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Business Watch: August 5, 2003

5 August 2003, Volume 3, Number 29
Turkish Energy Minister Hilmi Guler announced on 29 July that Turkey will resume gas purchases through the Blue Stream pipeline on 1 August, Reuters reported the same day. Turkey halted shipments in March, citing pricing disagreements and lackluster demand. Starting on 1 August, Turkey will buy 4 million cubic meters of gas per day, gradually stepping up purchases for a total of 800 million cubic meters by year's end, "International Oil Daily" reported on 30 July. With information scarce, Russia's two leading business dailies offered conflicting interpretations of the reconciliation. "Kommersant-Daily" wrote on 30 July, "Judging by the fact that Turkey's Energy Ministry promises to sign all documents in a single day, Gazprom made serious concessions to [Turkish state company] Botas in order to save the long-term contract." The same day, "Vedomosti" headlined its article "Turkey Makes Concessions," and quoted Gazprom spokesman Sergei Kuprianov as saying that the Russian gas monopolist was not offering Botas any price cuts. "International Oil Daily" reported, however, that Gazprom had agreed to "slightly reduce gas prices" under three separate contracts, including Blue Stream. A 31 July press release by Gazprom merely stated, "Russian gas shipments to Turkey will take place on competitive terms that do not differ from the terms for shipments to other European countries." The press release also noted that the two sides have agreed to halted arbitration proceedings and that another round of negotiations is scheduled before the end of August. DK

State-owned oil company Rosneft and investment firm Olma are nearing an amicable resolution to a conflict over a 2002 analytical report, "Vremya novostei" reported on 31 July. Rosneft had sued for $27 million, claiming that the Olma report undervalued the oil company, damaged its reputation, and caused a drop in the share prices of its subsidiaries. Many industry observers saw the lawsuit, which could have ruined Olma financially, as a pernicious challenge to analytical independence. According to press reports, the settlement proposed by Rosneft would require Olma to repudiate its 2002 conclusions and cover the oil company's legal expenses, estimated at up to $200,000; in return, Rosneft would drop its material claims. Oleg Fedorov, deputy executive director of the Investor Protection Association, told "Vedomosti" of 31 July: "The legal system in Russia is such that it is very difficult to oppose a large state-owned company in court. Of course, it would have been better for the market if the trial ended in a win for Olma, but an amicable settlement still means that, in practical terms, they won." Prospekt analyst Vladislav Tropko told on 30 July that Rosneft proposed the out-of-court settlement as a means of smoothing ruffled feathers among investment companies, which had been throwing up roadblocks to the oil company's plans to list its subsidiaries' shares on the RTS stock exchange. The two sides have until a 28 August court hearing to hammer out the details of the settlement. DK

Oil major Sibneft announced in a 25 July press release that the company's board of directors has approved an interim dividend payment of $1.006 billion, or $0.21 per share, for the first half of 2003. Sibneft President Yevgenii Shvidler cast the payment in a rosy glow, saying, "Sibneft strives to maximize shareholder profits once it takes care of investment programs and financial obligations." Others noted that Chukotka Governor Roman Abramovich and Sibneft's top management, who own 92 percent of the company's shares, are the primary beneficiaries of their own largesse. Aton analyst Timerbulat Karimov told "Vedomosti" of 28 July that Sibneft's owners are pulling money out of the company before its merger with Yukos by the end of the year. Sibneft has been Russia's dividend record-holder, paying out $983 million for 2001 and $1.09 billion for 2002. News of the interim dividend sent Sibneft shares up 3.4 percent on the benchmark RTS index to close at $2.40. The dividend, which is expected to be approved by a 15 September shareholders' meeting, will apply to all shareholders registered as of 31 July. DK

President Vladimir Putin signed a decree on 25 July annulling a 1994 decree by his predecessor that required banks to report all transactions of more than $10,000 to tax authorities, AK&M reported on 29 July. From now on, banks will only be obligated to report transactions in excess of $20,000 to the Committee for Financial Monitoring, an anti-money-laundering body subordinate to the Finance Ministry. Observers welcomed the change. Aleksandr Murychev, president of the Association of Regional Banks, told "Vedomosti" on 30 July that the 1994 decree was "an empty decision that did no economic good at all. The decree didn't work anyway -- whoever needed to evade taxes just broke up the amounts and had different accounts." DK

Vladimir Potanin's Interros holding company announced in a 28 July press release that it paid $200 million for Aleksandr Smolenskii's banking business -- six banks with a total of 350 branches nationwide, a credit-card processing center, and an armored-car company. The core asset, the Mutual Credit Society (OVK) bank group, rose from the ashes of Smolenskii's SBS-Agro bank, which failed during the 1998 financial crisis in a spectacular miasma of bad debts and disgruntled customers. SBS-Agro came to symbolize the perilous fragility of Russia's pre-1998 financial system, and its successor never quite overcame the inherited stigma. Central Bank Deputy Chairman Andrei Kozlov told "Kommersant-Daily" of 29 July that the acquisition, the largest in the history of Russian banking, is the "beginning of a trend toward bank consolidation." Some analysts felt that the addition of OVK could catapult Interros's Rosbank, currently the country's ninth-largest bank in terms of assets and capital, into fifth place, "Vedomosti" reported on 29 July. The price tag also raised eyebrows. Troika Dialog's Andrei Ivanov told "The Moscow Times" of 29 July, "Interros paid a steep premium"; and "Gazeta" reported the same day that experts felt that Interros forked over double for a business it estimated in May to be worth $100 million. Taking a step back to evaluate the big picture, Mikhail Matovnikov, head of the banking department at Interfax Rating Agency, told "Finansovye izvestiya" that the acquisition made for a good match, with Interros needing a retail infrastructure and OVK having "an infrastructure and staff, but problems with a reputation that scared clients away." DK

In a move that could end the conflict over the Korshunovskii Mining and Enrichment Plant (GOK), the Mechel Steel Group agreed in principle to pay off the plant's 1.7 billion-ruble ($56 million) debt to the state budget, RIA-Novosti reported on 29 July. Mechel holds a controlling stake in the plant, which the Federal Financial Recovery Service (FSFO) has been attempting to take over for debts. For its part, Mechel claims that the FSFO is acting in the interest of Mechel competitor Evrazholding. FSFO Director Tatyana Trefilova responded favorably to the Mechel offer, writing, "The FSFO does not object to an amicable settlement of the Korshunovskii GOK insolvency case," "Vedomosti" reported on 30 July. But clouds appeared almost immediately on the horizon of the impending resolution. RBC reported on 31 July that Mechel and the FSFO had fallen to squabbling again, this time over Trefilova's decision to participate personally in the selection of an external manager for the troubled plant. Mechel spokesman Viktor Novikov told RBC that "the actions of the FSFO director [Trefilova] prove that the FSFO's real interest is to push their own external manager through the courts and install him at the plant as quickly as possible." DK

National Reserve Bank (NRB) head Aleksandr Lebedev and an Aeroflot delegation recently held talks in Paris with Aeroports de Paris (ADP) about a consortium for a bid to manage Moscow's Sheremetevo international airport and construct a new terminal, "Gazeta" reported on 30 July. The government is set to announce the tender conditions shortly. The stiff preliminary terms -- $500 million in equity and $2 billion in assets -- would preclude a bid by NRB and led many observers to suspect that the tender was being tailored to Alfa Group, which suggested the idea of a tender to run Sheremetevo. Moreover, Alfa Group has already confirmed its willingness to finance the construction of the badly needed Sheremetevo-3 terminal. Powerful partners could give NRB the needed muscle to compete with Alfa, however. Lebedev told "Gazeta" that the consortium, which might also include state banks Sberbank and Vneshtorgbank, could be signed into existence by late August. United Financial Group transportation analyst Yelena Sakhnova counseled caution, however, telling "Nezavisimaya gazeta" of 31 July, "There's no need to overplay the news of talks between Aeroflot and the French. As far as I know, the Russian side will conduct negotiations with companies from various countries before making its decision." ADP, which manages Paris' Charles de Gaulle and Orly airports, earned a net profit of 478 million euros ($539 million) in 2002. NRB owns 28.5 percent of Aeroflot. DK

In a sale that could have important ramifications for an ongoing ownership conflict, Taganrog Boiler Factory co-owner Sergei Bidash has sold his approximately 50 percent stake in the factory to structures affiliated with the Russian Coal Company, "Vedomosti" reported on 28 July. Bidash was removed from his post as chairman of the factory, Russia's largest producer of steam boilers, in June in the course of a struggle with entrepreneur Pavel Svirskii and his Sigma investment company, which claims to own a 60 percent stake in the factory. When Bidash announced the sale of his stake to an unidentified third party on 23 July, Svirskii shrugged off the news, telling "Kommersant-Daily" the next day, "We now control around 60 percent of the enterprise's voting shares, so it's hard for me to imagine exactly what Mr. Bidash could have sold." But an anonymous source at Russian Coal told "Vedomosti" that "the new owners are resolved to continue litigating with Sigma to regain control of the factory." Meanwhile, Sigma is making active efforts to conclude new contracts with customers in Vietnam, Bulgaria, and Bangladesh, possibly in the hopes of acquiring a strategic investor, RBC reported on 28 July. Continued conflict appears possible. DK

Nationwide telecom holding Svyazinvest angered minority shareholders when its board of directors voted on 31 July to go ahead with a disputed $153 million deal to supply regional subsidiaries with Oracle's Enterprise Resource Planning (ERP), reported on 1 August. Mustcom representatives Stuart J. Paperin and David Geovanis were the only dissenting votes on the nine-member board. Mustcom, a consortium headed by financier George Soros, owns a 25 percent-plus-one-share stake in Svyazinvest; the state controls the remaining 75 percent minus one share. Minority shareholders have fought the Oracle deal since it was announced two months ago, calling it insufficiently transparent and excessively costly. (The $153 million price tag is equal to 80 percent of the holding's total net profit for 2002.) Oleg Rumyantsev, a spokesman for the Investor Protection Association (API), told on 31 July that the API plans to file suit against the seven board members who voted for the deal. Geovanis seemed resigned after the vote, however, telling "Vedomosti" of 1 August, "There wasn't much hope. The money for the deal has already gone out. It's unlikely anything can be turned back." The board meeting also voted in Communications Minister Leonid Reiman as chairman. Svyazinvest includes seven regional subsidiaries and Rostelecom, the national fixed-line long-distance and international operator. DK

LUKoil construction arm LUKoil-Neftegazstroi is one of four companies that have been awarded a $1.2 billion contract to build two 800-kilometer pipelines -- one oil, one gas -- for the Sakhalin-2 project, RIA-Novosti reported on 30 July. The other companies are Russia's Starstroi, Italy's Saipem SpA, and Britain's AMEC SPIE Capag. Construction of the two pipelines is scheduled to be finished by the end of 2006, "International Oil Daily" reported on 30 July. A 30 July Saipem press release estimated the company's share of the contract at $600 million; the size of LUKoil-Neftegazstroi's and Starstroi's shares in the contract was not immediately clear. The Sakhalin Energy consortium that operates Sakhalin-2 is led by Royal Dutch/Shell. According to "International Oil Daily," the project's Phase 2 will cost approximately $10 billion. DK

U.S.-based insurance behemoth American International Group (AIG) and Russian industrial holding Interros announced on 29 July that they plan to create two investment funds with total capital of more than $500 million, "Kommersant-Daily" reported the next day. The first, a $300 million private-equity fund, will kick off in the fall; a $250 million real-estate fund will start work by year's end. Derzhava Bank Vice President Andrei Makogon told "Vedomosti" of 30 July that a new real estate fund with "partners as serious as Interros and AIG could bring real money to the market." DK

AIG and the Russia's state construction committee (Gosstroi) signed an agreement on 29 July to cooperate on housing legislation and mortgage-related issues, from underwriting to the creating of a secondary mortgage market, RIA-Novosti reported the same day. AIG chief Maurice Greenberg commented, "We've already had the experience of developing a legislative and normative basis for mortgage insurance in other countries, and we're ready to share it with our Russian colleagues." Greenberg was just as upbeat at a 28 July meeting with President Putin, speaking of American business's growing interest in the Russian economy, RBC reported on 30 July . Not everyone was thrilled to see AIG position itself at the center of Russia's nascent mortgage market, however. "Gosstroi has become the agent for transferring the Russian mortgage market to foreign companies, primarily American financial giants," wrote on 28 July. "And this is happening with the obvious approval of the president." DK

AES Silk Road, a subsidiary of U.S.-based AES Corp., has agreed to sell its Georgian energy-sector holdings to Russia's RAO Nordic Oy, a subsidiary of RAO Unified Energy Systems (EES), Interfax reported on 1 August. AES Silk Road President John Huffaker announced in the Georgian capital of Tbilisi, "The contract between AES and RAO has been signed, but I can't report the light of the confidential nature of the information," reported on 1 August. AES Corp. owns 75 percent of Tbilisi distribution company AES Telasi, as well as two generating units; it also manages two hydroelectric-power plants. According to, the company has invested more than $260 million in the Georgian energy sector since privatizing the Tbilisi utility in 1998. Fearful of increased Russian influence over the energy sector, Georgian political circles took a dim view of the deal. A 1 August article in Tbilisi's "Dilis gazeti" noted that the "corrupt interests of the energy mafia" helped to drive AES out of Georgia and warned customers of a tough new sheriff in town: "No one will dare to do to the Russian company what they did to the Americans because...RAO EES can cut the supply of electricity and natural gas to Georgia." In a further indication of Russia's growing influence over the energy sector in the Caucasus, Arminfo reported on 1 August that RAO EES and Armenia have signed an agreement in which RAO EES will receive the Sevan-Razdan Cascade in exchange for debts Armenia owes Russia for fuel for Armenia's nuclear-power station. Valued at $25 million, the Sevan-Razdan Cascade consists of six power plants. DK

All financial institutions labor under two fundamental questions: Can we trust them with our money? Will we get our money back if they go bust? More than a few investors wished they had paused to ask themselves such questions in Russia's helter-skelter 1990s. But with memories of tumult fading and markets increasingly professionalized, less primal concerns had begun to seem more important. The recent, unexpected demise of St. Petersburg brokerage Prolog served as a reminder that some basic questions are still worth asking.

According to data from the Federal Securities Commission (FKTsB) for the first quarter of 2003, Prolog occupied 12th place among brokerages alone, and 23rd place among all financial institutions, by volume of securities transactions. (The FKTsB's top 100 lists can be found, in Russian, at The company had 11 regional branches. The National Association of Securities Market Participants (Naufor), the industry's chief self-regulating organization, rated Prolog as BBB, or "reliable." And the cake even came with icing: Prolog was one of the nominees in Naufor's "Securities Market Elite 2002" awards in the category "Discovery of the Year."

By the time Interfin Trade beat out Prolog to capture the "Discovery of the Year" award on 27 May, Prolog was already fighting to keep its head above water. A postmortem in "Kommersant-Dengi," No. 25, chronicled the rapid decline and fall:

Late May: Prolog begins to run late on payments to other brokerages

5 June: Naufor suspends Prolog's reliability rating; the Moscow Interbank Currency Exchange (MICEX) reports irregularities

18 June: the FKTsB suspects Prolog's license until 1 September

21 June: the Russian Trading System (RTS) exchange's board of directors expels Prolog

25 June: MICEX reports that Prolog is in arrears on 623 repo (repurchase agreement) transactions

When the lease ran out on Prolog's St. Petersburg headquarters in early July, the company evaporated, leaving creditors and clients in the lurch. A correspondent for "Sankt-peterburgskie vedomosti" succeeded in tracking down Director Stanislav Fedorov "in an industrial zone" far from the company's erstwhile downtown digs on 9 July. Fedorov assured the reporter that everyone would get their money -- somehow. On 16 July, the FKTsB revoked Prolog's license. On 17 July, "Kommersant-Daily" reported that Fedorov had dropped off the radar and rumored Prolog owner Aleksandr Grebenko was disavowing any links to the busted brokerage. Meanwhile, the company owed (and still owes) creditors and clients millions of dollars.

Prolog did not fail for any particularly noteworthy reason. It was the victim of its own poor judgment under volatile market conditions. Viktor Chetverikov, director of Naufor's information and analysis department, told "Vedomosti" on 18 July that Prolog made a spectacularly bad call in the spring, selling Unified Energy Systems (RAO EES) shares short only to see them skyrocket. Unable to cover its positions -- note the 623 outstanding repo deals mentioned above -- Prolog simply ran out of money.

More important is the question of what regulators can and should do in such situations. Yekaterina Makeeva, director of Naufor's legal department, told "Vedomosti" of 18 July that Prolog took the money, or what was left of it, and ran once it lost its license. Where were the regulators? Nadezhda Samuilova, head of the St. Petersburg regional section of the FKTsB, explained that the securities watchdog does not have the authority to file criminal charges, or even freeze assets. All clients can do is sue on their own.

FKTsB Deputy Chairman Gennadii Kolesnikov explained the process to "Kommersant-Daily" in a 28 July interview: "We used our most serious punitive measure -- we revoked their license. After that, everything moves into the sphere of civil liability between client and company. We spoke with law enforcement authorities in St. Petersburg. They don't feel that a crime was committed. If there are outstanding liabilities, people need to file suit. Measures can only be taken in the case of non-compliance [with a court decision]. Those are our laws." Kolesnikov noted that existing legislation fails to cover many of the problems that can arise on securities markets, from insider trading to out-and-out fraud. Regulators have prepared changes to the Criminal Code, but the cabinet has not yet found time to introduce them to parliament.

Prolog's untimely demise comes as a timely reminder that legislation needs to keep pace with expanding, and increasingly complex, securities markets. And more reminders may be in the offing. When it went belly up, Prolog owed the St. Petersburg branch of the Yamal Stock Center $650,000, reported on 1 August. Yamal soon began to have liquidity troubles, and "Kommersant-Daily" reported on 1 August that Naufor officially requested that the FKTsB revoke Yamal's license on 31 July. DK

The standoff between law-enforcement authorities and oil major Yukos began over a month ago. On 2 July, billionaire Platon Lebedev -- head of Group Menatep, a core Yukos shareholder, and a longtime business partner of Yukos CEO Mikhail Khodorkovskii -- was arrested on charges of fraud in the 1994 privatization of fertilizer producer Apatit. For the rest of July, the volume of investigative activity around Yukos was exceeded only by the intensity of speculation over the underlying causes of the legal assault.

Lebedev is still behind bars. The investigations continue. Recent events include:

28 July: Prosecutors charge that four companies controlled by Menatep employed illegal schemes to evade taxes during Lebedev's tenure. The new charge brings to four the number of criminal cases against Lebedev.

28 July: Prosecutor-General's Office spokeswoman Natalya Vishnyakova criticizes Prime Minister Mikhail Kasyanov for describing arrests for economic crimes -- a clear reference to the Lebedev arrest -- as an "excessive measure." As quoted by "Vedomosti" on 29 July, Vishnyakova tells journalists at a news conference: "Such remarks by the prime minister are, at the very least, inappropriate. To be more precise, they constitute direct pressure on the court. Each branch of government should mind its own business."

29 July: Journalists from "The Wall Street Journal," the "Financial Times," and leading Western news agencies meet with a "senior official" (identified by "Vedomosti" on 31 July as Kremlin chief of staff Aleksandr Voloshin). The Kremlin source suggests that President Putin had no prior notice of the prosecutor-general's move against Yukos and can do little to influence the investigation's outcome. A 31 July editorial in "Vedomosti" dismisses the remarks as a ham-handed attempt at a "double position" --anonymous comments reassure the West that no anti-oligarch campaign is in the works while presidential silence encourages Russians to believe exactly the opposite.

30 July: Representatives of the Prosecutor-General's Office and the Federal Security Service (FSB) begin an investigation of Group Menatep's Trust Investment Bank. "Kommersant-Daily" reports the next day that investigators are especially interested in transactions between Trust and the Russian Development Bank (RosBR), noting that RosBR President Tatyana Ryskina has close ties to Prime Minister Kasyanov.

30 July: The Russian Union of Industrialists and Entrepreneurs (RSPP) holds an extraordinary closed session to discuss relations between business and the state.

31 July: Economic Development Minister German Gref tells "Kommersant-Daily" in an interview that a campaign to reexamine 1990s privatizations would be "suicidal for the state."

31 July: Interfax reports that criminal charges might be forthcoming against Chukotka Governor and top Sibneft shareholder Roman Abramovich. Sibneft is currently in the process of merging with Yukos.

3 August: Britain's "Sunday Times" reports that U.S. oil giant Chevron Texaco is "in talks to take a 25 percent stake in Yukos" because the Yukos-Sibneft merger is "looking shaky." Yukos spokespeople tell on 4 August that they "do not comment on rumors." DK