov. A participant in a recent meeting between RTS representatives and the FKTsB told "Vedomosti" on 27 February, "We ended up with an ultimatum; the FKTsB needs Tyryshkin's head." A source told "Kommersant" on 27 February, "[Tyryshkin] got involved in politics and didn't listen to Igor Kostikov's recommendations on who to be friends with and who not to be friends with." Sam Barden, head of trading at Trust and Investment Bank, told "The Moscow Times" on 28 February that it would hardly be a tragedy if the RTS lost its license in the brouhaha, commenting, "A single exchange would make the market easier to regulate and more transparent." Moscow is now home to two exchanges, the RTS and the MICEX. The RTS is by far the smaller of the two; its 2002 turnover of $4.57 billion was only one-tenth of the volume on the MICEX. DK

COMPANIES
MINISTRY RELEASES 2003 PRIVATIZATION LIST
Yurii Medvedev, first deputy minister of state property, announced to journalists on 27 February that the choicest privatization morsels to be offered up in 2003 are a 25 percent stake minus two shares in communications giant Svyazinvest, a 26 percent-minus-one-share stake in insurer Rosgosstrakh, and a 17.84 percent stake in the Magnitogorsk Iron and Steel Works (MMK), RBK reported the same day. The Property Ministry initially suggested it would like to get $1 billion for Svyazinvest, $10 million for Rosgosstgrakh, and $175 million for MMK, "Vedomosti" reported on 28 February, although the ministry hastened to add that it will be conducting additional appraisals. Svyazinvest, which controls more than 90 percent of Russia's telephone numbers, is slated to be restructured into seven regional companies by the end of 2004, "Vremya MN" reported on 25 February. A 28 February editorial in "Vedomosti" suggested that the state might benefit by reviving an idea conceived earlier by George Soros, who cofounded the Mustcom consortium that purchased 25 percent of Svyazinvest in 1998 for $1.875 billion (a venture Soros later dubbed "the worst investment" of his career). The idea is that the state could make more by selling shares in Svyazinvest's regional subsidiaries than by selling a stake in the parent company. Finance-Analytic expert Sergei Arinin objected to "Vremya MN," however, that the subsidiaries are faring poorly and might not fetch a high price. DK

COMMUNICATIONS
TATARSTAN CELL SPAT TURNS NASTY
A group of masked men armed with machine guns burst into cellular operator Vimpelcom's Kazan offices on 27 February, "Kommersant" reported the next day. The men identified themselves as members of a unit in Tatarstan's Ministry of Internal Affairs (MVD) that fights high-tech crimes and said they were looking for "uncertified equipment." The raid comes amid a conflict between Vimpelcom and TAIF-Telecom, Tatarstan's largest, and most politically connected, cellular operator. The dispute began on 5 February when TAIF-Telecom, which operates under the brand Santel, blocked calls between its subscribers and competitors Bee-Line (Vimpelcom), Megafon, and Smarts, citing a ban on direct connections between operators who have not signed a network-cooperation agreement with each other. TAIF-Telecom claims that the newcomers need to pay for equipment upgrades to compensate for the added strain on networks before it can sign agreements with them; competitors charge that the company is abusing its position as a local monopolist, "Vedomosti" reported on 17 February. Vimpelcom lodged an official complaint about TAIF-Telecom's business practices with the Antimonopoly Ministry on 26 February, "Vremya novostei" reported the next day. TAIF-Telecom is part of the TAIF Group, a local business conglomerate with close ties to the Tatarstan government. A spokesperson for the Tatarstan MVD told "Kommersant" that the surprise visit by gun-toting guards in masks was merely a part of "routine checks at a number of telephone companies." A 28 February report in "Vedomosti" that Vimpelcom rival Mobile TeleSystems (MTS) is in final talks to buy Taif-Telecom further muddies the waters; MTS has denied the report. DK

INVESTMENT
HIGH HOPES FOR MIDDLE-BROW HOTELS
Two ambitious projects could ease a shortage of reasonably priced lodging in Russia's major cities. Group Menatep has announced a $300 million project to construct a national chain of mid-range hotels, while U.S.-based Delta Capital Management is embarking on a separate project to sink as much as $600 million into 50 three-star hotels, ABNews reported on 22 February. Group Menatep, linked through Mikhail Khodorkovskii to oil company Yukos, will collaborate with Britain's Sabre Projects Ltd. and U.S.-based Marriott on the hotels, which will offer travelers rooms starting at $70 per night. Menatep subsidiary GM Investment & Co. will kick the project off with a $30 million-$40 million investment. For its part, Delta Capital Management will collaborate with hotel operator Rezidor SAS and investment funds Swedfund International AB and The Investment Fund for Central and Eastern Europe, "Vedomosti" reported on 21 February. According to "Vedomosti," the project envisages building 50 hotels over 10 years for $400 million. Industry observers, as well as ordinary travelers, have long complained of a lack of affordable lodging in Russian cities, which frequently offer visitors a stark choice between pricey five-star luxury and dicey Soviet-era relics. DK

RENAULT INKS MOSCOW PRODUCTION DEAL
France's Renault signed a deal with the city of Moscow on 26 February to invest $250 million into a production facility for affordable family sedans, RBK reported the same day. The city of Moscow, which owns 38 percent of the Avtoframos joint venture, in return will provide tax breaks and cheap rent, "Vremya MN" reported on 27 February. French engineers are still at work on the X90, which is targeted at Eastern European markets with a sticker price of approximately $10,000. Renault hopes to churn out 60,000 X90s a year in Moscow by 2007, "Kommersant" reported on 27 Feburary. Moscow Mayor Yurii Luzhkov even talked about boosting annual production to 120,000, "The Moscow Times" reported on 27 February. The investment marks the largest commitment to date by a foreign carmaker to a production facility in Russia, outstripping the $130 million that Ford invested in its plant outside St. Petersburg and the $100 million that General Motors put into its AvtoVAZ joint venture. A 27 February editorial in "Vedomosti" cautioned against viewing the project as a victory for the protective tariffs on imported used cars that Russia introduced earlier this year, noting that Renault was more likely lured by reduced tariffs on the imported parts that it will use to assemble the X90. DK

IN FOCUS
FOREHEADS TO THE GROUND
Nothing confirms the reality of power like the humility of petition. In the old days of Muscovy, humble requests to the ruler of the land were candidly termed "chelobitnye" -- literally, "beating one's forehead against the ground" -- in a presumed reference to the Mongol traditions that made their way into Russian life after the Golden Horde overran Kievan Rus in the 13th century. Under the Soviets, Central Committee decisions often issued forth against a backdrop of imploring collective letters from workers, peasants, and intellectuals to the general secretary of the Communist Party.

With Mongol overlords as scarce as epistolary-minded proletarians these days, the torch has passed to new hands. Gazprom CEO Aleksei Miller and Rosneft President Sergei Bogdanchikov offered up a homage to tradition with a 17 February missive to President Vladimir Putin proposing an ambitious scheme for reapportioning licenses to develop oil and gas fields in eastern Siberia and Yakutia. The heads of the two state-controlled behemoths -- whom "Vedomosti" on 27 February accurately described as "part state officials, part oligarchs" -- want to unite the oil and gas fields of Chayanda, Kovykta, Upper Chona, Talakan, and Mid-Botuoba into a single project and auction off the rights. Miller and Bogdanchikov argue that it will be easier to develop the fields as a single group, "Konservator" reported on 28 February.

Eastern Siberia hardly lacks for hydrocarbons. "Vedomosti" reported on 26 February that the Chayanda gas field has reserves of 1.2 trillion cubic meters of natural gas; Talakan 124 million metric tons of oil and 47 billion cubic meters of gas; Kovykta 1.88 trillion cubic meters of gas; Upper Chona 200 million metric tons of oil and 95.5 billion cubic meters of gas; and Mid-Botuoba 51.6 million metric tons of oil and 547 billion cubic meters of gas.

According to "Vedomosti," President Putin liked the idea and scrawled on the letter, "Proposal deserves attention and support." "Gazeta" reported a slightly different resolution on 27 Feburary: "Review proposal."

Whatever the merits of the authors' arguments, and whatever the president's actual resolution, the letter bumps up against one rather thorny issue: Only two of the five fields are still up for grabs. Licenses to develop the remaining three fields -- Kovykta, Upper Chona, and Mid-Botuoba -- are already in the hands of lawful owners. Licenses for Kovykta and Upper Chona belong to Rusia Petroleum, the main shareholders in which are British Petroleum (BP), Tyumen Oil Company (TNK), and Interros; Mid-Botuoba belongs to local Yakut oil company Taas-Yuryakh-Neft.

Reaction to the idea was uniformly negative. "Izvestiya" termed the whole business of letters from captains of industry to the head of state a "pernicious practice." The newspaper went on to call such correspondence lobbying "amoral and destructive both for the reputation of business itself and for its relations with the authorities." A 27 February editorial in "Vedomosti" calmly noted that the examples of Latin America and Asia show that state monopolies in the energy sector are corrupt and inefficient. An industry representative huffed sarcastically to "Vremya novostei" on 28 February, "Maybe we'd be better off if we unified all the oil and gas companies in Russia."

Gazprom spokesman Igor Plotnikov told "Vedomosti" that the idea is not to annul existing licenses and hand them over to Gazprom and Rosneft, but rather to create a consortium to develop a new superfield cobbled together from what are now five separate fields. As for the legal niceties, a Rosneft representative resorted to the power of the obvious, explaining, "Only the state can determine the legislative mechanisms to support this idea."

While a redistribution of existing licenses would be sufficiently scandalous to render it highly unlikely, Gazprom and Rosneft will be strong contenders for a license for the Chayanda and Talakan fields if they can convince the powers that be to tie them together. Talakan is mainly an oil field, while Chayanda holds mostly gas, a good mix for a Gazprom-Rosneft tandem, "Konservator" reported on 28 February. Some argue, however, that Gazprom and Rosneft lack the financial resources to develop the fields. A source close to Yukos offered a solution to "Vremya novostei" on 28 February, explaining that the two state companies plan to divvy up the rights to eastern Siberia's remaining assets and then make them available to foreign companies for a hefty price.

Gazprom CEO Miller's last letter to Putin was the 24 December "Conception for Developing the Gas Market in the Russian Federation," a heartfelt plea to postpone the reform-inspired dismemberment of the natural-gas monopolist. If the president's comments at Gazprom's recent 10-year anniversary party about the need to preserve the monopoly as a "single organism" are any indication, the letter did not fall on deaf ears.

Eastern Siberia's riches, and especially the Talakan and Chayanda fields, represent a new arena for competition and enrichment in the Russian energy sector. Should their letter serve them well, Miller and Bogdanchikov are sure to be joined by other petitioners, foreheads pressed to the oil-rich ground in a tradition that is perhaps better left to wither than to flourish. DK

NOT SO LONELY AT THE TOP
2002, it seems, marked the end of an era -- the era of the lonely Russian billionaire. "Forbes" magazine's 17th annual list of the world's richest people contains 17 Russians, 10 more than the year before, garnering Russia fourth place worldwide and making Russian billionaires the fastest-multiplying examples of the species on the planet.

Leading the Russian section of the list with $8 billion is 21st-century oilman and born-again advocate of sound corporate governance Mikhail Khodorkovskii, CEO of Yukos. The rest of the pack, arranged here roughly by financial interests, are as follows (figures, obviously enough, in the billions of U.S. dollars):

Yukos: Mikhail Khodorkovskii (8), Leonid Nevzlin (1.1), Mikhail Brudno (1.0), Vladimir Dubov (1.0), Platon Lebedev (1.0), Vasilii Shakhnovskii (1.0)

Alfa-Group/TNK: Mikhail Fridman (4.3), Viktor Vekselberg (2.5)

Millhouse Capital (Sibneft/RusAl): Roman Abramovich (5.7)

Interros/Norilsk Nickel: Vladimir Potanin (1.8), Mikhail Prokhorov (1.6)

Basic Element (RusAl): Oleg Deripaska (1.5)

AfK Sistema: Vladimir Yevtushenkov (1.5)

LUKoil: Vagit Alekperov (1.3)

Severstal: Aleksei Mordashov (1.2)

Surgutneftegaz: Vladimir Bogdanov (1.0)

Paul Klebnikov, a specialist on Russian business and senior editor at "Forbes," explained to "RFE/RL Business Watch" in a 3 March telephone interview that the list's compilers focus on assets. After determining who controls how much of what, they establish the value of the companies, either by market capitalization, recent deals, or comparison with analogous outfits elsewhere. Klebnikov noted that the accuracy of "Forbes"' past calculations has been confirmed by subsequent information released by Yukos and LUKoil.

And herein lies the list's first lesson: It is getting easier to figure out exactly who has how much of what in Russia. Khodorkovskii is only one of several superrich Russians to have owned up to his business interests. Stephen O'Sullivan, head of research at United Financial Group, told "The Moscow Times" on 3 March that greater disclosure is one reason that so many more Russians joined the "Forbes" list in 2002, a year that saw a general decline in billionaires' literal and figurative fortunes worldwide.

The second lesson is that more and more of the wealth showcased in the list is generated by companies that have begun to resemble their Western counterparts, with financial results calculated to internationally accepted standards and increasing concern for shareholder value. As recent corporate scandals have shown, glossy annual reports are hardly a guarantee that all is well beneath the surface. Still, the improvement of corporate governance in Russia is both genuine and genuinely important.

The third lesson is that the very phenomenon of the Russian billionaire acts as a litmus test for varying evaluations of the country's transition to capitalism. Russia's communist-patriotic press broke into predictable howls of outrage at the list, leveling charges of iniquity and inequality. In a representative outburst, "Gudok" wrote on 1 March, "Fairy-tale riches can only come through the shameless appropriation of the people's wealth, causing the impoverishment of millions who labor." At the other end of the spectrum, a 3 March editorial in business daily "Vedomosti" concluded that, while Russia has "a suspiciously large number of billionaires for a relatively poor country," the nation as a whole has grown wealthier and must continue on its journey from "shadow into light." DK

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