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Business Watch: July 1, 2003


1 July 2003, Volume 3, Number 24
ENERGY
BP, TNK INK MERGER -- MINUS $600 MILLION
British Prime Minister Tony Blair and Russian President Vladimir Putin looked on approvingly as U.S.-U.K. conglomerate BP and Russian Tyumen Oil Company (TNK) signed an agreement in London on 26 June finalizing a merger of the two companies' Russian assets, the BBC reported the same day. BP will pay $600 million less than originally planned for half of TNK, forking over $2.4 billion (instead of $3 billion) in cash and $3.75 billion in stock for a total of $6.15 billion (instead of $6.75 billion), "The Moscow Times" reported on 27 June. The reduced amount takes into account debt that TNK assumed to acquire a 50 percent stake in oil company Slavneft in December. (While Slavneft was not included in the original TNK-BP merger, Tony Considine, who will be the executive vice president of TNK-BP in charge of downstream operations, told "Nefte Compass" on 24 June that the new company is interested in Slavneft's refineries.) Troika Dialog analyst Kakha Kiknavelidze told "Vedomosti" on 27 June that the reduced cash payment was fair, since "TNK left the new company with more debt than was expected." The joint venture boosts BP's production capacity by 1.1 million barrels per day, but raises a host of questions ranging from environmental policy to corporate governance. The project "could catapult [BP CEO] Lord Browne...to legendary status, or reveal him as a reckless risk-taker," the "Financial Times" wrote on 26 June. DK

GAZPROM FACES HURDLES IN STRUGGLE TO RETAKE AZOT
A little-known group calling itself the "Neftegazbank group of companies" on 21 June acquired a 53 percent stake in agrochemical corporation Azot, a wayward Gazprom subsidiary over which the gas monopoly is attempting to regain control, "Kommersant-Daily" reported on 23 June. Azot, which controls one-quarter of the Russian chemical-fertilizer market, slipped away from Gazprom in 2002 in the course of a squabble between Gazprom deputy CEO Aleksandr Ryazanov and Nikolai Gornovskii, former director of the gas monopolist's sales subsidiary Mezhregiongaz, "Vremya novostei" reported on 23 June. Gazprom paid 333 million rubles ($11 million) to regain a 33.9 percent stake in Azot in April and reached an agreement in May to acquire an additional 52.64 percent for 606 million rubles, gazeta.ru reported on 24 June. That second agreement, it seems, was never implemented. An "informed source" at Azot told "Vedomosti" on 25 June that Azot President Georgii Briling held parallel talks with both Gazprom and Neftegazbank, but the latter "offered the best price." According to "Vremya novostei," that price was far more than the $17 million Gazprom was ready to pay and ran into the "tens of millions of dollars." Unfazed, a Gazprom spokesperson told "Vedomosti," "We know how to return these shares and we have the capability." Observers noted that the Neftegazbank group of companies -- controlled by Mikhail Yurev, former deputy speaker of the State Duma; Neftegazbank CEO Mikhail Golubev; and dark horse Nikita Yegorov -- might have acquired the controlling stake in Azot for subsequent resale, at a profit, to none other than Gazprom. DK

TARDY MEZHREGIONGAZ WORRIES CREDITORS
Gazprom subsidiary Mezhregiongaz is unnerving creditors with late payments on the company's promissory notes, "Vedomosti" reported on 25 June. The delays, which reached 21 days last month, temporarily rendered the notes illiquid and sent annual yields soaring to 28 percent before a buy-up began, sparking rumors that Mezhregiongaz was intentionally holding back payments in order to buy back its own promissory notes on the cheap. (Mezhregiongaz denies the buyback rumors.) The repayment problems began earlier this year. "Kommersant-Daily" reported on 5 June that experts from the finance and investment company Leading estimated that, by early June, 50 million rubles' ($1.65 million) worth of promissory notes were overdue. Natalya Fedotova, Mezhregiongaz' deputy director for economic issues, told "Kommersant-Daily" that the repayment holdups resulted from uncontrolled promissory note issues under previous management in 2000. According to "Russkii fokus" (No. 20, 9 June), 10 billion rubles' worth of promissory notes were issued, 1 billion of which remain outstanding. For now, creditors are holding tight. Veles Capital Director Khachatur Muradov told "Vedomosti" that his company, which holds a substantial number of Mezhregiongaz notes, is waiting: "We're not lodging a protest on the promissory notes and we're not suing; we hope that the situation will change for the better." DK

FINANCE
KUDRIN CHEERS HOMEWARD-BOUND CAPITAL
Finance Minister Aleksei Kudrin told the "Financial Times" of 23 June that investment is outpacing capital flight, reversing a negative trend that has plagued the post-Soviet economy. "Russia's risks have fallen to historically low levels, and dollars are flowing into the country at an unprecedented rate," Kudrin gushed. According to Russian Central Bank estimates, the second quarter of 2003 will witness a net capital inflow of $2 billion after an outflow of $1.2 billion in the first quarter, "The Moscow Times" reported on 24 June. Vladimir Tikhonov, senior economist at NIKoil, told "Vedomosti" of 24 June, "The stable growth of Russian financial markets and the stagnation of the world economy have turned our companies and banks into capital importers." Capital flight has been a chronic problem in the Russian economy, with billions of dollars fleeing abroad in the 1990s to escape domestic risks. Corporate borrowing, which topped $8 billion in 2002, has played a key role in changing capital outflow to influx. DK

RTS TOPS 500
The benchmark Russian Trading System (RTS) stock exchange on 25 June broke the 500 mark for the first time since 1997, closing at 502.11, the exchange reported on its website (http://www.rtc.ru) the same day. Oil companies led the charge, with Yukos at the tip of the spear. The oil major's capitalization shot up to $31.5 billion as its shares rose 3.52 percent to close at $14.10. Yukos alone accounted for 4.15 points of the RTS 9.29 point rise, "Vedomosti" reported on 26 June. With Russian investors bullish on the domestic market, optimists abounded. Sam Barden, head of international trading and sales at Trust investment bank, told "The Moscow Times" of 26 June, "We believe it will move higher from this level in the near future, with all likelihood that it will break its all-time high of 569 before this year is over." Renaissance Capital trader Dmitrii Kulyashents downplayed the significance of the round number, however, telling "Kommersant-Daily" of 26 June, "For some people, it's a factor; but you don't trade indexes, and share prices grow for reasons that don't depend on the level of the index." DK

REGULATION
USED FOREIGN-CAR-IMPORT DUTIES SIGNED INTO LAW
Prime Minister Mikhail Kasyanov signed a resolution on 23 June making it more expensive for individuals to import 3- to 7-year-old foreign cars, "Izvestiya" reported the next day. Calculated on the basis of engine volume, the new duties for individual importers represent a 15 percent-85 percent increase. For example, the cost of importing a 6-year-old Opel Astra with a 1.6-liter engine will rise from 1,360 euros ($1,550) to 2,400 euros, "Vedomosti" reported on 24 June. (Companies that import used cars pay duties calculated on the basis of several factors, including declared value; they generally pay more.) The higher duties are an attempt to equalize import duties for individuals and companies, as well as a protective measure designed to stimulate domestic production. A government source told "Gazeta" of 24 June: "Preferences for used car imports were introduced for individuals in 1999, but since then this area has turned into an independent business. The government hopes that with rates equalized, foreign manufacturers will come to Russia." Industry analyst Yelena Sakhnova told "Izvestiya" of 24 June that the new rates are a boon to Russian automakers, since the greatest rate increase falls on precisely those used foreign cars that have given domestic producers the biggest run for their money. And it has been quite a run. "Gazeta" reported that, according to the Boston Consulting Group, Russian carmakers' market share has fallen from 71 percent in 2001 to 63 percent in 2002, with burgeoning used foreign imports accounting for much of the drop. DK

COMPANIES
NORILSK NICKEL REVEALS TOP SHAREHOLDERS
Metals giant Norilsk Nickel extended the list of Russian open-source billionaires when it publicized details about its chief shareholders on 23 June, Reuters reported the same day. According to information provided by the company, Vladimir Potanin, president of parent holding company Interros, and Mikhail Prokhorov, Norilsk Nickel's CEO, each own 25 percent of the company through four firms that each control 12.5 percent stakes in Norilsk Nickel. Given the company's current capitalization of $7.3 billion, each of those 25 percent stakes is worth $1.825 billion. NIKoil analyst Vyacheslav Smolyaninov told "Vedomosti" on 24 June that the ownership ratios came as more of a surprise than the owners themselves: "Rumors that Prokhorov owned a significant stake were circulating on the market, of course, but no one knew the exact amount. His stake wasn't expected to be as big as Potaninin's." A Norilsk Nickel representative told "Vedomosti" that the company's decision to reveal shareholder information came as one of the conditions in its nearly completed acquisition of U.S.-based Stillwater Mining. DK

MDM, SEVERSTAL PRIVATIZE VORKUTAUGOL
MDM Group and Severstal joined forces to privatize a 39.8 percent stake in coal producer Vorkutaugol, AK&M reported on 26 June. Formal ownership went to steel producer Severstal, which offered a winning bid of 840.34 million rubles ($27.7 million) at the privatization auction, a hairsbreadth above the starting price of 837.78 million rubles. The two companies told AK&M that they are "partners" on the deal, however. According to "Vedomosti," major shareholders in Vorkutaugol before the sale of the state's 39.8 percent stake were MDM and Severstal, each with roughly 14 percent, and the Komi Republic, with 21 percent. The joint acquisition represents a continuation of cooperative efforts by MDM Group and Severstal, which recently reached an agreement to divide up the assets of Kuzbassugol. The chummy spirit of coal-industry consolidation did not extend to everyone. Vorkuta Mayor Igor Shpekter described the privatization auction as a "carefully planned operation by the directors of two industrial groups" and glumly concluded that "Komi will probably lose more than it gains," regnum.ru reported on 26 June. Meanwhile, Prospect analyst Nikolai Ivanov told "Kommersant-Daily" of 27 June: "In Russian, business there's virtually no successful experience of jointly administering such assets. That's why MDM probably came out of this deal the winner, since it can then use the shares that belong to it for speculative purposes by selling them to Severstal." DK

COMMUNICATIONS
TELENOR COMPLETES COMBELLGA ACQUISITION
Norway's Telenor announced in a 24 June press release that the company has purchased the remaining 25 percent of Comincom-Combellga for $30 million, giving it 100 percent ownership of the Moscow fixed-line operator. "Vedomosti" reported on 25 June that Telenor is conducting talks with the owners of Golden Telecom, Russia's leading alternative carrier, about exchanging Combellga for a blocking stake in Golden Telecom. Aton analyst Nadezhda Golubeva told "The Moscow Times" of 25 June: "There are hardly any doubts now that this is a step for Telenor toward gaining a blocking stake in Golden Telecom.... A 100 percent stake in Combellga is currently worth about 22 percent to 23 percent of Golden Telecom." Such a merger would give Golden Telecom, by various estimates, roughly 40 percent of Moscow's alternative fixed-line market, with City Hall ally Sistem controlling another 30 percent. Prospect analyst Aleksei Zaitsev told "Gazeta" of 26 June that the resulting consolidation would give two major operators control of two thirds of the alternative market: "By next year, they could seize 85 percent of the capital's communications market, and the figures will be even higher for internet services." DK

AROUND THE CIS
RENATIONALIZATION LOOMS AT UKRAINIAN ALUMINA PLANT
Mykhailo Chechetov, head of Ukraine's State Property Fund, announced on 24 June that the government is mulling proceedings to renationalize Ukrainian Aluminum's (Ukral) 30 percent stake in the Mykolayivsky Alumina Plant (MHZ) because the company has failed to fulfill its investment obligations, Reuters reported the next day. Ukral, a subsidiary of Russian Aluminum (Rusal), bought into the plant in 2000 for $101 million, promising to build a new smelter and settle the plant's debts. A Ukral representative told "Kommersant-Daily" of 25 June that construction of the new smelter remains stalled while the Ukrainian government struggles to reach a decision on special electricity rates for the factory. NIKoil analyst Vyacheslav Smolyaninov told "Vedomosti" on 25 June that the loss of the plant, the largest alumina-production facility in the CIS, would be a serious blow to Rusal: "MHZ retains its value in light of Rusal's plans for a significant increase in aluminum production. I think that they'll make every effort to keep control of the plant." DK

LUKASHENKA DIGS IN OVER BELTRANSHAZ
Belarusian President Alyaksandr Lukashenka announced tough conditions on 24 June for the creation of a joint venture between Belarus's natural-gas-pipeline monopolist Beltranshaz and Russia's Gazprom, "Kommersant-Daily" reported the next day. Sternly warning that "swindlers won't walk off with our enterprises for a song," Lukashenka explained that he would be willing to part with a less-than-controlling 48.99 stake in Beltranshaz for $2.5 billion. While Gazprom withheld official comment, reports in "Vedomosti," "Izvestiya," and "Vremya MN" agreed that Gazprom hopes to acquire a controlling stake in Beltranshaz for $400 million-600 million. According to "Kommersant-Daily," Gazprom offered $350 million for 51 percent of Beltranshaz. The stark difference in assessments is of more than commercial significance. Russian President Vladimir Putin reached an agreement with his Belarusian counterpart in April 2002 that the creation of a joint venture on the basis of Beltranshaz by 1 July 2003 was one of the conditions for Belarus to buy gas from Russia at $24 per 1,000 cubic meters, or one-quarter of the market price in Western Europe. Troika Dialog analyst Valerii Nesterov dismissed Lukashenka's bluster, telling "Vedomosti" of 25 June, "Belarus wants too much, and it will get nothing." Beltranshaz's 6,142 kilometers of pipeline are in poor condition and require a minimum $1 billion investment for modernization, "Izvestiya" reported on 26 June. Previous gas spats between Russia and Belarus have been resolved through high-level political contacts, and the latest disagreement is likely to continue the tradition. DK

IN FOCUS
FREE SPEECH, BAD DEBTS, AND OLIGARCHS
"Independent" is a fine word. "Independent cinema" eschews crass market considerations, the "financially independent" are poised alluringly between the toiling masses and the cigar-chomping fat cats, and the "independent-minded" are bold and original.

NTV stands for "Independent Television." In the network's first incarnation as part of Vladimir Gusinskii's Media-MOST conglomerate, it basked in its moniker's warm glow. Privately owned and generally skeptical of such Kremlin assertions as "the counterterrorist operation in Chechnya is going particularly well this week," the channel enjoyed a faithful following at home and near-iconic status abroad, where it was touted as the defender of free speech at a time when the Western media still thought President Putin's KGB past worth the occasional quizzical stare.

In April 2001, control over NTV shifted from Gusinskii to Gazpom-Media, a branch of the state-controlled natural-gas monopolist. Gazprom-Media claimed that its sole motivation was to make good on bad debts when it engineered a 4 a.m. takeover of NTV headquarters. Leading journalists at NTV accused the state of trying to silence a voice of opposition, and many of them left the station. Meanwhile, editorial pages all over the world mourned the passing of independence from the Russian airwaves.

As it turns out, the end of NTV was only the beginning. Deposed NTV General Director and anchor Yevgenii Kiselev gathered the remnants of his journalistic team and led them to refuge at Boris Berezovskii's TV-6. Independent broadcasting continued on a smaller scale at TV-6 until a subsidiary of oil major LUKoil, a minority shareholder in the company that held the channel's broadcast license, embroiled the network in a complex bankruptcy suit that eventually proved lethal. Media Minister Mikhail Lesin pulled the plug on TV-6 on the night of 22 January 2002. Once again, some voices -- fewer this time -- bemoaned the end of "Russia's last independent television network," while others -- as numerous, and as official, as before -- chalked it all up to the vagaries of business.

By 1 June 2002, the anti-Kremlin veterans of NTV and TV6 were back on the air, this time as part of an avowedly oligarchic project called TVS. Twelve 7.5 percent stakes would be divided among as many oligarchs -- including such celebrities as oil tycoon and Chukotka Governor Roman Abramovich, privatization guru and Unified Energy Systems head Anatolii Chubais, and aluminum magnate Oleg Deripaska -- and the remaining 10 percent would go the station's journalists. The oligarchs promised to play fair with each other and the journalists, the journalists accepted a non-commercial partner widely seen as a political watchdog, and the latest and strangest variety of broadcast independence was ready for primetime.

A little more than a year later, everything had gone horribly wrong -- again. And at a touch past midnight on 22 June, TVS went off the air (in the middle of a commercial for Lays potato chips, "Kommersant-Daily" reported the next day).

The latest closure of Russia's (third) last independent television station drew correspondingly less outcry than the preceding two yanked plugs. (Dubious indicator though it is, a google.com search on "last independent" and NTV, TV6, and TVS produces, respectively, 224, 122, and 66 hits.) It did, however, focus more attention on the financial aspects of independent broadcasting in Russia.

According to "Kommersant," TVS gave up the ghost with debts of over $100 million, not to mention $6 million in unpaid salaries. A long article in "Kommersant-Vlast" (No. 23, 16 June) detailed lackluster management and chronic overspending at TVS, including $5 million to shoot a failed reprise of a reality show that had initially cost $1 million to produce. TVS burned through a $46 million loan from Vneshekonombank in half a year, and kept on going -- all the while pulling in a meager $2 million-3 million a month in advertising revenues.

A 23 June postmortem in "Vedomosti," the editors of which have not hesitated to criticize Kremlin media policy on other occasions, focused primarily on the station's financial flop. After noting that a successor could emerge from the wreckage of TVS, perhaps even with the old NTV team still in place, the editors examined the "failed attempt by a group of businessmen to save freedom of speech on a lone federal television channel" and drew a grim conclusion about "the inability of our big business to create successful enterprises in non-raw materials sectors of the economy."

This is not to imply that the tenor of coverage was not at issue in the remaking of NTV and the closures of TV6 and TVS. Their coverage of events was far more critical than the tame fare on state-controlled networks (which have sunk slowly and inexorably over the last two years into a seemingly endless rut of frozen-smile Putiniana). For all his self-importance, sniffling delivery, and pompous locutions, Kiselev was and is a genuine gadfly of the sort that does a body politic good; and satirist Viktor Shenderovich is, at his barbed best, simply one of the best things on TV in Russia.

What is striking, in retrospect, is that the fate of "independent" television -- with its avowed support for Western values and its rejection of the Byzantine element in post-Soviet politics and business -- should depend so entirely on some of the more dubious aspects of oligarchic capitalism. Though he won admirers in the West for the professionalism of his media outlets, Gusinskii does not appear to have been a particularly adept businessman. Similarly, Berezovskii's ambiguous accomplishments and subsequent difficulties lie in a sphere that only partly overlaps with the traditional understanding of business. Finally, the covey of quarrelsome oligarchs who sponsored TVS seemed more interested in one-upping each other than in proving that they can implement an effective business model outside of electrical energy, fossil fuels, or metallurgy.

Shenderovich told "Moskovskie novosti" on 24 June that the end of TVS "is just the death certificate for a person who was mortally wounded two years ago. After that, hospitals and rest homes. We hung on for another year. For me, the justification for the compromise that we made was the opportunity to work for Russia rather than for Brighton [Beach] and Jerusalem. Even the chance to do the show after Nord-Ost justified this compromise."

Shenderovich might be right. The program he put together after the bloody hostage crisis in October 2002 was bitter, brave, and brilliant -- the antithesis of everything that "state-controlled" has ever stood for in television. Still, the compromise was real, part and parcel of the financial murk that entwined the end of TVS.

After the third demise of Russia's only independent television station, observers might be forgiven for broadening their focus beyond the indisputably important question of free speech to the equally crucial question of the business practices that make it possible (or impossible) to broadcast that speech to a wider audience. DK

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