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Business Watch: June 10, 2003


10 June 2003, Volume 3, Number 21
ENERGY
TRANSNEFT TO BORROW $900 MILLION FROM SBERBANK
State-owned oil-pipeline monopoly Transneft signed a letter of intent on 3 June to borrow up to $900 million from Sberbank, also state-owned, to finance future projects, ABN reported the same day. According to a 3 June Transneft press release, the first 10 billion rubles ($327 million) will arrive later this month to fund the expansion of the Baltic Pipeline System (BTS). Transneft estimates that upping the BTS's capacity from 12 million tons annually (240,000 barrels per day) to 42 million tons (840,000 barrels per day) will cost $1.2 billion-1.3 billion, "Vedomosti" reported on 4 June. Petroleum Argus analyst Mikhail Perfilov warned in "Kommersant" on 4 June that the project could prove to be overly ambitious when measured against current transportation resources on the Baltic and demand for Russian oil in Europe. Inspired by high oil prices, Russian producers have been clamoring for added export capacity. DK

TNK MINORITY SHAREHOLDERS FREEZE $380 MILLION IN ASSETS
Minority shareholders in Tyumen Oil Company (TNK) have obtained an order from a court in the British Virgin Islands freezing $380 million of the oil major's assets, "The Moscow Times" reported on 3 June. The suit, by British Virgin Islands-based Astian Group and Seychelles-based Indian Ocean Petroleum Services, alleges that TNK used transfer-pricing schemes to cut minority shareholders out of their fair share of the company's profits. TNK Vice President Dmitrii Ivanov told "Vedomosti" of 3 June that the suits are "a typical example of greenmail, and our lawyers will prove this in court." A 4 June report in "Nefte Compass" linked the two plaintiffs to U.S. investor Kenneth Dart, noting that they have filed similar suits against other Russian oil companies in the past, albeit without success. With TNK currently involved in a multibillion-dollar joint venture with U.K.-U.S. BP, the lawsuit and asset seizure generate inopportune negative publicity. Lawyers for TNK will initiate proceedings on 9 June to have the order lifted, the "Financial Times" reported the same day. Russian companies have consistently claimed that transfer pricing -- whereby subsidiaries of a single company sell goods to each other at reduced prices in order to minimize taxable profit -- is legal under Russian law. DK

MOSENERGO BOARD CHANGES
Moscow utility Mosenergo announced in a 3 June press release that on 30 May the company held its annual shareholders' meeting and elected a new board of directors. The new board reflects changes in the company's shareholder structure, with minority shareholders gaining one seat to bring their representation to three of 13. The three minority-shareholder representatives are: Aleksandr Savin and Hodson Thornber of Renaissance Capital and Artem Kuznetsov of Guta Bank. "Kommersant" reported on 31 May that Business Development Corporation Holding Limited, which advanced Kuznetsov's candidacy, represents the interests of Viktor Vekselberg, chairman of the board at both aluminum producer Sual and oil company TNK. Troika Dialog President Pavel Teplukhin told "Vedomosti" of 2 June that the minority shareholders might be looking to sell their stakes, which could total 17 percent of the company, to the city of Moscow, which already owns about 8 percent of Mosenergo. The beginning of the year witnessed heightened interest in Mosenergo stock, "Gazeta" reported on 2 June. Observers now estimate the stock's free float at no more than 4-6 percent. DK

COMPANIES
TOUGH ROAD AHEAD FOR AVTOVAZ
AvtoVAZ shareholders voted at their annual meeting on 31 May to pay out dividends of 219.7 million rubles ($7.2 million), or 31 percent of the carmaker's $22 million 2002 net profit, "Izvestiya" reported on 4 June. The payment will have to wait for the resolution of a lawsuit brought by minority shareholders over last year's dividends, however. A Troika Dialog research note concluded gloomily, "The generous payout looks suspiciously like an attempt to buy [shareholders'] consent, rather than a genuine intention to turn over a new page in the company's dividend history," "The Moscow Times" reported on 4 June. AvtoVAZ faced an acute overproduction crisis in 2002 and halted its conveyer belts several times. Meanwhile, the State Audit Chamber is looking into a 2001 agreement with the Federal Property Fund that allowed AvtoVAZ management to regain control of a 51 percent stake in the company that the state had impounded as collateral for a $900 million debt, "Vedomosti" reported on 2 June. In a curious coincidence, the Audit Chamber probe was initiated by Aleksandr Klevlin, head of the pro-Kremlin Unity Party's bloc in the Samara Duma and director of a company embroiled in a legal dispute with AvtoVAZ. Even more curiously, AvtoVAZ board Chairman Vladimir Kadannikov and Director Vitalii Vilchik joined the Unity Party in the last week of May, "Vedomosti" reported on 2 June. DK

NORILSK NICKEL RELEASES FIRST INTERNATIONAL RESULTS
Metals giant Norilsk Nickel announced in a 5 June press release that, for the first time in its history, the company has released audited, consolidated financial results calculated to International Accounting Standards. Low palladium prices took a bite out of the bottom line, as 2002 revenues fell 29 percent to $3 billion and net profits dropped 35 percent to $584 million. Revenues came in below the forecasts of experts polled by "Vedomosti" on 6 June, but Alfa-Bank analyst Maksim Matveev told the newspaper that the company is controlling expenses and doing its best to maximize net profits. The company's board of directors decided to pay 25 percent of declared net profits -- which came to $315 million after the payment of a $269 million debt to the Finance Ministry -- in dividends, "Vremya novostei" reported on 5 June. The decision makes Norilsk Nickel one of Russia's more generous companies, with only oil majors passing on a greater share of profits to shareholders. Norilsk Nickel produces 20 percent of the world's nickel, more than 10 percent of its cobalt, 60 percent of its palladium, and 20 percent of its platinum. DK

CONTROVERSY SIMMERS AT BOILER FACTORY
A group of minority shareholders vying for control of the Taganrog Boiler Plant elected its own board of directors on 2 June, Regions.Ru reported on 4 June. The Sigma Group, led by Pavel Svirskii, owns a 27 percent stake in the plant, "Vedomosti" reported on 3 June. According to the newspaper, current chairman Sergei Bidash and his partners, who maintain physical control of the enterprise, own a controlling 54 percent stake in the boiler plant. Each side promises to prove in court that it is the legitimate owner. A 2 June article in "Novaya gazeta" noted Svirskii's role in earlier takeover attempts at other enterprises and cast doubts on the legality of the court decisions he claims to have obtained to buttress his claims. Bidash told "Vedomosti": "Sigma's actions are classic greenmail. They aim to interfere with the plant so that they can then get money to go away." In an intriguing complement to the story, the Taganrog Boiler Plant is the first Russian enterprise to renew shipments of its products to Iraq after the fall of Saddam Hussein, RIA Oreanda reported on 4 June. With $40 million in sales in 2002, the plant is one of the country's three largest energy-sector engineering plants, "Kommersant" reported on 4 June. In the latest development, Svirskii and a group of 10 supporters attempted to enter the plant on 5 June, regnum.ru reported the same day. Current management kept them out of the facility. DK

MDM, SEVERSTAL DIVVY UP COAL SPOILS
Energy holding MDM Group and steel producer Severstal have reached an agreement to split up coal producer Kuzbassugol, RBC reported on 4 June. MDM and Severstal owned 48 percent and 52 percent of Kuzbassugol, respectively. Under the terms of the deal, the companies will split up Kuzbassugol's 13 mines, with MDM getting eight mines that produce power-generating coal, and Severstal five mines that produce coking coal. The companies did not release further details on the deal. The division of production assets fits the two companies' profiles, with each getting what it needs for its primary business. Aton analyst Aleksandr Agibalov told "Vedomosti" of 5 June that the deal is difficult to evaluate with so little information available, but it appears to be mutually beneficial. Prospect analyst Nikolai Ivanov told "Kommersant" of 5 June, however, that Severstal "spent significant funds ($80 million-120 million) to gain control of Kuzbassugol, yet it remains unclear whether it broke even." According to RBC, Kuzbassugol is the third-largest coal company in Russia and holds 35 percent of the country's reserves. DK

COMMUNICATIONS
MTS EXPERIENCES TECHNICAL DIFFICULTIES
Customers of cellular operator Mobile TeleSystems (MTS) found themselves without service in the center of Moscow on the afternoon of 30 May, "Gazeta" reported on 2 June. According to MTS, the outage occurred at 1:46 p.m. when a software glitch knocked out one of the company's 15 switching stations. It took engineers several hours to restore service to nearly 4 million users in Moscow. MTS First Vice President Yurii Gromakov explained to "Vedomosti" of 2 June, "Nowhere in Europe is there as complicated a switching subsystem as MTS has in Moscow." "Gazeta" wrote that the outage "severely undermined the image of a company that positions itself on the market as the operator for 'reliable' and 'high-quality' communications." But ACM-Consulting analyst Anton Pogrebinskii downplayed the significance of the incident in remarks to "Kommersant" of 31 May: "I think that things like this happen and will continue to happen.... No equipment is completely protected against malfunctions." DK

INVESTMENT
SECOND STAGE FOR SAKHALIN-2
Sakhalin Energy signed a $2 billion contract on 2 June with an alliance of Russian and Japanese firms to build Russia's first liquefied-natural-gas (LNG) plant, ITAR-TASS reported the same day. Sakhalin Energy is the operator for the Sakhalin-2 project, which brings together Royal Dutch/Shell (55 percent) and Japan's Mitsui (25 percent) and Mitsubishi (20 percent). The contract, which comes on the heels of two May agreements that nailed down Japanese buyers for the project's natural gas, represents the beginning of Sakhalin-2's $10 billion second phase, "International Petroleum Finance" reported on 4 June. The LNG plant is slated to become operational in 2007. Commerzbank analyst Ivan Mazalov told "Vedomosti" on 3 June that Sakhalin-2's proximity to Asian markets is a plus, but the slow growth of energy consumption in the region will make it difficult to obtain new contracts. John Barry, chairman of Shell-Russia, noted on 2 June that his company would be willing to reduce its share to introduce Russian or South Korean partners, "The New York Times" reported the next day. Russia's Gazprom has expressed interest in joining the project, but the gas monopolist's talks with the Sakhalin-2 consortium have foundered on differing approaches to developing the region's gas reserves, "Kommersant" reported on 3 June. DK

DIVORCE BATTLE MUDDIES CLEARWATER DEAL
A litigious divorce might have implications for Nestle's recent acquisition of Clearwater, Russia's largest home-and-office, bottled-water delivery firm. Purchased by Nestle in February (see "RFE/RL Business Watch," 25 February 2003), Clearwater was founded by American Scott Nicol in 1991. He married Russian golf champion Maya Kucherkova in 1993, but the couple separated in late 2002. A court in Pennsylvania, where Kucherkova now resides, began alimony hearings on 4 June, "Vedomosti" reported the next day. According to the newspaper, Kucherkova is asking the court to annul Nestle's acquisition of Clearwater and give her half of the company's shares, as well as half of Nicol's Hungarian and Ukrainian business interests. "Gazeta" reported on 6 June that experts give Kucherkova good odds of obtaining a favorable decision from a U.S. court, but regard any court interference in the deal with Nestle as highly unlikely. Kucherkova's lawyer, Aleksandr Dobrovinskii, estimated the value of his client's claims at $35 million-40 million, "Vedomosti" reported. DK

IN FOCUS
BTC PIPELINE BATTLES DELAYS
For the past several months, the Baku-Tbilisi-Ceyhan pipeline has been fighting perceptions that the project has fallen behind schedule. Investors in the $2.95 billion Caspian oil route known as BTC are quick to say that is not the case.

"To the best of my knowledge, there's no delay, and everything is proceeding on time," Richard Herold, director of international affairs for Britain's BP oil company, told RFE/RL. "I'm not sure where the perceptions are coming from that it's behind schedule."

But the perceptions persist. In a series of interviews, government and industry officials addressed several concerns for the landmark plan to link the Caspian to the Mediterranean Sea with a 1,760-kilometer line through the Caucasus. Issues for the U.S.-backed project include financing, the health of Azerbaijan President Heidar Aliev, and the opposition of nongovernmental organizations (NGOs). Officials agreed that the financing question has raised the biggest doubts about delays. But the project has gone forward despite the lack of a completed financing package, most recently with the launch of construction in Georgia on 23 May.

On 5 May, BP's Michael Townshend, who is general director of the BTC Co. consortium, told Interfax that the line is still on schedule to pump oil from Azerbaijan's offshore fields in 2005, eventually reaching its capacity of 1 million barrels per day. Natiq Aliev, president of Azerbaijani state oil company SOCAR, said work has started in all three of the countries where the pipeline will pass, Interfax reported.

Turkish Energy Minister Hilmi Guler also said problems with "red tape" have now been solved on his country's portion of the line, the "Turkish Daily News" reported on 14 May. In a letter to Prime Minister Recep Tayyip Erdogan in early April, the consortium had raised concerns about taxes, land acquisition, and political appointments at the Turkish state-pipeline company BOTAS, the paper said. U.S. officials have reaffirmed that the project continues to enjoy Washington's strong support as a strategic goal for the region.

But officials say the financing remains a major focus of concern. "The question is not whether the project is going to be done. It's how it's going to be financed," one company official said. According to a U.S. government official, some delay is the result of the sheer complexity of the financing scheme. BTC Co. plans to borrow 70 percent of the project's cost, or about $2 billion, from multilateral lenders, export credit agencies, and international banks. Officials say the oil group planned to go to commercial lenders only after decisions by the World Bank, the European Bank for Reconstruction and Development, and the U.S. Export-Import (ExIm) Bank. Their approvals are seen as key to securing the most favorable terms.

The entire process has been slower than many analysts anticipated. "Nobody thought it would take this long," one consultant said. The financing package that was expected to be completed by the first quarter of 2003 is now likely to come in the fourth quarter, according to officials. SOCAR's Aliyev said that credit lines for the project will not be opened before October, Interfax reported on 19 May.

The wait is mainly a problem for Azerbaijan, because SOCAR lacks the funding to tide it over. Although Aliyev said Baku can cover SOCAR's 25 percent share in the project from sources including the country's hard-currency reserves and State Oil Fund, the International Monetary Fund has "strongly recommended" that it avoid using central-bank reserves, Interfax reported on 28 May. A U.S. official said that "bridge," or interim, financing is being considered. But the delay has raised questions about the drawn-out process that has been under way since the 1990s. The pipeline project has been coordinated with the development of Azerbaijan's major offshore oilfields, where billions of dollars have been invested in anticipation of the export route.

Although proponents have discussed the pipeline with the World Bank's International Finance Corporation since at least 1998, the formal consideration called for a high degree of detail, said Laurent Ruseckas, a Paris-based director of Cambridge Energy Research Associates.

"I think that despite all the talk about financing the pipeline that goes back several years, it was hard for the multilaterals to start the tangible process of moving forward and negotiating the exact terms until a number of things had fallen into place, such as completion of the detailed engineering study and finalization of the sponsor group. And all that really didn't really come together until last year," Ruseckas said.

Similarly, U.S. financing agencies like the ExIm Bank and the Overseas Private Investment Corporation were long seen as supporters of the project. "That's different than the financing package itself...when the deal is on the table," ExIm Bank board member J. Joseph Grandmaison told RFE/RL. The approval process follows strict criteria, he said. Another U.S. official said consideration could not take place without contracts for the project, which determine the U.S. content that can be financed.

In addition to BP and SOCAR, the BTC sponsor group now includes U.S.-based Unocal, ConocoPhillips, and Amerada Hess; Norway's Statoil; Turkey's TPAO; Itochu and Inpex of Japan; Eni of Italy; and TotalFinaElf of France.

Concerns raised by NGOs have also played a growing part in the process. The NGOs have sent over 70 appeals to financial institutions in opposition to the project, Natiq Aliyev told Interfax on 19 May. Groups including Friends of the Earth mounted a major effort last fall to keep the pipeline from passing through Georgia's Borzhomi Gorge, the site of the country's famous mineral springs. But the campaign suffered a defeat in December, when Georgia gave its final approval after getting added safeguards and assurances from BTC Co.

On 19 May, Amnesty International also embraced many of the concerns raised by the environmental coalition in a report that criticized the legal framework of the Host Government Agreement (HGA) signed by Turkey for the project in October 2000. Amnesty argued that the accord, which is intended to protect BTC against unexpected legal changes, has the effect of exempting the developers from rights safeguards in the path of the pipeline, particularly in Kurdish areas of eastern Turkey. "Certainly, a company has a right to protect its investment, but there have to be guarantees for human rights," said Zafra Whitcomb, business and human rights program coordinator for Amnesty International USA, in an interview. Whitcomb questioned whether eminent-domain laws for land takings in the public interest should be used to benefit private developers. The criticism comes at a sensitive time as the World Bank enters a 120-day period to consider the BTC project before an expected board vote in the fall.

BP argues that it will be scrupulous about protecting human rights and its company image. "It's a bottom line for our corporate reputation," one official said, adding that the company has been negotiating with the NGOs to address their concerns. But the official also argued that the NGOs could assure the best protections by supporting World Bank lending, which would subject the project to multilateral standards and monitoring.

In the absence of World Bank approval, the project is likely to proceed anyway with oil-company equity financing, analysts and officials said. "The worst-case scenario is that the multilateral finance package doesn't come together, and that's really not all that bad, since in this case the companies would presumably just finance the pipeline as an all-equity project," said Cambridge Energy's Ruseckas. "The capital is certainly available, and in terms of investment returns, it's not a bad project." But failure to win World Bank approval would almost certainly be seen as a setback. Michael Lelyveld

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